The Feed-in Tariff (FIT) was introduced by the government on 1 April 2010 to replace grant-funding as the financial incentive to encourage renewable electricity-generating technologies. At the time PV systems were more expensive to buy and install than they are today.
Under the scheme, a tariff is paid by the government for electricity generated by renewable technologies to mitigate the cost of installing the equipment. A statutory export payment
is also made, creating further income from excess electricity generated. The FIT has a further purpose – to encourage improvement in the PV component supply chain and to reduce the cost of PV systems to enable them to compete with conventional power sources1. Planned periodic degression in the FIT ensures that the level of support remains consistent with the cost of installing PV systems.
The scheme’s introduction produced an unexpectedly popular reaction. Installation rates were higher than anticipated, resulting in rapidly reduced system costs. By 2011, annual financial returns from PV systems had become more lucrative than the government’s anticipated 5-8%, creating strong demand and stretching the public budget for the scheme to the point where remedial action was necessary. The newly elected government’s rapid response was to make a significant cut to the incentives available under the FIT, stimulating legal challenges in the High Court and extensive coverage in the media2.
This process left many potential PV system adopters with the impression that the FIT was a thing of the past, and perhaps that the opportunity to receive an income from solar PV had been missed.
The reality is that since the initial sharp reduction took place in 2011, FIT rates have stabilised and the cost of installing has continued to fall.
The High Court also ruled that the government had acted unlawfully in attempting to apply retrospective cuts to FIT rates prior to the end of its own consultation period. This set a new legal precedent and reinforced the reliability of FIT income, once a generator has been registered.
Now that the degression mechanism of the scheme has settled, the nature of FIT payments means that returns from PV are assigned as a low-risk, long-term asset class – some investors place the tariff income in the same risk class as UK Gilts – providing a stable and steady income over a long period. This stability is naturally important to investors, ensuring that reliable, predictable rates of return can be achieved.
Tariff bands and the degression mechanism
- Tariffs are assigned based on the size of a PV system – the larger the system, the lower the tariff
- FIT support is reduced over time as installations become more economical
The amount payable under the FIT scheme relates to the size of the PV system, referred to as the ‘total installed capacity’, which is divided into a number of size bands. Each band attracts a commensurate FIT rate per kilowatt-hour (kWh) of electricity generated.
The rate is assigned when a system is connected, and linked to the Retail Prices Index for 20 years.
Every three months, for new projects, the tariff rates are reconsidered based on the total combined amount of solar installations that have been installed in a given band. If the deployment trigger level set by the government is not met, the FIT rate remains the same for the next period. If enough systems have been installed to reach the trigger, then the subsequent period will have a FIT rate that is lower.
In this manner the scheme seeks to self-regulate so that there can be no repeat of the rush to install, since if more installations get deployed, the tariff rate will be reduced automatically. If the deployment trigger is not reached for a total of nine months then a 3.5% reduction takes place regardless.
1Feed-in Tariffs are also payable for some other technologies, including: hydroelectric, wind, micro-CHP and anaerobic digestion. Despite this solar PV continues to dominate, accounting for 86% of total installed capacity from 1st April 2010 to 30th June 2014. In the South East this figure rises to 95%.
2Related news articles:
“UK government loses solar feed-in tariff bid” www.theguardian.com/environment/2012/mar/23/uk-government-solar-feed-in-tariff
“Government loses second case on solar tariff cut” www.bbc.com/news/business-16721328