Feed in Tariffs

Why all the fuss about the FIT (Feed-In Tariff)? 

If you’re not amongst those who already have solar panels, or were aware of the mad scramble to beat last year’s 12 December deadline, you may be wondering what the fuss is all about?

Firstly the feed-in tariff is a rate of money paid by the government to homeowners, businesses and organisations such as schools and community groups to generate their own electricity through small-scale green energy installations such as solar panels. The UK scheme was  launched on 1 April 2010.  You can receive feed-in tariffs for both the generation of electricity (a generation tariff) and for giving unused generated electricity back to the National Grid (an export tariff).

The level of payment depends on the technology and whether it is being fitted to an existing home, or installed as part of a new build. Future payments are guaranteed for the next 25 years for solar and 20 years for wind turbine-generated power and are linked to inflation.

Under the original scheme, anyone fitting an average-sized £12,500, 2.5kW solar photovoltaic (PV) system to their existing home are currently paid 43.3p per kilowatt hour (kWh) generated plus an extra 3p for every kWh that they export back to the grid. The income is tax-free. The resulting return on the investment is estimated to be typically 7-10%, although here in the South-East performance of well-positioned PV panels has been comfortably exceeding estimates.  Also the cost of installations has been falling along with the number of installations rising rapidly.

Faced with the available budget diminishing much more rapidly than anticipated, the Government recently announced a big cut in the solar generation FIT (applicable on 12 December instead of the 31 March 2012 date previously announced), and it is this cut that is leading to news announcements of big cut-backs in the staff of solar energy companies, cancellation of planned solar schemes, etc.

The FIT rate paid to householders installing solar panels will be cut from 43.3p per kWh of solar electricity to just 21p after 12 December 2011.  In principle that will mean cutting the return of around 7-10% to more like 4%.  And of course this is having a huge impact on the companies offering free panels on the basis of receiving the FIT income.

However for householders who can manage to pay the installation cost themselves, even the lower level of FIT payments could still mean that solar panels will make good sense.

There are several reasons for this, quite apart from the benefits in reduced CO2 emissions.  Firstly, after the current rush of installations has passed, installation costs can be expected to drop further due to the increased competition amongst the suppliers.

Also the investment return figures tend to ignore the benefit of the drop in electricity that has to be paid for to your electricity supplier (currently around 13p to 14p/kWh).  You can maximise this effect by timing your use of washing machines, immersion heaters, etc to coincide with times when your solar panels are performing well.  And even at times when you are using all the generated power in the house, at present you still receive the 3p/kWh export FIT on the basis of an assumed level of 50% export, as well as the main generation FIT payment.

John Willis