James' blog - BusinessGreen

Is Barker's solar spin splitting the industry?

Thu, 09 Feb 2012 17:45:00 GMT

Everyone welcomes Greg Barker’s pledge to grow the solar industry, but with the small print promising to shrink the sector this year firms are divided on how to respond

And so, the saga continues. Any hopes the government may have that the latest wave of proposed reforms to the feed-in tariff incentive scheme would bring to an end the controversy surrounding the UK's solar sector are proving entirely unfounded. The whole sorry tale of how the solar sector has been knee-capped by crippling policy uncertainty and unresolved tensions between admirable long term green ambitions and short term political battles has simply entered a new chapter - again providing a living and breathing parable for wider concerns about the seriousness of the government's green agenda. Climate Minister Greg Barker last night predicted there would be a "sharp intake of breath" across the solar industry when the proposals were published, and indeed there was. It took a few minutes, because while the press release and ministerial statement spoke of "improvements" to feed-in tariffs that would put "transparency, longevity, and certainty" at the heart of the reformed scheme, the real news was found in the official consultation document. It was once people reached page 10 and the news that tariffs for standard solar installations could be cut to as little as 13.6p/kWh from July, that breaths were snatched. Yes, the proposed cuts would only come into effect if there is a surge in installations over the next two months, and yes, the cuts may end up being more modest, but if 13.6p/kWh is adopted that would constitute another 35 per cent cut on top of the halving of tariffs that will come into effect from next month. As people read on it also became apparent that further cuts could come into effect from October, taking the level of support down to 12.9p/kWh. And then there was the new "regression mechanism", supposedly modelled on that used in Germany, which could result in cuts being imposed at two month's notice. Oh, and the payment period could be reduced from 20 to 25 years, and the index linking of payments could be ditched. At that point, the collective intakes of breath were in danger of asphyxiating some of the solar industry's finest. But before we get into the justification for and implications of such deep cuts, let's look at the good news. There is no doubt that it could have been a lot, lot worse. The government's decision to relax proposed energy efficiency requirements for installing solar panels so that an estimated 50 per cent of buildings can access the scheme is a vast improvement on plans that would have restricted the market to 14 per cent of properties. Moreover, while solar industry insiders such as Solarcentury's Jeremy Leggett are right to suggest the prospect of changes to incentives every two to six months will dampen demand and make planning extremely difficult, the new regression mechanisms should represent an improvement on the chaotic round of consultations and delays that have led to the current crisis. Assuming DECC gets its sums right (and I admit that is a pretty big assumption) businesses and households should be able to make a decision to install solar panels on the understanding that a well placed array will deliver a return on investment of at least five per cent - not a stellar return, but enough to attract domestic and commercial customers keen to cut emissions and limit exposure to rising energy prices. Best of all, Climate Minister Greg Barker today set the most ambitious target yet for the UK's solar industry, pledging to deliver 22GW of capacity by 2020, a 22-fold increase on current levels. Significantly, he also predicted that the market will continue to grow over the next three years, attempting to assuage fears that the government would back load all the promised growth until the second half of the decade. This pledge was supported by a commitment from DECC that additional budget had been identified that will cover recent over-spend and allow for £460m to be spent on new installations during the current spending period - enough, according to one expert I spoke to - to deliver moderate growth for the industry through to 2015. The government is now on the record with a commitment to the rapid expansion of the solar sector over the next eight years, handing green campaigners a stick with which to beat it if the industry does falter and it looks like the target will not be met. There have even been whispers that the government could from the summer include solar in an updated version of its renewable energy roadmap, having shamefully opted to exclude the technology from its list of renewable energy priorities in the original version. The problem - the all-consuming, over-arching problem - is that the scale of the cuts that are being proposed mean many people in the solar industry are deeply sceptical the sector can continue to grow in the short to medium-term. Emotions are running high, but you cannot simply shrug off descriptions of the proposed cuts as "disastrous", "catastrophic", and "Armageddon" for the industry as idle scare-mongering. A lot of otherwise sober voices are convinced the sector will see a contraction over the next couple of years, making it all but impossible to scale up again to reach the 22GW target by 2020. Why is there such a massive discrepancy between the prediction of DECC and some solar firms that the new rates and regression mechanism will deliver sustainable growth, and rival industry warnings that the proposed changes spell disaster for a previously expanding sector? The answer apparently lies in a report from consultancy Parsons Brinckerhoff that analyses the recent reduction in the cost of different solar technologies, providing data that officials were then able to use to calculate the five per cent rates of return they want to see from the new lower tariffs. However, the report was apparently commissioned and delivered within three days and was based on information from just 13 firms. One extremely disgruntled solar industry source described it as a "shambles" and one of the worst government reports he had ever seen. Others are warning that the rapid recent reduction in solar panel costs that has been experienced over the last 12 months and informs the scale of the proposed cuts will not be maintained. All experts are agreed that costs will continue to fall in the long-term, but plummeting prices over the past year were caused by a global supply glut that is rapidly disappearing. Key material costs are now rising and some solar firms fear they will struggle to deliver the reductions in costs that will enable them to offer a five per cent rate of return at the proposed new tariff rates. However, there is considerable disagreement and confusion on this crucial point. Estimates from JDS Associates reckon that if the government opts for its mid-range scenario of 15.6p/kWh then modest improvements taking the cost of a 2.6Kw array down to around £7,000 would allow firms to offer the promised five per cent rate of return. But, others reckon another gold rush will occur over the next couple of months as people try to take advantage of the 21p/kWh rate, prompting the government to opt for a 13.6p/kWh tariff that slash rates of return and make solar installations unattractive to all but the most committed environmentalist. The solar industry is once again split. Optimists believe cost reductions can be delivered that would make the new tariff rates attractive and as such the sector will continue to grow over the next two years at a steady and sustainable rate. Pessimists (judging by my in-box, they are the more numerous group) fully believe in solar's long term viability, but insist the scale of the cuts will make it all but impossible for them to offer an attractive rate of return to customers anytime soon. Intriguingly, the government's own impact assessment appears to partially side with the pessimists (realists?), revealing that while calendar year 2011 saw 205,000 installations and 15,000 full time employees working in the sector, 2012/13 will see 120,000 installations and 10,000 employees. The sector will contract by a third over the next 12 months, before apparently bouncing back to 15,000 employees and 190,000 installations in 2013/14. Some solar supporters have an explanation for the gap between the government's rhetoric and its apparent willingness to pursue policies that could cripple the sector. They complain that the proposals have the fingerprints of the Big Six energy companies all over them and the solar sector is falling victim to a concerted campaign to strangle potentially game-changing microgeneration technologies at birth. Paranoid conspiracy theory? Perhaps, but there is some evidence to fuel it. The solar industry remains furious that a promise last year to allow it to provide one secondee to DECC has still not been honoured, while Big Six employees can often be found working within the department. Moreover, under the proposals feed-in tariff rates for larger solar farms and rooftop installations could be cut to as little as 4.7p/kWh, well below the rate of 9p/kWh that is equivalent to the support handed to offshore wind. Previous promises to put solar farms on an even footing with other large scale renewables look set to be revoked, once again tilting the market in favour of the kind of gargantuan projects favoured by large utilities. In addition, while solar and small scale wind face the prospect of deep cuts to feed-in tariff incentives the only microgeneration system that could see support increase as a result of the consultation is micro-CHP. Coincidentally or not, this is the one microgeneration technology that several of the Big Six have a significant stake in. There are also credible whispers suggesting Barker has had to fight tooth and nail against ex DTI and Energy Department officials who remain ideologically hostile to anything other than large centralised energy projects. The minister has faced huge criticism from the solar industry over the past six months, but according to several well placed sources he has actually done a huge amount to protect the sector from those who would happily kill it off completely, delivering reforms that may allow the sector to survive in the long term, if not prosper in the short term. Where does all this Whitehall intrigue leave the solar industry? The answer is once again fighting for its life as it faces several more months of confusion and uncertainty. Installers are likely to enjoy a short term boost as people move to take advantage of the higher rates before they fall in July. But in the medium term it remains completely unclear whether the light contained in the consultation is the end of the tunnel or the proverbial on-coming train. The best case scenario is that solar costs continue to fall, DECC's maths proves accurate, and companies can with confidence offer attractive rates of return of five to eight per cent. It is also to be hoped that the stated goal of 22GW of capacity means ministers will have to raise tariffs if costs do not come down as expected and the market stalls badly. However, even if the medium to long term prospects end up looking good, the government's own impact assessment suggests the market will contract next year and not return to last year's levels until 2015 at the earliest. A lot rests on whether responses to the consultation can convince DECC to go with the more modest proposed cuts - as such it is encouraging that ministers have not yet set out a preference for any of the proposed new tariffs. For what it's worth, I have a more optimistic outlook for the solar sector than many of those solar firms still in shock at the latest round of cuts. Regardless of all the disruption it has faced, the solar market enjoys one fundamental advantage over many technologies - people love solar. The technology is getting better all the time and it is rapidly moving into the mainstream as more and more households and businesses deploy it. A five per cent rate of return might not win over many financial directors, but growing numbers of businesses are still being attracted to a technology that promises to cut energy bills and carbon emissions, while enhancing brand equity. The solar sector will survive and still has the potential to play a major role in the UK's low carbon energy mix, particularly if predictions that solar energy will soon compete with grid power on cost prove accurate. I have an inkling the best solar firms will find a way to continue their recent success. The technology remains highly attractive and if your company hasn't considered deploying solar it should at least investigate the option. But sadly, regardless of how positive a spin you try to put on it, the solar industry is again focused on survival rather than building on the rapid growth that has created thousands of jobs and helped cut building related emissions that are again rising - and all for the want of a relatively small sum of money. That is why, despite the government's encouraging words and the partial victory over those committed to killing solar off altogether, this sorry saga could still end up as a tragedy.

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