How can a government turn what should be a good news success story into bad news in one fell swoop? Read on ………..

Increasingly UK governments like to broadcast their ‘green’ credentials, and indeed in my very own tax arena recent years have seen particularly interesting developments in incentives for environmentally-friendly behaviour, focusing in particular on areas such as:

 Efficient energy and water systems

Low emission motor vehicles

Energy efficient buildings

The development of tax legislation has been piecemeal, and is far from representing a comprehensive environmental tax code. However, a recent EU green paper suggested that within a generation the tax burden on business and consumer will be driven more by environmental behaviour than by income level, which suggests that a fundamental shift is coming, and coming soon.

Of course government has other means at its disposal to encourage responsible environmental behaviour. Apart from ‘sticks’ such as landfill tax and air passenger duty, these include incentives to generate ‘green’ energy. Prominent among these is the ‘feed-in tariff’.

This is a device to encourage the insallation of solar power voltaics, more colloquially known as solar panels. It is usual for solar PV installations in residential property to generate more power than the property itself requires, and as a result they are designed to permit the excess energy generated to be fed back into the national grid. As an incentive to householders to install solar PVs, the government devised a ‘feed-in tariff’ which paid generous rates per kilowatt for such excess energy.

The tariffs applies to other forms of energy as well as solar PVs (wind turbines, hydro electricity, anaerobic digesters and micro combined heat and power), but the real boom in environmentally-friendly power installations was seen in solar PVs. Apart from the attractive feed-in tariff, the other factor at play was a dramatic reduction in installation prices, and the result was widespread take-up of solar PVs, at a level roughly twice that anticipated by the government.

Now the more naive among you might think that this was great news, and that such a quantum leap in the solar power capacity of the UK was precisely what the government had been seeking. However, you would of course be wrong.

Governments are forever the victims of the law of unintended consequences, in that they will introduce legislation for a specific purpose, only to find that the legislation has had other, unforeseen consequences which they perceive as damaging. The Government had set a budget for the feed-in tariff based on the installation costs prevailing for solar PVs at the time. However, such was the success of solar PV installers in both marketing their wares and reducing the installation costs that the budget was clearly going to be comfortably exceeded.

Being a UK government, the inevitable response to this was of course to slash the feed-in tariff, particularly for smaller installations, in a number of cases by over 50%. Apart from the fact that this messes up the calculations which many householders no doubt carried out to consider whether their installation was worthwhile, it has also had a devastating effect on the ongoing market for installation of solar PVs. So not much evidence there for the government’s alleged green credentials.

There is no doubt that there were examples of abuse of the feed-in tariff, notably unscrupulous installers who were retaining the right to benefit from the feed-in tariff themselves rather than passing it on to the householder. However, it should not be beyond the wit of man to produce legislation to combat that specific abuse (how about “you have to occupy the property to claim the tariff”, for example?)

Unfortunately, the natural tendency of any government when faced with a tough nut to crack appears to be to reach for the sledgehammer, and this case has proved to be no exception. The following figures for smaller installations will give a clear idea of how bad the financial damage to householders and other owners of small installations is:

Declared generation capacity     ‘Old’ tariff     ‘New’ tariff

Up to 4kW (retrofit)                                43.3p/kW          21.0p/kW

Up to 4kW (new build)                           37.8p/kW         21.0p/kW

4kW to 10kW                                              37.8p/kW         16.8p/kW

10kW to 50kW                                          32.9p/kW          15.2p/kW

Apart from the financial damage this will do to those who have already installed solar PVs, imagine the impact it will have on those who might have been considering such an installation, and on their views as to how far the government is to be trusted to stick to the published terms of the feed-in tariff in future. So much for the rush to solar power in the UK, then.

In fact it appears that the consequences for the UK may be even worse. I have already been approached by people marketing Enterprise Investment Scheme investments based on solar PV installations in Italy and Poland; there was a thriving market in such investments in the UK until ….. you get the drift. So we may see a significant shift of capital investment from the UK to those EU countries that have had the sense to institute a long-term, guaranteed, sustainable feed-in tariff regime.

So next time you hear the government trumpeting its environmental credentials and telling us how it is in the lead in implementing the Kyoto protocol, think of the feed-in tariff, and weep…………….