More dramatic than Downton Abbey - the FiTs fiasco

Richard Ousey
Energy, Environment and Sustainability Director at Grant Thornton LLP
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Post date: Tuesday, 8th November 2011

The latest series of Downton Abbey has triggered a torrent of criticism from once loyal viewers left confused by the supersonic pace, unbelievable plot twists and unresolved storylines.

It's not clear whether Chris Huhne, George Osborne and Climate Change Minister Greg Barker are amongst the disaffected aficionados, but a brief trawl through their public utterings on the Government's solar Feed-in-Tariff Initiative (FIT) over the last year suggests a similar preoccupation with creating high drama and confusion.

This drama would appear to have reached its dramatic denouement on 31 October, when Barker announced swingeing cuts in the tariffs rates paid on smaller Solar Photo-Voltaic ("PV") Panel installations (up to 50 kW).

The cuts average out at 55%, with tariffs for a normal household installation falling from 43.3p to 21p for each kWH of energy produced. A further reduction of 20% applies to 'multi-installation' sites. Barker indicated that the cuts factor in continuing reduction in panel costs and are targeted at delivering investor returns of circa 5%.

Every good drama has a death or two, and just as the earlier (March 2011) announcement of significant cuts to large (+50 kW) solar installations effectively killed developer interest in "super-size" solar, so the 31 October announcement promises to do the same to smaller initiatives.

The proposed cuts are now out to consultation, offering the chance for one more plot twist, but a lot can be read into the fact that the tariff cuts will kick in from 11 December, 2 weeks before the consultation concludes – 23 December.

The Coalition should not be criticised for cutting tariffs, they were merely following the lead of earlier adopters such as Germany where downward pressure on panel costs were inflating returns beyond original predictions. What is indefensible, however, is the way in which the three ministers have played out a very public spat as to the ongoing attractiveness of Solar PV. This has badly damaged market sentiment and confidence in Solar PV and, by inference in future tariff based green initiatives such as the recently announced Renewable Heat Initiative ("RHI").

Over the last month we have George Osborne at the Tory Party Conference referring to the 'insanity' of the Greens and commenting caustically

"We're not going to save the planet by putting our country out of business" (3 Oct)

Only to be countered by Chris Huhne speaking on the same podium at the RenewableUK Conference in Manchester:

"We are not going to save our economy by turning our back on renewable energy" (26 Oct)

Keen to get in on the action, Greg Barker then used a Birmingham-based renewables conference (28 Oct) to state that the Government wanted growth in solar panel installations to continue. Almost simultaneously, however, a leaked Government memo to the Financial Times indicated that household solar tariffs would fall to 9p per kWh from the previous 43.3p position. It's tempting to say that the leak may have come out of Camp Osborne, equally, it may have been that it was a shrewd move from Barker's allies to manage market expectations, and make the ultimate 21p announcement seem like a hard won victory.

So before the credits roll on Solar FIT, what can the green investment market learn from the experience and use to develop positive solutions to ensure the commercial viability and deliverability of future green initiatives? 

Well:

• Any financial forecasting must err on the side of caution when modelling likely future tariff-based incomes to quantify break even points etc. It's worth remembering that as recently as 3 October 2010 George Osborne was referring to a likely 9% fall in Solar tariffs
• It's essential that this forecasting also factors in the, sometimes ignored 'third' source of income; savings achieved on 'traditional' energy bills through mitigating against hyper-inflationary pressure·
• Fundamentally, however, the key to successful long-term delivery of these initiatives must be demonstrating to George Osborne and Treasury colleagues that these initiatives will not "put the Country out of business". Rather a robust business case must be developed to stress that these initiatives are commercially self-sustaining in the long-term, and that the cost of Government subsidies are more than outweighed by benefits in terms of inward investment, increased output, energy security and job creation.

The other solution of course, is simply to require politicians to be unfailingly honest, collaborative and supportive of fellow cabinet colleagues, but that, one suspects, would be a plot twist even too outrageous for Downton Abbey!

Energy and Environment