The great solar power scam – and you pay for it!

Imagine an A-level economics question: “What the UK is doing is the most expensive way of making emissions reductions”Discuss. So let’s discuss it.

More than ten years ago, I got a quote on a solar powered photovoltaic (PV) installation for some outbuildings with a south-facing roof.  At the time there was a generous government grant of (as I recall) about 30% of the capital cost.  But we looked at the quote, and found that even after the grant, the value of the electricity we’d get would show only a 1% return on capital.  At the time I could have got 4% in a Building Society – and with a Building Society, you can get the money out again!  So we didn’t do it.

A couple of weeks back, I received a mailing for PV installations, with details of the current “Feed-In Tariff” for the electricity generated.  And on the kind of typical domestic installation that we might look at, the tariff is 41.3p a unit.  Bear in mind that the typical cost of a unit of domestic electricity is around 10p (depending on a variety of factors).  So they’re offering to pay four times over the odds for the electricity you generate – despite the fact that it comes in penny packages for limited periods, and depends partly on the weather.

How do they do it?  Does the government pay the subsidy?  No.  The electricity company has a legal obligation to buy this extraordinarily expensive electricity.  And what do they do?  They pass the cost on to all their customers, of course.  So while it isn’t paid by the government or the tax-payer directly, it is in effect paid by all of us, because we all use electricity.  The inflated price of one man’s PV unit is paid by his neighbours (and by industry) in their electricity bills.

It gets worse (or better, depending on how you look at it).  This extraordinarily inflated tariff is guaranteed for 25 years.  It’s inflation-protected.  And it’s tax free.

I’ve seen estimates from several suppliers indicating a return on capital employed of between 8 and 10%.  Tax free.  Consider that today there is simply no deposit account available that so much as covers inflation, after tax.  You’d be lucky to get 3%, and most deposit accounts offer much less.  Yet here is the government offering us up to 10% tax free on our investment.  Is that profligate, or what?  For an older person facing retirement, you can get an annuity rate of around 5% (if you’re lucky).  And you pay tax on the income.  But you can invest the same money in PV, and get 10% tax-free!

The government (and the scheme was put in place under the previous Labour administration) seems to recognise that this can’t go on, because it’s a starter offer that will cease to be available in March 2012, when the Feed-In Tariff will go down to 37.8p (I have the OfGem leaflet in front of me) – though the tariff remains for the full 25 years for those who buy-in before the deadline.

This poses a moral dilemma.  Do we take the outrageous Tariff that the government is offering?  Or do we seek to protect our neighbours and the common weal by refusing it?  I suspect we fall back on the arms dealer’s defence: “If I don’t do it, someone else will”.

As public policy, it is sheer lunacy, and demonstrates the proposition with which we started out.  But as an economic proposition to the householder, it is close to irresistible.

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7 Responses to The great solar power scam – and you pay for it!

  1. Richard Musi says:

    Roger,

    Thank you for this article.

    The Feed in Tariff is a policy which has been proven to most effectively and economically increase the amount of Renewable Energy in the energy mix. We all agree that fossil fuels are finite sources and thus Renewable Energy is imperative for the future.

    The UK Feed in Tariffs for solar are initially high because this market is underdeveloped in the UK. The tariffs regress each year starting from April 2012 to promote competition and to reduce costs. The whole idea of a Feed in Tariff is to make Renewable Energy as cost effective as conventional finite sources such as coal, oil and gas.

    As a public policy, it is certainly not lunacy as you say. When Germany introduced its Feed in Tariff policy, the average increases in fuel bills per month were about €1; approximately £10 a year. If you can find a better way of bringing Renewable Energy to the mass market I’ll eat my hat.

    Bests,
    Richard.

    • Thanks for commenting, Richard, but this is really nonsense. We have plenty of coal and uranium for 200 years — by which time we’ll have new technical solutions (and someone esle will worry about it!).

  2. Peter Wilkinson says:

    Roger
    I had reached the same conclusion and therefore will also inform my neighbour, before proceeding with an installation, so that I do not feel so guilty about him subsidising my consumption! As you say an expensive way of meeting our 2020 renewable energy commitments.
    I would also draw your attention to the latest take on PV installations – namely FREE supply, installation & maintenance by a number of companies with the FITs taken by the companies while the consumer has the benefit of lower energy bill but without having to fund the installation! A 25 year contract that would pass with the property – Mortgage companies will no doubt have something to say!
    Another potential minefield for Rogue Traders I fear, unless regulated.
    See what you think?

    Regards
    Peter W

  3. derek castle says:

    Roger,

    Thanks for explaining it in simple language, sometimes I think the world has gone mad.
    Thanks and regards.

  4. Repeal the Climate Change Act

    Responsible department: Department for Energy and Climate Change

    The Climate Change Act will cripple the UK economy (to the tune of hundreds of billions of pounds) by imposing legally binding restrictions on carbon dioxide emissions that are more stringent than those of any other country on Earth. It is based on a totally false premise – the science of anthropogenic global warming was completely discredited by the “climategate” scandal – and the policy is being pursued solely for financial gain by academics (grants), government (“green” taxes) and vested interests such as investors in subsidised “green” technologies and “Enron-like” carbon trading scams. The Act must be repealed before it is too late.

    Act now sign the e-petition and share this link with your friends http://epetitions.direct.gov.uk/petitions/2035

  5. phil hooton says:

    thank you for setting out a reasoned argument against the scheme. I wonder if the carbon footprint of the production and fitting of the panels is offset during the effective working life ( i believe 25 yrs) of the systems. Regrettably the maximum power production of panels is at its zenith on mid summers day when power demand is low and at its lowest production in December when high consumption is the norm. It appears that the motivation for solar panels is financial rather than environmental in many cases and is the preserve of the wealthy subsidized by the poorer sections of the community.

  6. A. Statistician says:

    So the “government”? is to reduce the tariff from 41.3p, to 37.8p a unit according to OfGem? A reduction of only 3.5p, is a reduction of just 8.475%. This is hardly significant when this means that the UK Solar PV feed-in tariff is still more than Five times as much as coal or nuclear generators get in the UK, and indeed it is around Forty times as expensive as comparable coal sourced power supply in China. How can British manufacturers compete in World markets with this disparity, leaving aside the cost to the domestic consumer? Charles Hendry is supposed to be the “energy minister”, yet plainly he has not been diligent about examining these figures. Shouldn’t Hendry be saying to Ed Davey & David Cameron that this is untenable? Shouldn’t he threaten to tender his resignation if Davey and Cameron not change course? What is Greg Barker’s contribution to this disarray, and aren’t all four culpable?

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