Automatic cuts to solar incentives "misunderstand market", expert says

Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com, made the comments as energy regulator Ofgem confirmed the revised Feed-in Tariffs (FiTs) that are to be available to new solar PV installations from 1 May to 1 July 2013 (1-page / 269KB PDF). Incentives will remain at current levels for installations with less than 50kW of generation capacity, but incentives for installations over 50kW will be cut by 3.5% from 1 May 2013.

"The reduction is of course permitted by the quarterly degression mechanism for solar tariffs which was introduced in November 2012," Fletcher said. "This provides that where the last two quarter degressions were a zero reduction then the next quarter will see degression at the default level of 3.5% for solar PV even if the capacity deployed is below the trigger level for the mechanism."

The cut will take effect although the  generating capacity installed since the last review of the tariff rates has not breached the Government's 'trigger level' for an automatic reduction. Cost controls for the FiTs scheme, introduced by the Government last year, will see cuts to the rates by an average of 3.5% per quarter either if an overall installation limit is reached in previous quarters or if three consecutive review periods pass without any cuts being made.

"The Government's reasoning for including this power is to incentivise reductions in installation costs, but this does seem to misunderstand how the market works in reality," said Fletcher. "A degression mechanism will be introduced from April 2014 for FiTs applicable to other technologies, such as anaerobic digestion (AD), hydro and wind up to a certain scale, but this will be on an annual basis subject to the ability to impose a six-monthly degression if installed capacity has reached the expected capacity in the first half of the calendar year. Businesses in these sectors will have more time to respond, and there is an argument that solar PV should be treated the same way," she said.

Environmental law expert Linda Fletcher pointed out that those operators of solar PV installations at the top end of the spectrum of those eligible for support under the FiTs scheme could potentially opt to receive support under the Renewables Obligation (RO). The RO is the main financial support mechanism used by the Government to encourage the development of large-scale renewable electricity generation projects. Solar installations with a capacity of between 250kW and 5MW are eligible for support under either scheme.

"In these cases, the installer can choose – albeit as a one off choice - which scheme to come under, and so it is probably worth exploring the support available under the RO as an alternative for those looking to install PV at this capacity level," she said. "The current renewables obligation certificates (ROCs) available for solar PV are 2 ROCs per MWh, but the Government aims to reduce this level of support as from 1 April 2013. Any decision should be a one as to which incentive support system to use."

Fletcher added that it was "surprising" that the Government was proceeding with automatic cuts bearing in mind the legal proceedings being brought against it as a result of its previous "rapid reductions" to the level of support available for solar PV under the FiTs scheme. A total of 17 solar energy providers, construction companies and housing associations are seeking damages from the Government in the region of £140 million.

FiTs provide long-term financial incentives to businesses that generate electricity from renewable sources, and vary according to the technology used. Once accredited under the FiTs scheme, installers are eligible for payment for the life of the generation equipment subject to a statutory maximum.

When introduced in April 2010 the scheme originally offered a generous 43.3p per kilowatt hour (KWh) to owners of small-scale PV installations with a generation capacity of less than 4kW. Unexpectedly high uptake combined with the falling costs of the technology forced the Government to conduct an emergency review of the scheme; however its planned cuts of more than 50% for new installations completed after December 2011 were overturned by the High Court due to insufficient consultation. That decision was later upheld by the Court of Appeal and Supreme Court.