Analysis: DECC’s proposed changes to financial support for solar PV

Today’s shock announcement that the Department of Energy and Climate Change (DECC) is planning on removing RO support for solar developments over 5MW from April 2015 has the industry reeling.

Although the industry had been prepared for a ‘severe’ cut in RO support, few anticipated the government’s plot to completely exclude solar over 5MW from the scheme. In its place, the government is forcing solar developers’ planning on installing >5MW projects to use the Contracts for Difference (CfDs) mechanism from April 2015.

Watch Ray Noble and Nick Boyle lambast the government for creating further uncertainty in the UK solar market:

However, the industry has expressed serious concerns over CfDs’ ability to properly support the deployment of solar. The Solar Trade Association (STA) notes that “CfDs are far less accessible for the SMEs that are prevalent in the solar sector”. The association has also warned that DECC’s proposals will actually hamper solar’s ability to drive down costs, noting: “The CfD proposals contain no minima for solar – as the STA has made clear, solar will not be able to compete with onshore wind until 2017/18.”

Leonie Greene, head of external affairs at the STA added: “The industry is concerned by the replacement of the RO with CfDs. The proposals are highly complex and will greatly increase risks for smaller SME companies, which are prevalent in solar, compared to big utilities. Without minima, 5MW+ solar will not be able to compete with onshore wind, as DECC knows.”

Ben Cosh, founder and managing director of TGC Renewables added: “DECC’s justification not to let solar PV compete with offshore wind for CfD is not defendable. They cite potential cost reductions in offshore wind of 25-30% by 2030 i.e. from £140/MWh now to £98/MWh by 2030. The government must be being black mailed by the big six who have vested interests in offshore wind.”

The government claims that such a dramatic measure is necessary in order to curtail the massive growth in RO-funded ground-mount solar that has transformed the UK into Europe’s largest solar market. DECC states that “by 2017, there could be more solar deployed than is affordable – more than the 2.4GW-4GW set out in the EMR delivery plan”.

Industry insiders claim that DECC’s assertion that RO solar support jeopardises the Levy Control Framework (LCF) is spurious. According to calculations by the STA, DECC’s latest figures show that last year solar accounted for just 1% of total RO spend. However, the association recognises that government figures severely lag behind actual deployment so has worked out that the current solar capacity of 2.1GW represents around 6.5% of last year’s RO budget or 5% of next year’s RO/CfD budget. The association concludes: “Even if large scale deployment is doubled to 4.2GW this year cumulatively, solar will make up £280 million or 9% of the 2014/15 RO/CfD budget.”

In its consultation, the department notes that there are two other options it could consider instead of removing RO support entirely: a capacity cap or a solar-specific banding review.

A capacity cap would see DECC set the theoretical maximum level of large-scale solar that the government believes it can afford for one year. However, DECC does not prefer this option because it could place “a significant administrative burden” on Ofgem.

The second option, a solar-specific banding review will be the outcome that many solar developers will be pushing for and would truly reflect a technology agnostic approach from the UK government. Astonishingly, DECC says that it feels it cannot carry out a solar-specific banding review because it “requires a degree of foresight that we currently do not have and we could not guarantee that we could obtain sufficiency robust evidence that we need to set support in 2015/16 and 2016/17 at levels that would constrain large-scale solar deployment within affordable limits”.   

Indeed, the department has said that precisely because solar costs drop so quickly, even if DECC correctly estimates costs there would be “no guarantee they would right six months later”.

Ominously, DECC has warned that it might “consider stricter controls than those proposed” if solar deployment poses a bigger threat to the budget than they have anticipated. This would presumably constitute removing support for projects under 5MW as well.

The so-called ‘grace period’

In a move designed to help reassure developers, the government is also proposing a ‘grace period’ for those that have already made “significant financial commitments”.

In order to qualify developers must be able to demonstrate that they have: a grid connection offer and acceptance offer, relevant planning consent, confirmation that the developer or operator either owns or leases the land; and evidence of expenditure of £100,000/MW in project pre-commissioning costs (PPC) or proof that all material equipment contracts have been entered into. However, DECC has said these landmarks must have been reached by today, 13 May 2014.

Developers have expressed serious concern that, because the deadline is set for today, the grace periods will not actually help those developers who are committed to significant UK solar projects. In cases where all four of these criteria can be met, there is a good chance the project is at an advanced stage and will be able complete in good time.  

The shift to rooftop

Despite hailing the enormous potential of roof-mounted solar in the UK, current policy support for the sector has led to disappointing take up. Identified as the key sector for solar in the UK’s Solar Strategy, DECC has attempted to help get the market moving with proposals to split the current feed-in tariff (FiT) degression band for >50kWp installations and stand-alone installations into two separate bands.  

DECC believes that this move will protect roof-mounted solar from being adversely affected if ground-mount deployment under FiTs spikes. DECC is proposing to split 75% of the capacity under the existing trigger to ‘other than stand-alone’ installations with the remaining 25% reserved for stand-alone installations.

Below is a table outlining DECC’s proposed new degression triggers:

However, the STA states that it is “bitterly disappointed” that DECC did not consider increasing the capacity triggers under the FiT rather than separating ground-mounted off into another band. The association notes that “despite the Solar Strategy claiming it wanted to see a major increase in roof-mounted solar, DECC is not proposing to correct the major structural problem with FiTs, essential to deliver on this goal”.

Greene added: “The government says it wants to see a lot of mid-scale rooftops but everyone involved in solar knows the UK policy framework is inadequate. We have been warning DECC they must fix the user-friendly FiTs for medium- and large-scale projects for nearly a year. Not only would these proposals tilt the playing field against solar power per se, but they also expose the bias against everyday decentralised energy investors. It is long overdue that government gave communities, businesses and the public sector the same access to renewables as utilities.

“We urge DECC to work with us as soon as possible to deliver fair proposals, including making the new CfDs work for solar, and fixing FiTs for the mid to large scale rooftop projects they claim they want to support.”

DECC states that it is looking to implement the changes to the FiT degression bands in January 2015.

Consultation response

DECC will be consulting on all of the proposals outlined above until 7 July 2014.

Summarising the industry’s feeling towards today’s announcement, Paul Barwell, CEO of the STA said: “This feels like a kick in the teeth for exceptional performance. Our costs have dropped 30% against offshore wind in two years and we have devoted a year to driving good practice throughout the industry. This is not a just reward.”