Practical Law

Jackie Gray, Director, Dickinson Dees LLP:

In 2010, the previous government launched the Feed in Tariff (FIT) Scheme to incentivise small scale generation of electricity in the UK from renewable sources. The Scheme involves making payments to generators of electricity for each unit of electricity generated, with different tariffs for different technologies. The technologies include solar photovoltaic (PV) panels, wind turbines, combined heat and power systems, hydro power and anaerobic digestion. The tariffs vary depending on the technology, the size of the installation and in the case of solar PV, whether the solar PV is retro-fitted (to buildings already occupied) or installed as part of a new build (before first occupation). There is also a tariff for electricity that is exported to the national grid.

For local authorities and registered social housing providers (Registered Providers) the installation of Solar PV on social housing offers an attractive opportunity to generate income and reduce energy bills for tenants.

Feed in Tariff Rates

The current tariffs are fixed but will decrease by pre-determined rates each year (degression).  The tariffs have been fixed at the highest rates until 31 March 2012 (the First Degression Date), and then decrease each year up to 2021.

In February 2011 the Energy Secretary, Chris Huhne announced the start of an early review of the FIT Scheme (the Review), which has been brought forward due to concerns that large scale solar farms could use up funds allocated to FITs and have a detrimental impact on the cost of the Scheme. The Review is anticipated to report back at the end of 2011 and is likely to result in a change to the tariffs from 1 April 2012.

However the tariffs may change as soon as 1 August 2011 for larger solar PV installations due to the consultation launched by the government in March 2011 on a fast track review of the FIT Scheme in relation to solar PV installations above 50 kW (the Fast Track Review).

Current FITS rates in pence (p) per kWh (including rates uplifted with inflation in April 2011) & reduced rates proposed from August 2011

Technology	Size	Rate (p) from 01/04/10 to 31/3/11	Rate (p) from 01/04/11 to 31/3/12	Fast Track Review Proposed Rate
PV Retrofit	up to 4 kWh	41.3	43.3	No Change
PV New Build	up to 4 kWh	36.1	37.8	No Change
PV	4 – 10 kWh	36.1	37.8	No Change
PV	10 – 100 kWh	31.4	32.9	50kW to100kW – 19p
PV	100 kWh – 5MWH	29.3	30.7	100kW – 150kW – 19p 150kW – 250kW – 15p 250kW – 5MW – 8.5p
PV	Stand Alone	29.3	30.7	8.5p

Benefits under the Scheme

Once solar PV units are installed and registered for the Scheme, the tariff is fixed and the generator (the owner of the solar PV units) is entitled to the rate at the registration date for each unit of electricity generated over the next 25 years, with annual inflationary increases. The first inflationary increase was applied in April 2011 resulted in a 4.8% uplift on the existing tariffs. In addition to the FIT income, occupiers of the buildings can benefit from the free electricity generated during the day which will reduce energy bills.

Excess electricity can be exported back to the grid and will generate additional income through an export payment. This can be in the form of a guaranteed export rate, based on either the amount actually exported where an export meter has been installed, or until smart meters are rolled out, on the basis of a deemed export of 50% of the electricity generated. For 2011/12, the guaranteed export rate is 3.1 pence. Alternatively, if an export meter is installed, the excess can be exported back to the grid on the open market and the generator is able to secure an open market export rate which may be higher.

Impact of the Review & the Fast Track Review

The Review has caused some alarm within the solar PV industry and in particular some investors are nervous about investing in large scale solar PV projects until there is more certainty. Although the consultation on the Fast Track Review has now closed, a further consultation on the main Review is expected to be launched in July. The changes proposed by the Fast Track Review reduce the attractiveness of projects which involve installing PV units with a capacity above 50kW on large areas of roof space or directly on land, such as solar farms.  It has been suggested that these changes may also prevent many projects planned by small business, local authorities, schools, hospitals, community groups and Registered Providers which would have involved installations on larger commercial, community and civic buildings. There are, however, still a range of opportunities available to these organisations despite this.

Social Housing Residential Projects

Projects involving residential properties, where the average Solar PV units are generally less than 2.5 kW, still present an attractive opportunity, particularly where they can be delivered by 31^st March 2012. There is, therefore, currently a lot of activity in this market, particularly in relation to social housing where “Rent a Roof” schemes are available to local authorities and Registered Providers who don’t have the capital to invest in Solar PV themselves. There are also opportunities to invest in joint ventures with private sector partners where additional capital is required.

Solar PV projects are however complex and there will be a number of issues to consider at the outset of a project to make sure that the best model, structure and approach for your organisation is selected. Any project should also be part of a wider environmental strategy to reduce carbon emissions and increase energy efficiency. Local authorities and Registered Providers will also need an early indication of how many properties are suitable for Solar PV to establish the projected FIT and export income and understand what the financial benefits of a project will be. However issues such as public procurement rules, tenant consultation, tax, consents, property rights and the impact of future property disposals including “Right to Buy”, to name but a few, will also need to be considered, addressed and reflected in appropriate contractual documentation. It is therefore essential that legal advice is sought at an early stage.

Conclusion

The installation of Solar PV under the Scheme provides a good opportunity for local authorities and Registered Providers to reduce carbon emissions, help reduce fuel poverty and, depending on the project model, to generate additional inflation proofed income streams. However there are a number of project models to consider and a number of issues which need to be addressed before making firm commitment to implement a project, particularly where a joint venture or roof rental model is being considered as these typically involve entering into binding legal arrangements for over 25 years. With changes to the FIT Scheme anticipated from April 2012, the clock is ticking to take advantage of the current arrangements.