Investments  

Does solar still have a bright future?

Mention investing in the emerging solar photovoltaic (PV) sector in the UK, and the conversation will soon turn to government feed-in tariffs.

The twists and turns in government policy on feed-in tariffs have left a damaging perception of uncertainty. Furthermore, the noise around feed-in tariffs has sparked a larger debate about the affordability of renewable technologies.

Feed-in tariffs were introduced by the then Labour government in April 2010 as a mechanism to boost investment in underfunded renewable energy-generation infrastructure in the UK. This followed similar moves in a number of European countries and offered a guaranteed price to compensate for the high cost of producing units of renewable electricity compared to more conventional power. The response to the introduction of the scheme from the UK solar PV industry was immediate and a number of large-scale projects were developed – so called ‘solar farms’.

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In the meantime there was a very technical but very important clarification of the way the feed-in tariff was accounted for in the public accounts. The result was a spending cap applied to the payments made under feed-in tariffs in the government’s comprehensive spending review in the autumn of 2010.

The impact of the spending cap and the rapid roll-out of infrastructure being planned by developers put pressure on the government’s support of solar PV, and in January 2011 the new coalition government issued its Fast Track Review of the scheme. This led to the first of the reductions in the level of the feed-in tariff for larger scale projects, to be followed a few months later by a second review that led to another reduction, this time affecting residential projects as well as larger scale installations.

Clumsiness in executing these tariff reductions led to a well publicised legal challenge, which successfully delayed by three months the implementation of the reduction, although we wait to see whether the government will be able to pursue an appeal through the Supreme Court.

The reality is that feed-in tariff payments are usually intended to be temporary incentives to develop capacity in the industry and should be adjusted downwards as costs in the supply chain reduce, so that consumers do not pay inflated profits to industry participants. In this respect, the government’s reductions in the feed-in tariff were a well intentioned policy.

The failure, however, to communicate a narrative of how the system would work and the long-term plan has created challenges for industry participants as they build capacity in the UK. In addition, it has given confused messages to investors and consumers who are worried that their financial outlay will be vulnerable to a political change of heart.

Myths and misconceptions

The reductions to the UK tariffs announced in 2011 were only in regard to installations completed after a future date, and have not affected installations already ‘plugged in’ to the system.

This has had an impact on developers of solar PV installations, who have had to manage their inventory purchases carefully and adjust their cost model. While disruptive, however, the tariff reductions have not resulted in solar PV becoming uneconomic in the UK. As with many subsidy interventions, there has been an element of cost inflation at all points in the chain and it has been possible to squeeze some very material reductions. For example, panel prices were £2 per watt as recently as early 2011 and are now close to £1 per watt.