Energy Guides

What are feed-in tariffs?

Updated: Friday 25 May, 2012

By Martin Fagan

Feed-in tariffs are what the government pays you for generating your own electricity with solar panels. Energychoices.co.uk looks 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 for once.

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. 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 segregation, as the government announced in October 2011 it was slashing the rate it paid to people who had solar panels installed on or after Monday 12 December, 2011. After that date, said the government, the feed-in would be slashed in half.

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 for those households and businesses that had solar panels fitted and registered between Monday 12 December 2011 and Saturday 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 Saturday 3 December, 2011, 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 (www.britishgas.co.uk) 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

From Saturday 3 March, 2012, the government slashed the feed-in tariff to 21p per kWhour from 43.3p per kWhour 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 Sunday, 1 April 2012, there is a new energy efficiency requirement for householders installing solar PV.

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

Subsidies slashed even further!

On the Thursday 24 May, 2012, the Department of Energy & Climate Change (DECC) announced that, from Wednesday 1 August, 2012, cuts the feed-in tariff even further.

First things first - if you installed solar panels after Saturday 3 March, 2012 or plan to get them installed and registered before Wednesday 1 August, 2012 the above feed-in tariff is the one you will receive. However, register your panels after Wednesday 1 August, 2012 and a new reduced feed-in tariff applies.

From Wednesday 1 August, 2012 the feed-in tariff will be 16p per kWh, a 24% reduction on 21p per kWh. This tariff will increase every year by the rate of the Retail Price Index (RPI); however, this Index-linked period has been cut, to 20 years from 25 years, as the DECC says this reflects the falling lifetime costs of the scheme and will bring solar in line with most other technologies supported under feed-in tariffs.

The good news is that the export tariff - the payment you receive by selling any unused electricity back to the grid - is not only being reintroduced, but also increased, to 4.5p per kWh from 3.2p per kWh.

So why has the government cut the feed-in tariff?

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 and export 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 kWh of energy produced, index-linked for the next 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, and is likely to fall further.

This is because 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 10 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 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 Thursday 1 November,2012 and every three months thereafter. As the cost of solar panels falls, it’s likely the feed-in tariff will fall accordingly, especially as the DECC is anxious to prevent the feed-in tariff from becoming oversubscribed and is taking measures to ensure this doesn’t happen.

To this end, the DECC now says the three-month reduction in the feed-in tariff will average out at 3.5% every three months. If there is a rush to install solar panels in any three-month period, the DECC reserves the right to reduce the tariff by up to 28%; if, however, the uptake of solar panels is low, cuts will be skipped for up to six months.

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.

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 signup 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, use the Energy Saving Trust Solar Energy Calculator to estimate the income and savings you could receive from a feed-in tariff.

For more information on installing a solar PV system, read our guide.

* Calculated at 2.369 kWh x 21p – the average amount of energy generated plus 1184.5 kWh x 3.1p – the amount of electricity fed into the grid. Payments for Solar PV panels for the electricity you generate and use began in April 2010 as part of the Government's Feed-in Tariffs Rate from 1st April 2012 21 p/kWh used onsite and an additional 3.1 p/kWh used for export. Rate applies only to installations fitted to or wired to a dwelling with an energy efficiency rating within rating bands A to D. 50/50% split between electricity used onsite and excess exported back to the grid on a typical export tariff. Unit price used in calculation representative of the average p/kWh charge, as derived from the annual bills at industry average consumption of 16,500 kWh for gas and 3,300 kWh for single rate electricity, paying by Monthly Direct Debit on British Gas' Standard Tariff prices as at 11th January 2012, averaged across all regions and including VAT. 50% onsite consumption number sourced from the Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010. The figures do not take into account any maintenance, repair or other costs required during the 25 year period. Correct as at 1st April 2012.