Still FIT for purpose?

Plans by ministers to change the subsidies available for solar electricity have provoked uproar in many quarters and led to threats of judicial review proceedings. Jackie Gray looks at the impact on local authority and housing association projects.

The government recently announced significant cuts to the feed in tariff (FIT) rates for solar PV. This was part of the first of two consultations on the Comprehensive Review of the Feed in Tariff (FIT) Scheme, which was first announced in February this year. This follows an earlier consultation on the Fast Track Review in March which already resulted in cuts to the FIT rates from 1 August for large scale solar PV installations.

Now that the dust has settled, we have had the opportunity to stand back and consider the effect of the cuts and other proposed changes to the FIT scheme and look at what this may mean for solar PV projects in the future.

Background

The FIT scheme was launched in April 2010 to incentivise the small scale generation of electricity in the UK from renewable sources by subsidising the cost of installing renewable technology. The scheme involves making payments to generators of electricity for each unit of electricity generated (a generation payment), with different tariffs for different technologies. The technologies include solar photovoltaic (PV) panels, wind turbines, combined heat and power systems, hydro power and anaerobic digestion. However solar PV has been by far the most popular technology and represents around 75% of the total capacity installed under the scheme.

Solar PV can be installed on land or suitable roof space. For local authorities and housing associations it has proved a particularly popular option for social housing as tenants can use the electricity generated to help reduce their fuel bills. It has however also been installed on the roofs of schools, colleges, universities, offices and community buildings. A roof rental model has also developed to help those who don’t have the capital to buy and install the equipment themselves. This allows a homeowner or occupier to benefit from free or reduced electricity in return for leasing the air space above the roof to a developer, who owns and pays for the equipment but retains the generation and export payments.

The tariffs vary depending on the technology, the size of the installation and in the case of solar PV, whether the solar PV is retro-fitted to existing buildings or installed on new buildings. The tariffs were fixed at the highest rates until 31 March 2012. From 1 April 2012 the tariffs were to decrease each year according to the published rates, up to 2021. However once the solar PV is installed and registered for the scheme, the tariff is fixed at that date and the generator is entitled to be paid a generation payment using the tariff which applied at that date for the next 25 years, with annual inflationary increases. Any excess electricity not used can be exported back to the grid and an additional export payment of 3.1p per unit is paid.

The government’s proposals

The government now propose to cut the FIT tariffs for solar PV by more than 50%. For an average domestic solar PV installation this will mean a drop in the tariff from 43.3p to 21p for each unit of electricity generated. However in a shock to the solar industry and to the dismay of many public sector organisations who believed they had until 31 March 2012 to complete solar PV projects before the tariffs started to reduce, the government propose that the cuts will apply to all new solar PV installations registered for the scheme from 12 December 2011. This is two weeks prior to the end of the consultation and has reportedly lead to two judicial review challenges, one of which is being brought by Friends of the Earth, who claim the early cut-off date is unlawful.

Further, from April 2012 the government proposes a new multi-installation tariff for aggregated solar PV schemes which would be 20% lower than the standard FIT rates. This new 16.8p tariff will significantly impact social landlords and other public sector organisations, including local authorities with solar PV installations on more than one site.

In a double blow for the social housing sector in particular, the government also proposes to introduce a new requirement for properties on which solar PV are installed to meet new energy efficiency requirements from April 2012 in order to be eligible to receive the standard FIT rate. If the new energy efficiency requirements for properties are not met, then with the exception of some transitional arrangements for solar PV installed after 1 April 2012 but before 31 March 2013, the solar PV installed will only attract a rate of 9p per unit for new installations.

Immediate impact of the changes

The significant cut in rates for those solar PV installations which do not meet the December deadline is a real blow to public sector organisations yet to implement solar PV projects and who now have only six weeks to do so. This timeframe has jeopardised many projects including a number of large scale social housing projects. For some social landlords in particular there simply isn’t enough time now to deliver their solar PV projects as their business cases won't stack up with the reduced FIT rates and funding is no longer available to finance projects beyond 12 December.

The Renewable Energy Association (REA) advises that solar PV projects for over 30,000 social houses are now likely to be cancelled. With an average solar installation costing in the region of £10,000, this means over £300m worth of potential investment in solar technology may no longer go ahead. It also means that the time, resource and costs incurred by many developing projects will be wasted.

For those social landlords and other public sector organisations that have already signed contracts to install Solar PV on properties beyond December, there may be the opportunity to vary the terms of their contract, for example, by bringing forward the installation programme or reducing the number of installations. However this is likely to have significant cost implications and in particular it may not be possible to cancel orders already placed without incurring financial penalties. Roof rental contracts may be more complex and will need careful consideration to assess the impact of the proposed changes on the contractual arrangements.

Where projects are cancelled or reduced, the expectations of those who thought they may be able to benefit from free electricity, such as tenants, will need to be managed. In some cases social landlords may have already entered into tenancy variations with tenants to reflect the intended installation. The terms of these will need to be reviewed and tenants will need to be advised whether their property will still benefit from solar PV and any free electricity associated with it.

The impact from April 2012 and beyond

For social landlords who were planning retrofit programmes beyond 1 April 2012, the lower multi-installation tariff will further reduce the FIT rates available to fund projects and result in a considerably lower rate of return on the capital invested. This will also significantly reduce the availability of finance and may result in the end to the roof rental model for social housing projects.

In addition to the cut in FIT rates, the government has also proposed minimum energy efficiency requirement for properties on which Solar PV is installed. This will mean that either properties will have to have an Energy Performance Certificate (EPC) at level C or above or all energy efficiency measures identified in an EPC and which qualify for Green Deal finance will first have to have been implemented before the standard FIT tariff will apply.

The government has estimated that the average cost of installing the measures required to reach EPC level C could be up to £5,600 per property. For cash strapped public sector organisations this may therefore rule out solar PV on a number of properties as they won’t have the capital funds to implement additional energy efficiency measures and in the social housing sector tenants may not be able to pay for the additional measures through Green Deal plans.

What next?

There is a small glimmer of hope for public sector solar PV schemes as the government has indicated that it also intends to look at proposals to ensure that “community schemes” can benefit in full from the FIT as part of Phase 2 of the Comprehensive Review. Views are also invited on this as part of the Phase 1 consultation, including how a community scheme could be defined. This may provide some hope that large public sector projects such as those on schools, hospitals and in the social housing sector may have a future, but this is little compensation for organisations incurring costs in relation to projects now which may be cancelled and those for whom the promise of free electricity has currently disappeared.

For public sector organisations and social landlords, the best advice at the moment would therefore be to respond to the consultation. Make your opinions about the proposed cuts and changes heard and express your views on “genuine community projects” and the benefits which they will offer.

Jackie Gray is a director in the public services team and part of the energy practice at Dickinson Dees LLP.