Posted by: Nick Duxbury31/05/2012
Since October social landlords have been baying for some certainty around the future of the feed-in tariff so that they can firm up their solar plans. Last week the government took the biggest step it has taken to date towards providing that certainty.
Last Thursday climate change minister Greg Barker announced that the FIT will be cut from 21p/kWh to 16.8p/kWh on 1 August. This has given landlords a welcome extra month to install PV before the next cut. Most importantly, the FIT will decline by an average of 3.5 per cent every three months – although, sensibly, there will be no cut if less than 200MW is installed. This is exactly the kind of response that will give investors some comfort and, frankly, something the government should have come up with six months ago.
Significantly for landlords Mr Barker has said that multiple PV installations will be able to claim 90 per cent rather than 80 per cent of the FIT. This is clearly good news for social housing schemes. However, the sector is still hanging on for the response to a second parallel consultation about introducing a community tariff that would recognise the benefits to tenants and communities in terms of tackling fuel poverty etc, that would allow landlords to claim 100 per cent of the FIT. It is difficult to know whether the change in heart on multiple housing schemes is ominous, though. Will it mean that the government feels more able to back-track on its plans for a community tariff if it has given some ground on multiple PV schemes?
Fingers crossed not. As Pippa Read, policy leader at the National Housing Federation this week argues: ‘While the new regulations do provide more certainty, they still do not recognise the social housing business model, where the electricity goes free to the tenant to help cut fuel bills and reduce fuel poverty. A higher tariff is therefore needed if some of the poorest in society are going to benefit at any scale from a scheme that they assist in paying for through their bills. We hope to see this reflected in the government’s proposed community tariff later in the year.’
While, the housing sector has cautiously welcomed Mr Barker’s reforms, the solar sector is characteristically unimpressed by the government’s slashing of its solar ambitions from 22GW by 2020 to installing 11.9GW. There have also been some grumbles about the reduction in the length of the FIT from 25 years to 20 years. At the heart of the matter is the improved investor certainty, though.
DECC reckons that the new FIT should offer investors a return of around 6 per cent. Not anywhere near the previous 10 per cent, but still not too shabby. Interestingly solar developers seem to think this should be sufficient to revive some of their ‘free PV’ offers.
As we report this week, Empower Community, which before November last year had deals with eight social landlords to install PV on 22,000 roofs, has agreed a deal with York Council to install on 700 homes before 1 August. Empower were hit hard by the earlier than expected cut to the FIT and ended up losing £175 million of institutional backing from Aviva Investors as a result of the saga. Now they are back with a new institutional investor and, albeit with slimmed down returns, have been able to make their ‘free PV’ model work. Under their offer, Empower share the profits from the tariff with the investor and the landlord through a community fund. The company says it is still in talks with the remaining seven landlords that put schemes on hold amid the uncertainty last year.
The real test is whether the company can continue to extend this offer to social landlords for free (and with a return for landlords) after 1 August when the FIT is cut. Alex Grayson, managing partner at Community Empower, is relatively confident that this is going to be doable. As he tells Inside Housing this week, the company is now in talks with a new institutional investor at 16p/kWh and with under the new FITs regime, ‘prima facie it looks like we are still in business’.
‘It won’t be as lucrative as it was going to be, but for most landlords it should still be worthwhile,’ he says.
Mr Grayson also suggests that investors have also reduced their expectations around returns from PV schemes as it has become less of a ‘novelty’ asset class and there is more experience around the solar and housing sector.
However, he warns that schemes further north than York could become a thing of the past due to the slimmed margins. Mr Grayson says there is a 16 per cent difference in the amount of sunshine between the north and the south. Given that fuel poverty is often more of a problem in the north than the south, this is a sad outcome.
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