Feed In Tariffs: A Tragedy in Three Acts

No happy ending here...

The last acts of two long running energy sagas were played out in the second week of the ‘early return’ to Parliament that gives way to the conference recess. If we had to characterise them as plays, the big one, the Energy Bill, could be designated as an action play possibly giving way to comedy.  The smaller one, the Feed in Tariff / PV Solar Fiasco, could clearly be put down as a tragedy.  More on the action play later.  For now, the tragedy.

The ‘Fiasco of Feed in Tariffs’ or FFIT for short, keen readers of former posts  will recall, came about because of a seeming panic reaction by DECC to the success of the Feed in Tariff for solar. Not only have there been huge numbers of installations (some 60,000 so far since FIT came into being), but some people were building VERY BIG solar installations. These are very much more cost-effective than home roof micro-installations, and are lauded as playing a possible substantial role in future UK renewable deployment in the DECC ‘renewable energy roadmap.’  But never mind.  Right now, what they and indeed the overall success of FITs do is to create a possible future budget problem for financial planning that generally assumes things will not work very well, and hence will undershoot allocated resources, rather than the other way round.

But, some feeble voices might point out, the possibility of course correction, or indeed changes to the tariff levels to achieve the balancing of just these sort of issues was allowed for in the original scheme, which always was due to be reviewed in 2013.  And anyway, they might add, FITs would pay for itself through the levy arrangement that underpinned it. It wouldn’t need public funds. Industry and investors knew this, and had factored it in. The difference was the sudden lurch in February into an interim review which, as will be known by those who follow these things, has proved quite disastrous for installation of relatively small sized solar PV: community centres, churches and so on.  All a far cry from the alleged claim that it was all about the emergence of huge and scary ‘solar farms’ of perhaps 5megawatt capacity.

The last act of all this was played out in Committee Room 11 of the Commons at an unseasonable hour of the morning on Thursday. Labour had ‘prayed against’ the instrument that implements the panic change: it made no difference to the validity of the change itself, but at least gave an opportunity for it all to be aired in the Commons and not stuck away in a ministerial order (see here for the debate).  Some good points were made and scored, but it didn’t really shed much more light on the central question of: “why?”  Or more exactly: “why then?”

My take on it is this. Treasury came up with its plans to introduce a cap on energy levies around the turn of the year, to be introduced in the March budget. This included in the cap Renewables Obligation, Feed in Tariff and Warm Homes discount, all of which were deemed by Treasury to be ‘imputed tax and spend’ even though, as levies, they cost the taxpayer nothing.  DECC was taken by surprise about this, because only one of these levies had ever been pronounced upon as definite “imputed tax and spend” by the Office for National Statistics, the body that is supposed to do this job. Treasury itself decided that FITs and the Warm Homes Discount should be designated and told DECC so.  The ‘cap’ is for the duration of the spending cycle but also is limited annually. Next year this will be just over £3bn overall, £170 million of which will be FITs. It was not possible for the direction of take up of FITs to be accommodated within this new cap, and if DECC had waited until 2013 to revise its tariff level, spending would be way out of line with the new rules. So it had to act by “lurch,” which is what it did. It then had to declare that the reason for the lurch was not a “cap,” since this officially didn’t exist, and would not be announced until the budget.  Hence all the stuff about a flood of huge new applications etc etc.

The continuing problem for DECC now is though, that even after all this damage has been done, spending on FITs will still exceed the new cap. Take-up on small domestic installations continues to flourish. It is quite possible that, even on the new rules, the cap will be overshot by perhaps 30-40%. What does DECC do then? Will we see another lurch, this time against small domestic installations? Or will they either “borrow” against future cap limits (meaning that there will be a far steeper cut in tariffs post 2013) or eat into Renewable Obligation budgets (which they can do because there is room for some movement within the cap.) If they do that, then it could have implications for the Renewables Banding Review.  A big dilemma. A space to be watched, I’m sure.

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