Market insight

The Feed-in Tariff introduced a new opportunity for social housing providers to simultaneously earn additional income, reduce tenant's energy costs, and cut carbon emissions.

Many local authorities and housing associations have been investigating the potential income, costs and finance options to roll out large numbers of solar PV systems across their housing stock. Examples include: 12 social landlords in the Liverpool area, Birmingham City Council and Dundee City Council.

This briefing note provides insight into some of the key issues that these projects will need to consider.

Click here for the briefing note.

To qualify for the original 30.7 p/kWh Feed-in Tariff (FIT) support level, solar parks with a capacity of 100 kWe or more were required to be connected to the grid by 1 August. A significant number of solar parks have achieved this. Therefore, many tens of MWe capacity will be registered in the coming months, which will change the market pattern.

In future, some of these schemes may add extensions of several MWe. However, this route to retain the original FIT support level for extensions is being closed by the Department of Energy and Climate Change (DECC), so solar parks are likely to add a spectacular, but short-lived, uplift to the market.

Our analysis of the first 12 months of FIT data shows that total capacity continued to grow, reaching just under 108 MWe by the end of March 2011, a 48.8% increase since December 2010. Solar PV shows the most growth and, since December, increased by 59.8% to 77.3 MWe.

In fact, solar PV systems dominate the market with 72% of the total FIT capacity. There were concerns that the FIT Review, severe winter weather, etc would reduce the growth rate. Instead, there has been an accelerating growth of additional solar PV capacity added month by month over the first 13 months.

The growth rate of the domestic solar PV market is consistent enough to allow us to make some market projections.

These projections suggest that domestic solar PV could reach at least 163 MWe and potentially reach as high as 223 MWe by the end of March 2012. This assumes that current trends in investment for solar PV are not disrupted by major changes in the tariff support levels.

The fast-track FIT review has confirmed reduced tariffs for solar PV systems over 50 kWe, which comes into effect on 1 August 2011. As a result, several large solar parks that have planning consent will have to be operational before this date to be eligible to receive the current tariff support level. Hence, any growth in this segment of the market will be short lived.

The AEA Microgeneration Index shows that the financial incentive of the Feed-in Tariff has stimulated significant update in microgeneration across the UK in the year since the introduction of the scheme

It also shows that levels of microgeneration uptake across the country do vary significantly. In some cases, such as in the south east and south west, this is due to higher levels of solar resource. However, some areas with less solar resource, such as Yorkshire and the Humber, also demonstrate very high levels of solar installations. Why is this?

Yorkshire and the Humber has made much progress in developing a local supply chain, have many supporting local planning policies and have stimulated interest, understanding and market appetite for microgeneration. It demonstrates that taking steps to overcome non-financial barriers can have significant benefits for the uptake of microgeneration.

This supports the message presented in DECC's new microgeneration strategy published today. It states that "Taken together, financial support and actions to tackle non-financial barriers will provide a springboard for the deployment of microgeneration".

The new strategy specifically discusses actions that will increase skills, develop the supply chain and generate interest in microgeneration, which will support the microgeneration incentives in increasing the uptake of microgeneration in the UK.

Our analysis on schemes that have applied for Feed-in Tariff accreditation up to 31 December 2010 highlights that total capacity continues to grow, reaching just under 72 MWe, a 64% increase since September.

Solar PV shows the highest growth - an increase of 84% to 48 MWe. Wind capacity increased by 34% to 14.3 MWe and hydro capacity increased by 27% to 9 MWe. Increases between October and December 2010 are due to the FIT alone because transfers from the Renewables Obligation were completed by 1 Oct 2010. Nationally, the first two anaerobic digestion (AD) schemes have been installed, one at 140 kWe the other at 526 kWe. The number of micro combined heat and power (CHP) installations rose from 5 to 30, bringing the total installed capacity to 30 kWe.

Orkney area had the highest installed capacity at just over 2 MWe having registered two 900 kWe wind turbines and a number of smaller wind and solar systems. Cornwall has the next highest capacity at 1.6 MWe, which is largely solar photovoltaic (PV). Other regions show different patterns, with solar PV dominating in urban areas and a more diverse range of technologies in rural areas.

The installation of small PV systems on existing homes dominated market growth, and represented 79% of the solar PV capacity. Although the PV market grew rapidly, the rate of growth slowed slightly in December. Discussions with suppliers indicate that practical issues of installation during the cold weather had a negative impact for some clients. Future analysis will show if the sector caught up - or if other factors, such as uncertainty over the future of the FIT scheme, were already at play and that this is a sign of the initial growth rate stalling.

Our analysis also shows that the FIT has only met a small fraction of the installations and carbon dioxide (CO2) savings that the Department of Energy and Climate Change (DECC) expected. This is not surprising because the policy has only been in operation for a short time and the lead-in time for many of the larger microgeneration schemes means that these have not yet applied for the incentive. This makes predicting the future uptake more difficult and, thus, the task of the FIT Review more challenging.

Yesterday, the Secretary of State for Energy and Climate Change, Chris Huhne, announced an early review of the FIT scheme, aimed at reducing its costs by £40 million. The two main elements of the review are:

• A comprehensive review of FITs.
• A fast-track review of large-scale PV and farm-scale AD plant.

The comprehensive review could cover all aspects of the FIT scheme, including tariff levels, thresholds and administration.

The fast-track review of the large-scale PV tariffs is focused on systems over 50 kWe and is intended to address DECC's concerns over the potential for large PV parks to absorb too much of the budget allocated to the FIT. The fast-track review for AD is on the opposite tack - aiming to examine why so few farm-scale AD schemes have been encouraged so far.

The risk of an early review has been present since last summer. The AEA Microgeneration Index provides data that is highly relevant to Government's FIT review including, for example, the tariff levels and the uptake in each tariff band.

The two charts below show the FIT payment and the installed capacity for each band of retrofit solar PV and wind systems.

The difference between the scale and pattern of uptake for small scale systems is stark:

• Small scale solar below 4 kWe does not require planning permission, the energy generated is straightforward to calculate and has the highest tariff of 41.3 p/kWh. Capacity is already over 35 MWe and continues to increase.
• Small scale wind below 1.5 kWe shows 10 kWe of capacity, planning permission is required and the site location and conditions have a very marked impact on energy generated.

For large scale systems the opposite trend emerges:

• For wind systems in the 500 kWe to 1,500 kWe range total capacity is 5 MWe.
• There are no PV systems above 100 kWe.
• In both cases, planning is required, but the development cost of wind will be higher as a detailed assessment of wind resource using long-term measurement of wind speed with a meteorological mast is essential.
• The difference between these two examples is that wind projects will have been in development before the details of the FIT were finalised, with sites already under detailed investigation. In contrast, the large-scale PV market in the UK had a standing start - with the results yet to show.

Hence, the FIT review must take into account the wider, non-financial issues that influence the uptake of the scheme.

The announcement of the FIT review has started a vigorous debate, with a focus on the uncertainty this creates among a newly formed and growing industry. For larger scale developments this is likely to have a knock-on impact on costs of finance, which may reduce the viability of some projects. This directly affects plans for large-scale PV and AD, with developers facing a block on progress from inward investors who can readily choose other markets for their projects.

Our future analysis will show if the FIT review impacts investment in these two technologies alone or if there is a more widespread impact on the market.

DECC's response to the consultation on FITs stated that 'It is expected that by 2020 the scheme will support over 750,000 small scale low carbon electricity installations...'.

With 11,359 installations in the first six months, the scheme has delivered only 1.5% of this expectation. If the 750,000 installations were to be phased evenly over the ten years, then 37,500 installations might have been predicted for the first six months. In reality there should be a bias towards early market growth - as the values for the FITs are not known after April 2013 and will be lower than they are now. So the current figure is very modest compared to both expectations. Hence the number of registrations in the first six months does not provide the evidence for a major re-think of the FIT scheme - a view the Government seems to share.

What is less certain is the level of new schemes in the pipeline - could there be a tidal wave of new schemes about to hit the FIT register? There is less robust evidence here, but we can get some insight from the responsiveness of the supply chain.

Our experience is that suppliers are able to provide quotes quickly and to offer lead times for installation in a few weeks. We also hear that energy suppliers offering 'roof to rent' deals still have plenty of deals to conclude. This does not suggest that suppliers are overloaded with business.

The FIT has also created some interesting new sub-markets. One of these is from councils examining purchase or lease for large numbers of domestic scale PV systems on council housing. The potential volume of1,000+ systems offers a high level of discount and a much more attractive investment. However none of these schemes has yet been implemented. If they were, hard pressed councils and their tenants would be the beneficiaries -a major policy boost in energy, environmental and social terms.

On the evidence available it seems premature to judge that the FIT scheme is overheating the market - only time will tell.