UK should taper off subsidies over five years

The publication of a new report titled "UK solar beyond subsidy: the transition" could not have been more timely. The report, produced by the KPMG consultancy, at the request of the UK’s Renewable Energy Association (REA), was presented on Thursday at London’s Walkie Talkie skyscraper, which features a 50 kW PV rooftop fitted last summer.

The KPMG report

KPMG director Robert Hull, a former managing director at UK regulatory agency Ofgem, presented a pathway to a subsidy-free UK PV sector by 2020, predicting 14 GW and 20 GW PV capacity scenarios for 2020/21 would cost £130 million and £340 million per annum, respectively, under current subsidies.

The UK had already installed about 8 GW by the end of this year’s first quarter.

PV will be the first renewable technology to achieve grid parity in the UK, said Hull, adding current solar costs are lower than Department of Energy and Climate Change (DECC) .

The KPMG director said grid parity will be reached first by large-scale solar and later by residential. Nevertheless, the report argues, the government needs to craft "a transition away from subsidies over a five-year period and beyond, rather than the immediate cessation of support, that will result in job losses and industry consolidation."

The report suggests a policy toolkit that includes all domestic, commercial and ground-mounted solar PV segments. At the domestic level, for example, Hall said a relief in council tax (payable per property to local councils according to property value) could be such a policy tool. Similarly, Hall suggested corporation tax reliefs for the commercial sector and a new tax and rate regime for large-scale PV assets. Facilitating access for ground-mounted projects to energy markets, and grid access enhancement, are also vital policy options, Hull added.

An action plan

Nina Skorupska, chief executive at the REA, said, following the KPMG report, the association has prepared an action plan for achieving a smooth transition to a direct-subsidy free future.

Skorupska’s presentation did not include ground-breaking policy options but clearly indicated policy tools already used in other countries where renewable energy thrives.

REA’s action plan called for the country to build on energy efficiency policies that see PV built into homes at the building stage rather than as a retrofit; undertake a review of taxes and tax benefits for the energy industry; legislate net-metering; set a clear energy storage strategy; design a roadmap for the future electricity grid; make Contracts for Difference (CfDs) – the auction mechanism for large-scale PV – workable; and define an overall energy strategy that incorporates renewable energy and storage systems. Last but not least, the REA action plan calls for the Renewable Obligation Certificate (ROC) and FIT regimes to remain in place until at least until 2017 and 2020, respectively.

Skorupska acknowledged DECC’s announcement on Wednesday to scrap the ROC scheme for sub-5 MW plants from April 1, 2016 (ROCs for plants above 5 MW have been scrapped since April) cancels out one of REA’s action plan requirements. She added, the industry is now waiting for DECC’s FIT review.

DECC’s policy announcement this week also removed FIT pre-accreditation for installations larger than 50 KW.

The EMR leaves no room for hope

REA’s action plan might be better described as wishful thinking. Despite the recommendations being successfully implemented elsewhere, the UK’s electricity structure is defined by the Electricity Market Framework (EMR), legislated in 2014.

The EMR does not support the decentralised energy market that Skorupska and Hall asked for in their presentations.

The EMR clearly backs fossil-fuel generation via the capacity market subsidy mechanism, which in December auctioned about 50 GW of coal and gas plant generation capacity.

Renewable energies, on the contrary, receive subsidies via the EMR’s CfD mechanism, whose structure and budget favours large offshore wind plants. The EMR does not provide for storage policy.

Based on those characteristics, it is evident DECC envisions a centralized, traditional energy system, a reflection of the past. Large-scale fossil-fuel plants (subsidized via the capacity mechanism) and new CfD-backed offshore wind farms, preserve the old model. The new decentralised energy market Skorupska and Hall call for, and which includes enhanced electricity grids, energy storage combined with solar PV, and net-metering, works in reverse to the EMR design.

The net-metering mechanism is an example. Net-metering thrives in countries where the electricity price is not kept artificially low and where solar resources are strong, such as Cyprus. Skorupska admitted the UK’s wholesale electricity price is low. Because of the capacity mechanism subsidies, the wholesale price is not projected to rise. On the contrary, it may decrease even further. How can the UK’s net-metering compete with such low wholesale prices? Skorupska told pv magazine the industry needs to move fast, before 2018/19, when the first capacity market payments will run.

A ray of sunshine?

Even accepting the EMR was a well-intentioned policy re-design, the UK has ended in a statist market, where technology winners and losers are selected by the state. It appears PV has run out of political favor.

However the current market design is based on marginal cost electricity pricing, the absence of electricity storage and a passive demand side. All three characteristics are rapidly changing. New generation technologies, notably next generation solar, are overwhelmingly zero-marginal cost ones. IT may soon alter the electricity consumer from a passive player to an active demand-side manager. And battery storage has ceased being an R&D technology.