Roc and a hard place

Latest proposals for FITs mean commercial solar investors would be wise to consider whether they'd be better off with Rocs, says Miles Thomas.

The government’s recently published response to the consultation on feed-in-tariffs (FITs) has been designed to reassure consumers and give clarity to a solar market plagued by turmoil, including three widely publicised high court cases in recent months. Details of the latest proposals are set out in the box. However, the impact they are likely to have on investor confidence is mixed.

Portfolio developments will not be hit as dramatically as they previously were, which may prompt investment there. On the other hand, the new proposals focus specifically on buildings that are already energy efficient. This will, in effect, reduce the number of sites where systems can be installed.

Sectors that have previously looked to invest in systems to actively reduce costs, such as farms and commercial sites, may find their aspirations have become completely uneconomical because these installations will drop to the lower tariff if energy efficiency requirements take effect. In such cases, the reduction to 7.1p/kWh will call a halt to a number of schemes larger than 4kW, as many commercial and particularly agricultural buildings are unrateable in energy performance certificate (EPC) terms. This means that in the future the potential of commercial buildings and their roofs will be under-utilised.

In short, the government seems to be cutting a large number of commercial solar schemes out of the market. Whether this is a conscious decision to focus on the residential sector or not is yet to be seen, but it aligns requirements with those of the Green Deal.

The new cost framework itself is also open to question. This consultation has come at a time when the market is saying panels are being sold at below cost price, leaving the only large savings in the inverter and labour elements of the systems. There is scope for installers to reduce their margins, which is something Savills has been working on throughout the past 18 months, driving some substantial cost reductions on behalf of its clients. However, the consultation appears to have been based on historic cost and price models, not necessarily reflecting the plateau in price reductions that we are witnessing at present.

What has become clear is that the response to this consultation has gone a long way to crystallising the options available for investors – specifically, whether to move on or back to Renewables Obligation Certificates (Roc) subsidy models. These favour large field-scale schemes. While some are still squaring their options and are unlikely to act before the 1 August degression, investors in the round are moving from smaller rooftop FIT schemes back to large ground-mounted projects under the Roc model. Indeed, this trend is exploding in the marketplace, dominated by a different breed of player with more complex models and structures employed to drive acceptable returns.

Ultimately, outside of the residential and domestic landscape, it may come down to a test of objectives for investors. Electricity price rises, coupled with a desire to try to reduce their carbon footprint, may still drive some to invest – but this is unlikely to apply for the lowest tariff, precluding many farmers and commercial building owners and their sites. Large commercial landlords owning offices and smaller industrial units will be more likely to achieve the higher tariff, but investment levels may be low and scheme take-up slow going forward.

Those looking for a strong financial return may not invest even if the higher tariff level can be achieved, unless value can be added elsewhere – for example, where electricity can be sold to tenants at a higher value than the basic export price, and there is potential to avoid the metering costs associated with grid export.

One piece of relatively good news to come from all of this is that there is at least an element of stability being brought back into the photovoltaic and FIT markets. Even if the government models on degression are flawed, at least they appear to have been more considered than previous legislative attempts.

Broadly, the changes may increase confidence and long-term take up, but there may be a reduction in the take-up of larger schemes in the short term while the market adjusts to the realities of the new landscape. Investors may well have to cherry-pick sites that can meet the relatively difficult and complicated EPC criteria, because many sites they have focused on in the past simply would not qualify for any attractive FIT rates.

They will also need to consider schemes under the Roc model before it changes early next year, or will need to look at alternatives to try to reduce costs and ensure returns can be maximised. Even geography will play a part, because yields in the north will not provide the same return on investment in the south and this will have a role to play in selecting where to site new schemes.

Ultimately, it will pay to look at the bigger picture. Investors may want to think about diverting their funds to other technologies under the FIT or schemes under alternative support structures including Rocs and the Renewable Heat Incentive, which have not had the take up initially expected.

Miles Thomas is head of operations at Savills Energy

The feed-in tariff programme

There will be a baseline degression of 3.5 per cent every three months – 1 November, 1 February, 1 May, 1 August – with larger cuts (to a maximum of 28 per cent) depending on the rate of deployment. Tariff cuts will be skipped (for a maximum of two successive degressions) if take-up is low. The Department of Energy and Climate Change will publish deployment levels monthly, allowing the industry to plan for and estimate whether cuts will be implemented. The government has overlooked the option to increase tariffs if take-up is lower than predicted. Whether there is scope for this in the future is yet to be seen.

The government has rightly split the market into its relevant sectors to ensure that larger schemes do not get caught under the umbrella of residential schemes as they have done in the past – differing deployment criteria will be used for each sector, essentially splitting the market into three.

This article first appeared in Utility Week’s print edition of 13 July 2012.

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