The end of big solar will save households one and a half pence per week

Someone installing a large solar farm today is going to earn a subsidy of about £60 per megawatt hour, about 70% of the payment to offshore wind. As costs continue to drop steeply, developers are rushing to put panels on any field they can find. Government has finally woken up to the growth of solar farms and has decided to remove the subsidy for all installations over 5 megawatts, which will cover about 20 acres/8 hectares. In other words, solar has become too successful for its own good. The obvious response to the unexpected (to government, if not to the industry) growth of large scale PV would be to reduce the subsidy to perhaps £50 or even £40 a megawatt hour until the arrival of the new payment mechanism – Contracts for  Difference – in the next  few years. But, panicked by the explosive growth in farm PV, the government has instituted a blanket ban, citing fears of running out of budget. And, probably, it simply couldn't face yet another drawn-out - and probably unsuccessful - process to try to find precisely the right level of subsidy.

As usual, all the interesting reasoning for the decision is to be found in subsidiary documents and not in the verbose tergiversation in the main paper. And here’s the key figure from background papers: the saving from introducing the ban is calculated at £0.75 per household a year in the later part of the decade. (About one and a half pence per week). The total cost across all electricity users is about £70m a year, or about 1% of the total renewables subsidy. For this saving the government is disrupting the growth of this impressively successful industry and, probably more importantly, increasing the likely level of subsidy needed under the Contracts for Difference (CfD) scheme.

Why is this? The rapid growth of farm PV is helping drive down the costs of solar. When the CfD scheme comes into operation, solar installers will not get a guaranteed price but will bid into an auction. The key value of today’s burgeoning large scale PV industry is that it is forcing costs down rapidly. Surprisingly, the government still doesn’t appear to realise that this only partly because of falling equipment costs. As important, it is coming from unprecedented reductions in the cost of raising money from investors as they become more aware of the reliability of returns from solar. I have heard of offers at around 3% above inflation.

If the government had allowed the continued growth, experienced and well-resourced operators  would have been able to bid even lower prices for big farms when CfDs come into force in a few years. But today’s decision means that the industry will temporarily disappear in early 2015 or earlier and the cost reductions will cease. Capital providers will go on to other projects.

Was this worth it for one and a half pence per household per week? (Just for emphasis, this is their figure, not mine).