Ministers defend rapid cut to solar power subsidy

Ministers have argued that they had to act quickly to slash subsidies to small-scale solar power because the cost of panels has dropped by nearly half in the past year – much faster than the previous government envisaged when it set up the scheme.

The government received fierce criticism from the solar industry and environmentalists after the cut and the decision was ruled unlawful in the courts. But ministers have argued that overly generous payments to investors who installed solar panels were in danger of draining the scheme of funds.

They are expected to announce on Thursday a change to the way so-called feed-in tariffs are administered and an injection of funding for the scheme.

Energy minister Greg Barker said the figures on the costs of solar, which he said were independently arrived at, showed the government was right to cut feed-in tariffs. "The costs have come down much faster than Ed Miliband thought in 2010, when the payment was fixed. That has led to much greater deployment," he said.

"We had to take quick action. I know that [the changes to feed-in tariffs] have damaged confidence in the industry. But the new figures speak for themselves."

He said the price falls were good news for consumers and the renewables industry: "There is the potential for solar power to become competitive with fossil fuels without subsidy within the lifetime of this parliament. Solar has gone from being one of the most expensive forms of renewable energy to one of the cheapest."

An average domestic solar power installation cost 15,000 in 2010, but now costs about 8,000. This year the cost could fall to 6,000, according to research from the consultancy Parsons Brinckerhoff, commissioned by the Department of Energy and Climate Change. The report will be placed in the House of Commons library on Wednesday in response to a parliamentary question on the issue.

When the consultation on feed-in tariffs was launched in October, the costs of photovoltaic systems had fallen by about a third since 2009, when the original tariffs were set. The new data confirming sharper falls shows that customers on the original feed-in tariffs could be getting a much higher rate of return than was originally intended – or the solar power companies could be pocketing the difference and making substantial profits.

After the government announced its plans to slash feed-in tariffs last year, judges ruled the measures unlawful when they were challenged in court. On Thursday, Barker is expected to announce how the government will change the feed-in tariffs legally.

Barker is expected to announce that feed-in tariffs will be reformed so that they are gradually ratcheted down as the cost of panels declines, as happens in countries such as Germany. This aims to ensure that the rate of return to people installing the tariffs is kept steady at about 5%, which the government believes will give consumers enough incentive to invest in the panels, and installers enough margin to keep them in business.

But in a nod to the travails of the solar industry, which has suffered months of turmoil, uncertainty and job losses since the cut, the government is expected to announce additional spending on the feed-in tariffs.

Originally, the tariffs were allocated about 860m but this is likely to be increased to about 1bn. The tariffs are paid by additions to energy bills, not from the public purse, but the Treasury has limited the amount that can be spent on them because of fears that bills would rise too fast unless there is a brake.

The extra cash is coming from money that was underspent on larger-scale renewables, such as wind farms.

Solar panels have dropped dramatically in price in part because of massive investment in China, which has built hundreds of solar panel factories, mostly geared at the export market. The price falls have created their own problems, as manufacturers in the developed world have struggled to keep pace and some have gone bust or seen their profits wiped out.