UK Government's Proposed Cuts to Solar Power Subsidies

Introduction

Following its election to power in May 2015, the British Conservative Government announced a Spending Review in which it set outs its vision for restructuring the UK economy, with the specific purpose of reducing the public deficit (Muinzer, 2015). A key announcement made in the Spending Review, and currently out for public consultation, is the proposal to make significant cuts to the solar power subsidy scheme which has been in operation for the past five years (Clark, 2015). Debate rages between detractors and supporters of the proposals of the possible economic and environmental impact of the changes. The purpose of this report is to discuss and evaluate the outcomes of the policy changes, should they be enacted from January 2016. The paper proceeds as follows. In order to understand the likely impact of the changes, it is necessary to appreciate the political, environmental and economic context in which the solar power subsidies were first initiated; thus, the opening section of the report provides an overview of, and background to the current policy framework, and a more detailed discussion of the proposed changes. Next, the economic impact of the changes is discussed, followed by an evaluation of the environmental changes. A brief conclusion summarises the paper’s key points.

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An overview of the current and proposed policy framework

Support for solar power generation in the UK is comprised of two key subsidy packages – the Renewables Obligation (RO) scheme and the Feed in Tariff (FiT) scheme (Kay, 2015). The Renewable Obligations scheme is a broad package of support which places a duty on the country’s licensed electricity suppliers to source a certain proportion of their electricity from renewable sources including biomass, hydroelectric, wind power, tidal power and solar power (photovoltaic cells, also known as solar PV) (Wood and Dow, 2011). The obligation was initially set at 3 per cent, rising to 15.4 per cent in 2015. The current total subsidy that is available to RO generators is estimated at some £500 million per year up to 2037 (Knowles, 2013).

The Feed in Tariff scheme is in essence a small-scale version of the RO (Kay, 2015). It was launched in 2010 and was aimed at providing subsidies for installations of solar power generation of under 50 kilowatts (kW) at the household and firm level (Cherrington, Goodship, Longfield and Kirwan, 2013). Under the terms of the scheme, firms and householders are rewarded with a payment for every kilowatt hour (kWh) of renewable power that they generate for use on their own premises, and additional payment for unused power that can be exported back to the grid and redistributed for use elsewhere (Allan, Eromenko, Gilmartin, Kockar andMcGregor, 2015). Although, like the RO, the FiT can be used to support the generation of power from a myriad of renewable sources, solar power is the technology that dominates the scheme. According to Kay (2015, p. 38), “Solar PV accounts for 98.8% of the installations under FiT since 2010 and 84.5% of capacity”.

Generally, both schemes have been highly successful, which, paradoxically, analysts highlight as the key driver for the proposed policy changes. Grubb (2014, p. 339), for example, argues that the FiT in particular has become ‘a victim of its own success’: the solar surprise combined unimagined rates of growth with rapid cost reductions”. In 2014, the UK capacity for solar PV increased by some 81 per cent – more than double that of the previous year (Kay, 2015). However, the government has announced that it can no longer afford to subsidise solar power production. In announcing the proposals, the Department of Energy and Climate Change (DECC) stated that

“If cost control measures are not implemented or effective in ensuring that expenditure under the scheme is affordable and sustainable, government proposes that the only alternative would be to end generation tariffs for new applicants as soon as legislatively possible, which we expect to be January 2016, while keeping the export tariff as a route to market for the renewable electricity they generate” (cited in Morales, 2015, online).

It is proposed that subsidies to the solar power programme will be reduced by up to 87 per cent from January 2016 (Morales, 2015). The budget for support for assistance on renewable installations is likely to be capped at £75 million pounds to March 2019, and end thereafter, while subsidies under the FiT programme would fall to 1.63 pence per kWh from the current value of 12.47 pence (Newbery, 2015).

The economic impact of the policy changes

Discussion on the economic impact of the policy changes has been focused on the microeconomic impact (specifically pertaining to the solar power industry itself), and the wider macroeconomic impact. At the microeconomic level, it is argued that the survival of the embryonic, yet burgeoning solar power industry would be under threat if the proposals were to become reality (MacAlister, 2015). Firstly, industry analysts are anxious of a ‘rush’ on the solar power market caused by the establishment of a target date for the cuts to the FiT scheme. Demand for solar installations are likely to surge among those seeking to get cheap installations before subsidies are removed (MacAlister, 2015). For instance, even though the policy proposals have not been confirmed or implemented, industry supplier Energy My Way is now calling on consumers to “get solar panels on your roof before 31 December 2015 to lock in the Solar Feed in Tariff for 20 years” (Eades, 2015, online). Accommodating such enormous demand in such a small amount of time can cause a drop in the quality and performance of installations, which may lead to supplier closures (Eades, 2015).

There is also the possibility of closures arising as a consequence of lowered demand for solar power installations and the job losses that may ensue (Mathieson, 2015). The lowering and removal of subsidies will make solar power less competitive relative to alternative forms of power, including both renewables and fossil fuels (Reid and Wynn, 2015). This will likely spur consumers that are considering switching to renewable energy sources to make the switch to cheaper sources, and will convince others not to make the switch at all. For instance, Mathieson (2015) points out that the current, subsidised cost of solar PV works out at around £80 per megawatt hour (mWh), which is considerably more expensive than fossil fuels (around £50 per mWh). Lowering, and eventually removing the subsidies will increase the real, and opportunity costs of solar power relative to fossil fuels which could kill the industry altogether. For this reason, the industry trade body, the Solar Trade Association has called for governmental support for the industry until 2020, after which it believes that it will have the capacity to operate without state support (Solar Trade Association, 2015).

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However, some commentators have argued that the lowering, and eventual removal of subsidies will actually encourage greater competition in the wider clean energy sector. Newbery (2015), for example, argues that a mature, efficient clean energy sector must be self-reliant and self-sustaining and should operate without state intervention and support. He argues that a market based scheme, such as the auction scheme which characterizes the carbon market, would encourage suppliers to improve investments in technology, to innovate, to lower costs and to act more competitively. Over time, this would strengthen, rather than weaken the economic performance of the industry, and its contribution to the wider economy.

At the macroeconomic level, it has been suggested that the lowering and eventual removal of subsidies for the solar energy industry will free up public funds that can be better used elsewhere to help the government to achieve its goal of repairing public finances (Kay, 2015). In 2013, the subsidy programme cost the British taxpayer some £650 million; the equivalent figure in 2014 was £850 million (Morales, 2015). Under its Levy Control Framework, the government did set a spending cap of £7.6 billion on subsidy expenditure by 2020-2021, but DECC analysis found that the number of solar farms that have so far been established is so great that the cap is expected to be exceeded by some £1.5 billion (Clark, 2015). This money, it is argued can be used to help reduce public expenditure, or can be invested elsewhere to boost the economy (Newbery, 2015; Reid and Wynn, 2015). Furthermore, it is argued that the removal of subsidies will spur greater investment in solar power by the private sector, which is a source of more productive capital than public finds (Newbery, 2015). However, commentators have pointed out that these cost savings must be balanced against the possibility of the British government having to pay the European Union (EU) a fine for failing to achieved its legally mandated goal relating to the reduction in carbon emissions. If, as the government itself predicts, 1 million more tonnes of carbon dioxide (CO2) are emitted per year (due to falling demand for solar power microgeneration installations), the government should expect to pay a fine in the region of £610 million by 2055-2056 (Bennett, 2015).

The environmental impact of the policy changes

The British government produced its own environmental impact assessment report which outlines the likely consequences of the proposed policy changes on take up of small, medium and commercial scale solar power (Department for Energy and Climate Change, 2015). The impact assessment report highlights that the changes will likely result in a lowered capacity for small-scale renewable microgeneration. The availability of subsidies has been directly responsible for the installation of around 3.3 gigawatts of renewable power capacity over the past five years, and 83 per cent of that added capacity has come directly from solar power technology (Morales, 2015). The cutbacks to the feed in tariff payments are expected to lead to a reduction of more than 6.1 GW of renewable energy capacity by 2020-2021, with the largest drop expected to come from the solar sector (Department for Energy and Climate Change, 2015). It is envisaged that around 890,000 fewer households will decide to install solar panels over the five years after the changes come into force.

The likely environmental impact of the proposals has been widely discussed by the green lobby both in the UK, and across Europe more widely. These bodies argue that the developments are likely to have adverse knock on effects for carbon emission levels and the ability of the UK to reach its carbon emissions targets (a lowering of total carbon emissions by 2050 by 80 per cent below 1990 levels) (Bennett, 2015). This is because, as discussed earlier, the reduction and removal of subsidies amounts to an increase in the cost of solar power production relative to alternative methods of energy production, which will disincentivise households and businesses from taking up solar power microgeneration activities, and could lead to a relative increase in the use of fossil fuels (Solar Trade Association, 2015). This could cause an increase in the total level of CO2 emissions coming from within the United Kingdom’s borders. One mid-range estimate is that around 1 million more tonnes of carbon will be emitted every year (Bennett, 2015).

Conclusion

The proposed changes to the policy framework for solar power subsidies is currently out for public consultation. The consultation will end on October 23rd 2015. It is therefore not possible to state with any accuracy what the future political, economic and financial framework for solar power will look like. However, the analysis presented above suggests that the impact of a lowering and eventual removal of subsidies for solar power technology at the both the small-scale and the commercial scales is likely to be substantial. However, the economic impact could be positive or negative. The very existence of the solar industry could be under threat; alternatively, the industry could be encouraged to become more efficient and competitive. The performance of the British economy could be enhanced, but this could be mitigated by the need to compensate the EU for failing to meet carbon reduction targets. The environmental impact could also be devastating if demand for solar power installations and solar PV capacity are reduced.

References

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