Energy Guides

What are feed-in tariffs?

Updated: Friday 18 May, 2012

By Martin Fagan

Feed-in tariffs are what the government pays you for generating and consuming your own electricity with solar panels. We look at what this means if you already have solar panels, or if you’re considering installing them.

If you install an electricity-generating technology from a renewable or low-carbon source, such as wind turbines or solar photovoltaics (PV) - powered by sunlight - the government's feed-in tariff scheme (FIT) could mean you get money from your energy supplier.

The FIT scheme means you can be paid for the electricity you generate, even if you use it yourself, and for any surplus electricity you export back to the National Grid. And of course you'll also save money on your electricity bill, because you'll be using your own electricity.

How do Feed-in tariffs work?

If you are eligible to receive FITs you will benefit in three ways:

1. Generation tariff - once your system has been registered your energy supplier will pay you a set rate for each unit of electricity you generate
2. Export tariff - you get a further payment from your energy supplier for each unit you export back to the electricity grid, so you can sell any electricity you generate but don't use yourself
3. Energy bill savings - you’ll be making savings on your electricity bills, because generating electricity to power your appliances means you don’t have to buy as much electricity from your energy supplier. The amount you save will vary depending how much of the electricity you use

However, there is now a form of feed-in apartheid, as the government announced in October 2011 it was slashing the rate it paid to people who had solar panels installed on or after 12 December, 2011. After that date, said the government, the feed-in would be slashed in half.

But this drew roars of disapproval from the green lobby which took the case as far as the Supreme Court, which in turn ruled against the government. However, the ruling only created a breathing space where those households and businesses that had solar panels fitted and registered between 12 December 2011 and 3 March 2012 were eligible for the old (higher) tariff.

If you had your solar photovoltaic panels installed and registered with the Microgeneration Certification Scheme (MCS) before 3 December, 2012, then the feed-in tariff pays you 43.3p per kilowatt hour (kWh) plus an additional 3.1p per kWh for energy exported to the National Grid.

According to figures from the Energy Saving Trust (ECT), a typical 3kWp (kilowatt peak) household installation (which is considered medium sized) could generate a return of £670 a year (£530 a year from the Generation Tariff, £40 a year from the Export Tariff and £100 a year through reduction of current electricity bills).

This payment system is guaranteed for the next 25 years and the payments will increase with inflation, but as you generate your own electricity and are not buying it in from one of the major energy companies, you won’t be hit by rising electricity prices.

As a response to this, and growing faith in the reliability of the technology, companies such as British Gas (0800 084 3952) are offering a 25-year manufacturer’s performance warranty.

Get free quotes for your solar panels here or call British Gas on 0800 084 3952 for a quote.

Subsidies Slashed

From3 March, 2012, the government slashed the feed-in tariff to 21p per kilowatt hour from 43.3p per kilowatt hour plus the additional 3.1p per kWh for energy exported to the National Grid.

This means the price the government pays you to generate your own electricity has fallen by 55% and the time taken to recoup any investment in a solar PV system is lengthened.

You can still export any excess energy you generate back to the grid, but you will only be paid 21p per kWh and there will be no additional payment supplement.

Also, as of 1 April 2012, there is a new energy efficiency requirement for householders installing solar PV.

Householders with an Energy Performance Certificate (EPC) of Band D or better (A being the best) will be eligible for the standard tariff of 21p/kWh for each unit they generate. For EPCs of E or lower (with G being the worst) then householders will receive the lower rate tariff of 9p/kWh.

So why has the government cut the FIT?

The feed-in tariff scheme was a victim of its own success. Some unscrupulous installers persuaded homeowners to let them “rent” their roofs for solar PV panel installation - with the installation company getting the benefit of the feed-in tariff payments and the homeowner getting a tiny rental payment and a small saving in their electricity bills.

The big winners are those who have already paid for solar PV installation themselves and signed up to the old deal paying 43.3p per kilowatt hour of energy produced, index-linked for 25 years and rising in line with inflation.

Despite its pledge to support renewable sources of energy, the government has defended its decision to cut tariffs on the basis that the cost of installing solar panels has dropped by around 30%, from an average of £12,000 to £9,000.

But prices for solar installation are falling as the competition increases. Not only does British Gas offer solar panel installation, but Tesco also does . Solar panels specialist Evo Energy says that the solar panels for an average installation will have paid for themselves within ten years, after which any income will be pure profit.

So if the cost of installing the system has fallen so significantly, this goes some way to offset the fact that the feed-in tariff has been reduced by 55%.

However, the Department of Energy & Climate Change (DECC) has also said that if the cost of solar panels falls further, the feed-in tariff may be revised downwards to suit. It will be revised again on 1 July 2012 and as the cost of solar panels fall, it’s likely the feed-in tariff will fall accordingly.

In addition, the feed-in tariff is subsidised by other consumers, with a green levy added to energy bills. The Government has pledged that this will not be more than £23 a year by 2020, so says it has to reduce the tariff rate to meet this cap.

Get free quotes for your solar panels here or call British Gas on 0800 084 3952 for a quote.

But installing a solar PV system could still save you money

This is because when you buy a solar PV system, you are effectively pre-buying decades of electricity at today's price, thus shielding yourself from future price rises. It does require a substantial upfront investment, but the cost of panels is falling. This is because PV panels are made from silicon and the price of silicon has plummeted as supplies of it have increased. Also, there are a larger number of companies entering the market to produce panels, which introduces a greater degree of competition which in turn puts downward pressure on prices.

And once you have signed up for a feed-in tariff rate, that rate is not only guaranteed for 25 years, but will also rise every year with inflation. So once you sign up for the rate, you will be paid that rate regardless of whether the government cuts it further.

The other thing to bear in mind is that any money the government pays you in feed-in tariffs is tax-free.

If you’ve recently had a quote for installing solar panels on your property’s roof, the our guide.