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Green power subsidies – FIT for purpose?
16 June 2011
FITs were originally introduced to encourage the take up of small scale electricity generation (mainly solar, wind, hydro and micro CHP) by individuals, organisations, businesses and communities. The idea was that small scale generators would be paid a tariff to generate electricity and export any surplus back to the national grid.
However, with returns of between 8% and 10%, it did not take long for investors to see the potential for securing mouth-watering returns over a 25 year period. And with no limit to the large scale projects, it was not a surprise that energy watchdog Ofgem was inundated with applications to build huge solar farms.
The overly high rates set by the previous government skewed the market and created an industry focused on short term profits, rather than creating long term growth through new markets, such as manufacturing our own solar panels rather than importing them from Germany or China.
The current government moved quickly to limit the number of these applications getting off the drawing board. It slashed tariffs for any project above 50kw, with the largest cuts of 72% on projects between 250kw and 5MW. To put this into perspective an average household solar installation is around 3kw.
But before decrying the government as ‘anti-green’, the savvy social investor must ask who would be losing out in order to pay for these returns. These solar farms would have quickly gobbled up the limited cash available to encourage investment into small-scale electricity generation.
Which brings me on to my next point. The FIT was never a government subsidy paid for directly from Treasury coffers. Instead, it is drawn from a levy put on the utility bills of every business and home in the country. Is it not right that it should be the same businesses, homes and community groups that get a share of the spoils? It is their investment after all.
Even the growing number of households facing fuel poverty would have been lining the pockets of an industry that has already had around £50m of government subsidy under different schemes over the last 10 years.
If you are an investor hungry for both financial and environmental returns, the truth of the matter is that renewables remain an exciting sector. Even if your primary motivation is simply a quick buck, the ROI in the solar market, in spite of last week’s cuts, still looks incredibly healthy.
For example, a solar PV system with a 250kW capacity would still provide enough panels to cover half a football pitch (or approximately 80 houses), and with a guaranteed repayment of 15p per kWh fixed for 25 years, smaller scale projects still stack up. In other words, even with the FITs cuts, an investment into a 250kW project (an approximate cost of £700k) would generate in income and savings an impressive £2 million over the 25 years.
So the smart businesses and investors will be the ones to get new projects off the ground before the rates potentially get cut further next year. However, perhaps the even more savvy investor will start to put faith in the UK’s ability to compete internationally in manufacturing the hardware that you’ll undoubtedly be seeing in a street near you very soon.