Ernst & Young concludes slightly higher feed-in tariffs could make solar projects viable without leading to overspending

The crippling cuts to feed-in tariffs for large solar installations could have been avoided, according to a new report that argues that more modest cuts to incentives would have allowed larger projects to remain commercially viable while still ensuring that the scheme does not breach its assigned budget.

The government has long maintained that deep cuts to feed-in tariff incentives of between 40 and 70 per cent for solar projects worth over 50kW of capacity were necessary to stop the popular scheme overspending.

However, research published today by Ernst & Young and the Solar Trade Association will argue that slightly higher feed-in tariff rates of between 20p and 24p/kWh for solar installations with between 50kW and 5MW of capacity would result in an internal rate of return of five per cent for project developers – sufficient to attract enough investment to the sector to allow some solar farms and community-backed projects to proceed.

The report also argues that feed-in tariff rates of 16p to 21p/kWh would similarly allow projects to proceed if solar-produced electricity exported to the grid was paid its true wholesale market value.

The tariffs proposed in the report represent a cut of almost a half on the original levels, which ranged from 30.7p to 33p, but are still higher than the new levels confirmed by the government last week following an earlier than expected review of the scheme.

Ernst & Young said that neither the new level of feed-in tariffs nor the support available to solar farms under the alternative Renewables Obligation, which sees solar receive two Renewable Obligation Certificates, is sufficient to maintain the industry in the UK.

However, it calculates continuing annual price falls of 13 to 17 per cent mean the sector would deliver solar power at the same price as the grid, known as ‘grid parity’, by 2017 as silicon prices decline.

The report argues that the decision to render large solar installations effectively uneconomic will not only undermine expansion in the UK, but leave investors unsure of the UK’s commitment to green energy as a whole, casting doubt on the country’s ability to attract the £200bn of investment needed in new energy infrastructure.

“Revisiting the feed-in tariff at such an early stage of its existence has undermined investor confidence not only in the UK solar industry, but potentially in the wider UK renewables market,” said Ben Warren, head of renewable energy at Ernst & Young.

“Regulatory uncertainty will lead to an increased cost over what would have been achievable under a stable feed-in tariff regime, which would have accelerated the achievement of affordable solar in the UK.”

The report also claims that the solar sector created 2,500 new jobs during 2010, and has the potential to support around 15,000 jobs by 2014.

“The report underlines the potential for this technology to increase competition in the UK electricity market and to deliver subsidy-free power to millions of users shortly after this parliament,” said Solar Trade Association chairman Howard Johns.

“Instead, the coalition government has put the UK industry at a serious international competitive disadvantage and made solar more costly than it needs to be in the UK - without first having even quantified the benefits.”

A Department for Energy and Climate Change spokeswoman said the government agreed that prices had fallen dramatically, which would enable more people to install PV on their roofs.

“However, the UK market for PV is comparatively small so our actions will not impact substantively on global prices but we are well placed to benefit from cost reductions,” she added.