What is a Feed in Tariff?
A Feed in Tariff (FIT) is a financial reward in the form of a fixed payment in exchange for energy generated from renewable sources, for example solar panels. The tariffs came into force in April 2010, so all qualifying systems installed now are eligible.
A FIT is made up of three components, an avoided cost and generation and export tariffs. As the name suggests the generation tariff is paid to renewable energy providers including private households, depending on the energy actually produced. The export tariff is received in exchange for excess renewable energy produced.
The avoidable cost element is generated from electricity savings that would have been paid. The government has estimated that the FITs should cover the initial capital cost and earn a return up to 8% per year. Any monies earned are received via household electricity bills.
What are the Financial Benefits?
There are various FIT rates dependent on the type of renewable energy produced, but to qualify the system must be installed by an accredited installer and systems must not exceed 5 megawatts. FIT rates vary, for example providers of solar generated energy will receive between the range of 29.3p and 41.3p for every kWh produced.
Selling any energy not used (via the export tariff) will earn 3p per kWh, making each kWh generated worth between 32.3p and 44.3p. The FIT rate is locked in for a period of 25 years and an added bonus is that the FIT rate will increase in line with inflation. It is important to understand that the generation and export tariffs will rise (or decline) in line with inflation over the 25 years, as they are linked to the Retail Price Index.
What about Paying Tax on Earnings?
The tariff is non-taxable for domestic users, which means that an individual would pay no tax on the money earned from the solar energy produced. For those individuals in the higher rate tax bracket, this means that an investment in solar powered energy can generate 40% more money than a standard taxable investment with the same rates of return.
This additional governmental incentive ensures that an individual retains the full monetary reward from all the renewable energy produced. For example, you could provide all the electricity required to power your home and there would be no energy bills to pay. You would also be reimbursed for any surplus energy exported to the national grid.
All income received is yours without any taxation, as long as the majority of renewable energy is used for household purposes. Businesses on the other hand, are subject to Corporation Tax on income generated via the tariff, however research would indicate that solar energy is still a financially rewarding investment.