What will the cuts mean in financial terms and will it be possible to install solar before the cuts kick in?
What will the cuts mean in financial terms? (Photography: Sarah Lee / The Guardian)
If the changes to feed-in tariffs (Fits) inadvertently published by the Energy Saving Trust today turn out to be correct, there will be two obvious questions for homeowners hoping to install solar. First, what will the cuts mean in financial terms? Second, will it be possible to install solar before the cuts kick in? Community schemes will be asking a third question, too: will they be offered any protection from the cuts?
Let’s deal with the first question. The Fits work by guaranteeing homeowners, community schemes and businesses a payment for each unit (kilowatt hour) of power generated by their solar system. The rate – currently set at 43.3p for domestic-scale systems – is fixed at the time of installation and then guaranteed, and linked to inflation , for 25 years.
In addition, the Fits provide a small extra payment (currently 3p) for each unit of power exported to the grid, as opposed to consumed within the building. However, the benefits are greatest when the power is required in the building. That’s because the bill savings (more than 10p per unit, depending on your tariff) are worth more than the export payments.
At these rates, solar PV is very financially attractive. The precise benefits depend on your position in the country (the closer to Cornwall the better), the aspect of the solar panels (closer to south-facing the better), the amount of the energy generated you require yourself (the more the better). But roughly speaking you might expect to an initial investment of around £10,000 to generate around £1,000 a year at current rates through a combination of Fits payments and bill savings. Because the hardware and the Fits rates will both be guaranteed for 25 years, you can be confident that the system will pay back your investment in around 10 years, and then generate an additional £15,000.
If the rates published by the EST today are correct, the generation tariff will fall by more than half to 21p (and there are rumours that the real figure might be 20p). This would reduce the annual return on a £10,000 solar system to around £550. That in turn would extend the payback period to around 18 years, after which you’ll only get an additional income of around £3,800 before your Fits income and system guarantee expire – a reduction of almost 75%.
Looking on the brighter side, the solar panels may last more than 25 years, and the bill savings will increase with ever-rising fossil fuel prices. Nonetheless, anyone wanting to install solar would do well to get in soon. But will that be possible in practice? The EST suggests that the cuts will affect anyone whose system isn’t installed and certified by 8 December– which is only around six weeks away. In normal circumstances, it’s not inconceivable to get a solar system ordered and installed in that timeframe, but with demand already very high – and with a huge spike inevitable thanks to the suddenness of the cuts – I suspect that only those who move quickly will avoid being frozen out.
Looking further forward, the costs and benefits of installing solar will gradually shift as prices of panels come down, energy prices go up and the Fits rates are subject to further changes. If take-up remains high at the reduced rates, it’s likely that even deeper cuts will be announced relatively soon as the Department of Energy and Climate Change (Decc) tries to remain within its spending cap. But whatever happens next, it’s unlikely that solar will represent quite such a good deal in the UK for a long time to come.
One other longer-term change to note: from April next year, according to the leaked document, anyone installing solar will need to raise their home’s energy efficiency rating to C or above in order to qualify for Fits certification. For many homes, this will require the addition of significant levels of insulation. The idea is that this will be possible at no upfront using the government’s forthcoming “green deal” scheme, though it remains to be seen exactly how the situation still stack up for people in inefficient older homes.
As for the third question, about whether community schemes will be protected from the cuts in any way, that remains to be seen. The word “community” doesn’t appear in the leaked EST document. If the government fails to protect such schemes from the reduced rates, it will be a blow to many projects (including one that I’ve been involved with) that are using the Fits to try engage a wider number of people in energy and climate issues.
Author: Duncan Clark
Source: The Guardian