UK’s Small-Scale FIT Closure Needs a Better Foundation

On July 19, my colleague Pritil Gunjan wrote a blog titled “A Solar Coaster Ride for UK Prosumers.” But we were soon to find out that the UK Department for Business, Energy and Industrial Strategy (BEIS) was creating the tightest loop-the-loop and twisting screwdriver turns for prosumers. Just as her blog was published, BEIS confirmed its intent to close the small-scale feed-in tariff (FIT) program on March 31, 2019 as planned. It also stated that it will close the export tariff to new applicants at the same time.

The UK government’s own Impact Assessment paper estimates that the closure of the FIT scheme and the end of export tariffs would reduce the internal rate of return (IRR) for residential systems installed in 2019 from 7%-8% to 2%-3%. BEIS estimates that small-scale annual installations will drop from around 210 MW (with the FIT and export tariffs in place) to between 51 MW and 103 MW in 2019.

As I argue in my upcoming DER Self-Consumption Enabling Technologies report, the future of distributed energy resources (DER) lies in maximizing self-consumption to reduce the amount of electricity bought from the grid and selling grid services to create new revenue streams. Viewed from this angle, BEIS’ decision is a step in the right direction, as the FIT and export tariffs reduce the need for prosumers to embrace those models. In addition, the government could encourage innovative companies to create business models that embrace self-consumption and grid services.

Foundation and Timing Issues

The problem is that BEIS is closing the FIT and export tariff programs before setting a new regulatory framework in which prosumers can participate. In other words, the UK government is demolishing a building still inhabited by an already strained solar value chain without setting up the foundation of the new regulatory framework for small-scale renewables.

This brings timing into the equation: the closure of FITs and the export tariff will occur on the same day as Brexit is expected to happen. As Pritil argued in her article before the BEIS announcement, “the longer-term outlook for post-Brexit solar is riddled with uncertainty as energy suppliers seek more legislative reassurances.” Despite this, it seemed that the industry had found the floor in installation numbers and figured out a sustainable business model without extreme cost increases. The same Impact Assessment estimated the cost of the FIT and export tariff programs at below 0.5% of the annual energy bill of the average consumer for the next 5 years. But now, the closure of the programs brings even further uncertainty to the table. This ambiguity is unlikely to recede soon since the legislative agenda is and will continue to be dominated by Brexit-related topics, pushing energy policy to the back burner.

Under these circumstances, the government’s decision most likely will not push the industry on a long-term sustainable path. Rather, the closure of FITs and the export tariff may simply slay the remaining actors in an already weak value chain. Given the uncertainty levels, it may have been better to tweak the current incentive scheme. Doing so would have enabled the government to ensure that the IRRs remained at an even level as it built the new regulatory framework and then pushed forward with the closures.