Feed-in tariffs prove popular

Author: Roy Perrott

A government scheme that was launched last year has led to a rapid rise in the use of solar panels and other ways of generating renewable energy. Although expensive to install, it is possible to make good money in the long term from these projects. As we will show, however, the message is “get in quick”, as the economics are soon to change.

What are FITs?

In April 2010, the previous government introduced a scheme to incentivise small scale generation of renewable energy. Those who generate their own electricity from a renewable source such as solar panels or wind turbines are entitled to a payment, known as a “feed-in tariff” (FIT), for each unit of electricity that they produce. The tariff varies according to the type of technology used and the capacity of the installation. The tariff is fixed at the outset for the duration of its lifetime (25 years for solar panels; 20 years for wind) – with RPI increases to cushion against inflation – so the consumer can work out relatively easily how long it will take for the installation to pay for itself and whether it is likely to earn any profit. If the installation produces more electricity than is needed, this can be exported to the National Grid for an additional (but lower) tariff.

Who pays for them?

We all do. Electricity suppliers with more than 50,000 domestic customers must offer FITs to all small scale generators (i.e. those with a generating capacity of 5 MW or less) who produce electricity from a renewable source. This cost is spread among consumers by means of a small levy on our electricity bills. The scheme costs the government almost nothing. It is somewhat surprising, therefore, that the government has recently imposed an arbitrary £900 million cap on the amount of money allocated to FITs. Once the FITs that have been paid out reach that level, they may be stopped completely. With wholesale energy prices rising, and incomes static or falling, the government is concerned that the rapid rise in the number of renewable installations since the FIT scheme was introduced will result in the levy on our energy bills climbing to an unacceptably high level. This is likely to happen much sooner than anticipated, such has been the rapid expansion of solar energy in this country. Approximately 30,000 solar panels were installed in the first year of the FIT scheme, compared with only a few hundred in previous years. The scheme has, to an extent, been the victim of its own success.

Who should use FITs?

With this in mind, the government has recently announced a substantial cut in the FIT payable to larger producers of solar energy from August this year. Whereas the scheme may still be viable for homeowners who are not planning to move home for many years, it will be much less attractive for larger community-led schemes which had been planning to install solar panels over wider areas such as fields and allotments. For installations not exceeding 50 kW, however – the roof space of most buildings would not exceed this limit – the original FIT rates apply…for now. There is a strong incentive, therefore, for bodies such as local authorities, registered social housing providers, hospitals and schools, to consider installing solar panels or wind turbines on their properties. Joining the scheme now, while FIT rates are still high, ought to ensure a steady, inflation proof income stream for the next 20 to 25 years, with the bonus of reducing carbon emissions. The scheme could also be of interest to commercial landlords, particularly of multi-let buildings. Bear in mind also that building regulations are likely to be amended in the years ahead to require buildings to be carbon neutral, so those who install energy efficient technology now may be stealing a march on the opposition.

Alternatively, a joint venture with a private sector partner may be the answer. A “rent a roof” or “rent a wall” scheme would allow the public body or landlord to share in the income that the installation would provide for little or no capital commitment.

Roy Perrott, Professional Support Lawyer, Fladgate LLP (rperrott@fladgate.com)

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