Explanation of the Feed-in Tariff cuts

Explanation of the Feed-in Tariff cuts

In recent weeks, there has been a lot of media coverage about the government’s shock decision to slash the Feed-in Tariff for solar panels at the end of the year. But what does this actually mean for homeowners? We answer some of your questions below. As ever, please don’t hesitate to contact us about all things solar and renewable, we are always happy to give advice and help where we can.

How does the Feed-in Tariff work?

The Feed-in Tariff is a payment scheme, designed by government, to encourage the use of solar panels in the UK. It came about as part of an overall strategy to tackle carbon emissions and meet the nation’s carbon reduction targets, committed to the EU.

When you install solar panels you benefit in three ways:

1. The Feed-in Tariff – you are paid for every unit of solar electricity your panels generate, whether you use the electricity or not. The words ‘Feed-in Tariff’ are slightly misleading, we prefer to call it a ‘Total Generation Tariff’, because you are paid for the total generation of your panels, it has no relation to how much electricity you consume, or sell back to the grid. Payments are for 20 years, tax-free and index-linked.

2. The Export Tariff – you are paid by the Export Tariff for the solar electricity that you don’t use within your home. It is automatically exported to the grid and you receive a small payment. Currently our homes are not metered for the export of solar electricity to the grid, so this is set at a deemed 50% of your total electricity generation, regardless of how much you actually consume.

3. Electricity Bill Saving – because a sizeable proportion of your household electricity is now free from your solar panels, you will benefit from cheaper electricity bills. Over time, as electricity prices rise, the amount you save will increase.

A typical example of the financial benefits of solar panels, installed before December 2015 based on a system generating 4,000kWh p.a. and consuming 30% of the electricity generated.

Number of Panels: 16 (4kWp)

Feed-in Tariff Payment: @ 12.47p per kWh = £498

Export Tariff Payment @ 4.85p per kWh = £97

Bill Saving:  kWh @15p = £180

Total Earnings, tax free and index linked, every year for 20 years = £775

Total Earnings over 20 years = £15,500

Why is the Feed-in Tariff being cut?

There has been a huge surge in popularity of solar panels in the UK in recent years, largely thanks to the Feed-in Tariff. There have also been many large-scale solar farms installed across fields throughout the country. This has meant that government targets for solar have been reached.

It is hoped that solar panels will still remain popular after the tariffs are cut, because awareness of the bill saving and environmental benefits of solar panels has increased. Solar panel prices have also dropped considerably. However, if you install your solar panels before the Feed-in Tariff cuts, you are guaranteed the Feed-in Tariff, at the current rate, for 20 years, tax-free. So, you will be £8,656 better off if you do it before the end of the year.

 When are the Feed-in Tariff cuts happening?

The government has released a consultation paper stating that the cuts are planned for January 2016. We won’t know exactly when the cuts will take place until we have confirmation from DECC (Department of Energy and Climate Change) but if you are thinking about getting solar panels then the advice is to do it now to avoid disappointment. The current Feed-in Tariff rate will be locked in for 20 years from the date your solar panels are commissioned so it makes perfect sense to make sure you qualify for the higher rate and get your solar panels before the end of the year.

If you install Solar Panels before the cuts, do you stay on the higher Feed-in Tariff rate?

Yes! The Feed-in Tariff rate is fixed for 20 years from the time your solar panels are commissioned. You may know someone who installed solar panels back in 2011 when the rates were at their highest. The advantage of installing solar panels earlier is 20 years of tax-free payments, at a fixed rate and index linked. This is why solar panels make an attractive investment, the Feed-in Tariff was designed to create a high demand for solar so the incentives have been generous.

Haven’t Feed-in Tariff cuts happened before?

Yes they have but here’s why this time it’s different. In November 2011 the Feed-in Tariff was cut by 50%. Take-up of solar panels had been high as many thousands of homeowners cashed in on the highly attractive opening rates. Once the solar panel market had been boosted by this early surge of demand, manufacturers of solar panels were able to drop their panel prices, some by as much as 50%. This meant that although the Feed-in Tariff was much lower after the 50% cut, so was the price of solar panels. You paid less for your panels, you got less back from the Feed-in Tariff, but the overall return on your investment remained the same.

This time, with the Feed-in Tariff being cut by 87%, at a time when manufacturers have already squeezed what they can out of the costs of producing the panels, there is very little margin that can be cut. We think it is unlikely that the price of panels will drop significantly despite the drastic cut in the Feed-in Tariff. The financial benefit to homeowners simply won’t be anywhere near what it was. So, the advice has to be to install solar panels now, before it’s too late to benefit.

What should you look for in a reputable Solar Panel company?

There is likely to be a rush for panels in the final quarter of 2015 and this can lead to companies installing poor quality systems that won’t stand the test of time. The Feed-in Tariff is linked directly to your panels’ performance, so you need to make sure you use a solar panel company that is trusted and has a strong track record of installing reliable systems. Read more info on finding a trusted solar company.

What to do now

If you are interested in having solar panels installed on your roof, contact EnergyMyWay today. We are an experienced, accredited company with a strong track record and offices all over the country. We offer advice and information, with absolutely no hard sell. Find your nearest EnergyMyWay or call 0845 371 3181

James Eades

By: James Eades

Operations Director, James Eades is EnergyMyWay's in-house expert on renewable energy policy, microgeneration technologies and best practice in the renewable energy industry.