Chapter 3: Feed-in Tariffs and ROCs - How Subsidies Went Wrong

Introduction

It's often difficult for new technologies to get off the ground. Not only do you have to get the cost of manufacturing kit down, and the kit more reliable, but you also need a supply chain to distribute and a qualified workforce to install and maintain the equipment. This is particularly true if you want something installed en masse to millions of homes and businesses, but also a handful of larger sites like power stations.

PV

Solar photovoltaic (or PV) technology is a watershed moment for making electricity. Unlike every other way of making electricity, it doesn't rely on moving parts like spinning a generator. It therefore requires much less maintenance or frequent access. Given it's relatively light, thin and flat, it can also be readily installed on existing building surfaces like roofs, and also be ground mounted. It also generates most electricity in the day time, when people are more likely to be awake, working and using electricity. Also, because it can be installed "behind the meter" of buildings, it offers the chance to bypass the charges of local energy grids, taxes and allow end users to generate some of their own power.

Feed-in tariff

The UK isn't blessed with the world's sunniest climate, but despite this a well positioned kw of PV panels will generate an average of about 1kwh/day of power in winter and 4kwh/day in summer. A typical house without electric heating, a heat pump or an EV might use 3,000kwh of electricity in a year, and a typical roof can accommodate 3-5kw of PV panels. So on a net, year round basis, PV can make a typical UK house self-sufficient for electricity, although in reality they will have a daytime surplus in summer and maintain a heavy grid reliance in winter.

Seeing this potential, the (outgoing) Labour government in 2010 decided to launch a Feed-in Tariff, initially with a payment of 43.3p per kWh for every unit of solar electricity generated. Crucially, this payment is made even if the electricity is used onsite and never reaches the public grid. This was incredibly generous, at the time electricity from the grid typically cost just 8-12p per kWh. At the time, there were very few contractors able to install the equipment, and homeowners needed a strong incentive to consider the substantial financial investment. At the time in 2010, a typical installation could cost £12,000-15,000, so with the feed-in tariff offered the expected payback was around 8-10 years.

Given the Feed-in Tariff was guaranteed for 25 years in line with inflation, some of the oldest PV installations in the country are still turning their owners a tidy profit, indeed when uprated with inflation they are now earning around 71p per kWh, which for a typical 3kW installation represents an annual revenue of over £2,000, though degradation can eat into this significantly.

Boom bust

In the years following the adoption of the Feed-in Tariff in 2010, the number of installations started to grow, little at first but gradually more and more as the cost of installations fell and homeowner confidence grew behind the earliest adopters. However, as the price of the installations fell, installation interest only went up more as the payback period fell. This left the government playing cat and mouse with the industry, as it started creating frequent deadlines when it would review and revise downward, as deemed appropriate, the level of feed-in-tariff subsidy. More and more installers entered the industry as well, operating at larger scale and at times with some sacrifice to the quality of workmanship. The pace of cuts to the feed-in tariff accelerated until March 2019, when the government announced an end to new entrants to the scheme, with the final closure taking effect in April 2019.

The boom peaked in 2011-2012 when over 200,000 solar PV systems were installed annually, with the industry employing around 25,000 people. By 2019, when the scheme closed, annual installations had fallen to fewer than 30,000, and the workforce had shrunk to approximately 5,000 - an 80% reduction in both installations and employment.

The closure of the Feed-in Tariff scheme created a massive bust in the industry, as the replacement support vehicle, called the Smart Export Guarantee, provides no support for generation unless it is exported to the grid. Consequently, a large number of installers went out of business. This was undesirable because:

Aftercare: Customers were unable to get aftercare for faults with installations. In particular, the Microgeneration Certification Scheme (MCS) - the industry body responsible for maintaining standards and providing consumer protection - failed to step in as many would have expected, leaving homeowners with faulty systems and no recourse. This reinforced scepticism among some consumers about the technology.

Risk Premium: Attracting more workers and investment into the PV sector in the future became harder because many were sceptical that government might again engineer boom-bust cycles, creating uncertainty about the long-term viability of renewable energy investments.

Ripple Effects: After installers went bust, homeowners with defective installations pursued the MCS Certification Body and in some cases bank/finance lenders. The outdated Section 75 consumer credit legislation, where lenders can be held responsible for the quality of home improvements they lend toward still makes financial institutions hesitant to lend for home retrofit.

Inequality and Legacy

While the Feed-in Tariff scheme has now closed to new entrants, payments will continue until 2044 and its legacy lives on in several problematic ways:

Wealth Inequality: The scheme disproportionately benefited wealthier households who could afford the £12,000-15,000 upfront investment in the 2010s. This created a form of "solar aristocracy" where affluent homeowners received decades of premium payments while others missed out.

Access Barriers: The scheme was fundamentally unavailable to renters, flat-dwellers, and those without suitable roof space, creating a divide between property owners and those without access to suitable installation sites.

Geographic Disparity: Solar yields in Scotland are 20-30% lower than in southern England, meaning the scheme's benefits were geographically skewed toward wealthier, sunnier regions.

Market Distortion: The Feed-in Tariff was simple to understand and calculate paybacks, but its 25-year fixed duration takes no account of the declining value of solar generation during increasingly frequent periods of renewable energy abundance. This means early adopters continue receiving premium rates even when their electricity has minimal value to the grid.

Financial Burden: In common with other electricity levies (see Chapter 10: Electricity Levies - Hidden Costs Everywhere), the cost of Feed-in Tariffs was added to the electricity bills of all consumers. Those who consume more units of electricity contribute more, while users that buy less electricity from the grid (e.g. those with solar PV) pay less.

The FIT scheme closed to new applications in 2019, but payments to existing installations will continue until 2044, creating a long-term cost legacy that all electricity consumers must bear.

Renewable Obligation Certificates (or ROCs)

Lesser known than the feed-in tariff these days, renewable obligation certificates were introduced as a way to increase the income received by early renewable projects plants connected to the grid. The scheme ran from 2002 to 2017, when it closed to new projects, though payments to existing installations continue until 2037. The main technology supported was wind power (both onshore and offshore), followed by biomass (including large-scale power stations like Drax) and hydroelectric projects.

In common with Contracts for Difference (CfD) support schemes, ROCs are only paid when generators are working and online, so the owner (rather than the taxpayer) is responsible for maintaining renewable generators in working order. This "performance-based" approach sounds sensible in theory - generators only get paid when they produce electricity.

The Renewables Obligation (RO) scheme supports only around 30% of Britain's renewable electricity generation. Despite this limited coverage, it still contributes approximately 10% to an average electricity bill, according to recent analysis.

The RO scheme was particularly generous to biomass projects like Drax and early offshore wind farms, which continue to receive premium payments. Early offshore wind projects under ROCs received around £140-150/MWh in 2012 terms. Adjusted for inflation, this translates to roughly £200-220/MWh today—significantly higher than current CfD prices of around £70-80/MWh for new offshore wind projects.

For these reasons, ROC projects still add about three times more to electricity bills than CfD projects. However, this comparison is somewhat misleading since many CfD projects haven't been built yet. As ROC projects reach the end of their support period, this imbalance will naturally rebalance.

A major flaw of the ROCs scheme is the asymmetry of the support. They prop-up, or increase the revenue of renewable generators above the wholesale market price. However, if the wholesale market price spikes (as it did in 2022), there is no method for clawing back or reducing the support. Instead, the renewable generators receive bonus profits. This was particularly evident during the 2022 energy crisis, when ROC generators like Drax and early offshore wind farms received both their guaranteed ROC payments AND the benefit of high wholesale prices - effectively double-dipping at consumers' expense.

In truth, ROCs are actually cheaper to consumers per MWh than FITs, but this can be misleading when looking at headline costs on electricity bills. According to recent analysis by Ben James, the Feed-in Tariff represents a smaller portion of electricity bills - approximately 2.4% of a typical annual electricity bill in 2025. However, ROC-subsidised renewable generators generate far more electricity in aggregate: in 2023-24 they generated around 78 TWh, compared to just 9 TWh from FIT generators. In terms of subsidy per MWh, ROCs provided around £50-120 per MWh (varying by technology and ROC banding), while FITs typically provided £140-190 per MWh (depending on technology and installation size). This means ROCs were actually more cost-effective per unit of electricity generated, but because they supported much larger volumes of generation overall, they appear more expensive on electricity bills.

These policy weaknesses contributed to the eventual replacement of ROCs with CfDs (see Chapter 14: CfD vs Marginal Pricing - Market Design Disasters). However, no reform of existing ROCs has been attempted, and during the 2022 energy crisis, the government even refused to levy the windfall tax on ROC generators, allowing them to keep their excess profits while other generators faced additional taxation.

Another weakness of the ROC scheme is the perverse incentive it creates when wholesale prices are low, which occurs during periods of excessive renewable generation - an increasingly frequent occurrence as Britain's wind and solar capacity grows. When wholesale prices fall below the level needed to cover ROC generators' costs, the grid operator must compensate them for the shortfall, effectively paying them not to generate electricity. This "curtailment compensation" means consumers pay twice: once for the ROC subsidy and again for the generator to stay offline.

ROC generators argue, with some justification, that this is a risk they shouldn't be liable for, as they were encouraged to build capacity under government policy. However, the cost of wind curtailment is growing rapidly on consumer bills, especially as the country fails to build enough transmission cable capacity fast enough (see Chapter 6: Transmission Constraints - Bottlenecks and Bottlenecks and Chapter 7: Scotland - The North-South Divide). This creates a situation where the ROC scheme not only subsidises generation when it's needed, but also pays generators to avoid generating when the system is oversupplied - a fundamental flaw in the market design.

To renege, or not to renege?

The idea of reneging on ROC contracts has not been a mainstream policy position under consideration by either the previous Conservative or current Labour governments. Reneging on FIT payments hasn't been considered either, though given the direct impact this would have on millions of households and smaller businesses, one assumes it would be politically impossible.

However, reneging on renewable subsidies is definitely an idea considered by the Reform party, which has argued that some schemes are too generous and represent an unfair burden on consumers. It remains to be seen whether Reform will win an election, or whether these radical ideas might be adopted by other parties forming a future government.

For the time being, the credibility damage of reneging on subsidies, combined with the substantial legal obstacles built into these schemes, has prevented this from happening in the UK. Spain provides a cautionary tale: when the government attempted to cut renewable energy subsidies by €2.7 billion in 2013, it triggered over 52 international arbitration cases with compensation payments exceeding €1.6 billion, severely damaging investor confidence in future renewable projects. Unless a future UK government is prepared to accept similar risks, reneging on these contracts seems unlikely, except under two specific conditions:

1. A future government abandons Net Zero targets entirely—something Reform has indicated it might consider
2. The RPI inflation indexation continues to push legacy renewable power costs significantly higher than new-build renewable or fossil fuel projects. RPI is a widely discredited measure of inflation that consistently overestimates inflation.

As this cost gap widens and the ROC contracts become increasingly distant from current energy policy, it's not infeasible that a future government may be able to renege on some of these contracts with enough temporal and policy distance to avoid contagion risk to other energy infrastructure projects. But this will be a balancing act, and will result in significant legal challenge, as the system of contracts was set up precisely to make this difficult - the government needed to provide investors with confidence that their long-term investments in renewable energy infrastructure would be protected from political interference, ensuring private capital would flow into the sector. It could also easily knock investor confidence in unrelated sectors like water.