The New Feed in Tariff Scheme: An Explainer

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail

If you’re considering producing your own renewable electricity or investing in community energy one of the most important factors you need to learn about is the feed in tariff system. The feed in tariff, also known as FIT, is the system of subsidies the government pays to producers of renewable energy to encourage investment into and adoption of the technology aimed at achieving Britain’s 15% Renewables by 2020 goal. The FIT system was signed into law in 2008 and came into effect in 2010, and it has been one of the pillars fueling the dramatic growth of British renewables we have witnessed over the last few years. The FIT system is also largely responsible for the community energy explosion which has rendered over 5,000 currently-active community energy organisations all over the UK.

solar-panels-692834_1280

The way it works is as follows: producers of renewable energy with a capacity of up to 5MW, whether they be private citizens or organisations such as community energy groups, are entitled to payment for the energy they produce. The FIT scheme is divided into three elements: the generation tariff, which is a fixed per kWh payment made to producers based on how much electricity they generate; the export tariff, which is payments made to producers for the electricity they sell back onto the grid; and discounts to electricity bills, as producers generate and consume their own energy. This last one is only applicable to residential installations as larger scale solar farms such as those built in community energy projects are made to export electricity to the grid and not supply it directly to individual users.

Changes to the Feed in Tariff

The media has been abuzz lately with articles and commentary on the government’s changes to the Feed in Tariff. Most of those voices have been very critical, and rightly so. When the Feed in Tariff was instituted six years ago it paid up to 43.3p per kWh of electricity generated (for solar PV, rates for other forms of renewable energy were slightly lower). It was incredibly successful because a high subsidy rate meant solar installations paid for themselves quickly and owners were able to generate a healthy profit over the subsidies’ 25 year lifetime.

In 2012 the tariff was cut by more than half, to 12.92p per kWh. While this represented a significant drop it still enabled producers of solar energy to make a decent profit and mitigated the costs of installation. Together with the rapidly declining costs of photovoltaic panels, this iteration of the FIT continued to fuel massive growth of British renewables, especially solar energy.

Then, in late 2015, the newly formed Tory government decided to further reduce the Feed in Tariff, alleging that subsidies to renewable energy were putting an unnecessary burden on consumers and increasing their utility bills unfairly – despite numerous studies showing this to be untrue, with British consumers paying an estimated £6 a year on average to support the FIT scheme.

As of January 15 of 2016, the Feed in Tariff has been reduced a further 65% to 4.39p per kWh. All new installations that receive Feed in Tariff accreditation will be subsidised at this rate. With renewable energy installation costs continuing to drop it is expected that users will continue to be able to break even on their installations, but whereas in the past it was possible to turn a profit with the current FIT most systems will take close to 20 or 25 years to pay from themselves, practically the entirety of the subsidies’ lifetime. This means that wanna-be owners of renewable energy can still purchase systems and not lose money, but it practically eliminates the possibility of making a profit from the installation, removing much of the incentive to invest in small scale renewables for anything other than altruistic reasons.

What Does This Mean for Renewables in Britain?

This paints a fairly dark picture but fortunately the outlook is not entirely negative. Like we mentioned above, the cost of installation of solar has been dropping non-stop since the FIT came into effect as production costs for photovoltaics go down. This trend has showed no signs of stopping and as the price of PV continues to fall the margin for generating profits will increase again. Eventually we will reach a PV price floor, based solely on practical issues like transportation, labor, and manufacturing costs, but it appears we’re not quite there yet. When this does happen it is likely that from a financial perspective solar will still be not as attractive an investment as it was a few years ago, but still a viable one.

For bigger players like Mongoose Energy, the FIT cuts have represented a setback but not a death sentence. Small community energy groups that operate independently and develop one-off projects have higher capital and project development costs, but operating at scale like Mongoose Energy does allow these to be lower and to remain competitive and viable even with the reduction to the feed in tariff.

Have a look at our latest infographic to see the current Feed in Tariff rates.