Delaying cuts to feed-in tariffs would cost households less than £1 a year

Delaying the government's proposed cuts to solar feed-in tariffs until April next year would add between 10p and £1.60 to annual energy bills, according to the Department of Energy and Climate Change's (DECC's) draft impact assessment of the controversial changes.

The 27-page document (PDF) was published on the DECC web site yesterday, providing an assessment of the economic, financial, and environmental impact of the government's choosing to maintain solar incentives at current levels, impose deep cuts to incentives from April next year as originally planned, or bring cuts into effect from 12 December as proposed earlier this week.

The assessment confirms that, if the government makes no changes to solar feed-in tariff incentives, the scheme will quickly exceed its spending cap, leading to an increase in average domestic energy bills of almost £26 a year by 2020.

In contrast, it shows that the government's preferred option of halving the level of incentives available to small solar installations, and applying the lower rate from April next year to any installation completed after 12 December, would limit the impact on average annual energy bills by 2020 to £2.60 to £3.20, assuming that the government also introduces new standards to limit installations to energy efficient buildings.

The proposal effectively to impose the cuts to incentives with just six weeks' notice has drawn a furious response from solar firms, which have warned that it will not give them long enough to complete orders and manage stock ahead of an anticipated reduction in demand.

A number of firms are expected to take legal action against the government over the pace of the changes, with complaints focusing on the decision to impose the changes to the feed-in tariff scheme before the completion of the consultation on the proposed reforms.

The government has maintained that the cuts need to come into effect quickly to head off a rush of new installations that would exceed the scheme's budget, resulting in significant increases to energy bills.

The impact assessment shows that delaying the cuts to incentives until April next year, as had been anticipated by solar firms, would result in an increase in installations. But it also calculates that those extra installations would lead to an increase in average annual energy bills in 2020 of just £3.30 to £4.20, again assuming that the government's proposed energy efficiency standards are introduced for future solar installations.

Solar industry insiders said that the impact on energy bills of delaying the proposed changes until April next year would therefore range from just 10p at the lowest end of the government's estimates to £1.60 at the high end, compared to the estimated impact of the current proposals.

Taking the mid-point of the government's estimates for the two scenarios the likely increase in energy bills from delaying the proposed changes until April is 85p a year.

"The assessment shows that, if there is the political will to find a compromise, we are talking about peanuts to pay for it," said one industry source. "DECC hasn't done the modelling for it, but the assessment suggests that, if there was a sensible delay that gave firms more time to prepare, the impact on energy bills in 2020 would be around 20p to 30p a year."

A DECC spokeswoman reiterated the government's view that "urgent action" is needed to stop the feed-in tariff scheme exceeding its funding allocation for the current spending period.

"The Impact Assessment notes that we estimate the costs to consumers (nominal, undiscounted) of Option 2 (tariff reductions from April 2012 to installations with eligibility dates from 12 December 2011) will be £320m-£350m in 2014-15 versus a FITs budget of £357m, whereas for Option 3 (delaying the tariff reductions until April 2012) the estimated range is £390m-£430m," she said.

However, the industry disputes these figures, stating that the government's own impact assessment shows on page 22 of the document that the actual estimated costs to consumers of delaying the cuts until April 2012 would run to £260m to £290m in 2014-15.

The latest development comes as solar firms reported that they have received a glut of orders from households and businesses hoping to complete installations before 12 December, while several councils and businesses confirmed that they are cancelling high profile projects, leaving solar firms facing huge liabilities.

A number of companies are now recommending that the government delays any changes to the feed-in tariff until late January or early February, a move they argue would give firms enough time to complete their current order book, clear pre-ordered stock, and limit the financial liabilities as a result of the cuts.

The impact assessment also reveals that official government figures show that, far from seeing costs fall by up to 70 per cent, as Climate Change Minister Greg Barker has suggested, the industry has in fact seen installation costs fall by 30 to 40 per cent since the launch of the feed-in tariff scheme.

Moreover, the smallest installations, which now face cuts to incentives of over 50 per cent, have seen the lowest reductions in installation costs, with the estimated cost of a 2.6kW installation falling 30 per cent from £13,000 to £9,000.