Subsidy cut puts heat on solar panel installers

Installers of  solar panels in the UK are rushing to complete as many projects as they can  before December 12, when a government support mechanism known as the feed-in  tariff (FiT) is due to be cut from 43p per kilowatt hour to 21p/kWh.

The industry is up in arms about the cut, which was announced unexpectedly in  October even though tariffs were scheduled to fall in April 2012 anyway. The cut  comes into force before the consultation period on the change is over. “We are  in an impossible situation – we’ve got about 300 installations that we’re now  trying to get signed off by December 11,” says Nick Keighley, director of  Solarlec, an installer based in the North West of England.

“It makes me so angry – people signed up in good faith and we agreed to  supply them in good faith but now we are left in the position of having to  decide which jobs to do before the deadline and which ones get the lower rate.  That may be the government’s fault, but it’s my business that suffers.”

The solar industry is particularly annoyed because it has already suffered  one set of cuts – earlier this year the rate for large-scale projects was  slashed explicitly to allow funding for smaller scale projects to continue. “We  are being penalised for doing a good job,” Mr Keighley says.

He has a point – the industry is in some ways a victim of its own success,  with the government justifying its move because it has overshot the solar budget  as a result of the popularity of the scheme.

However, part of the reason for this popularity was because returns were “unacceptably high”. “Much of the growth in PV [photovoltaic] has been as much  about consumers accessing the government-backed tariff as accessing the  technology,” climate change minister Greg Barker said.

The UK is far from the first country to  cut FiTs and its tariffs are among Europe’s most expensive (for the  government), according to research company Bloomberg New Energy Finance – rates  for domestic customers in Germany are half those of the UK, it says. “The same  thing has happened in Spain, Germany, the Czech Republic and elsewhere,” says  Jenny Chase, manager of the solar insight team at the the research company. “We  said in February 2010 that the UK FiT was too high.”

She also supports the decision to cut rates now rather than wait until April. “Installations tend to go up exponentially towards the end of a FiT banding  period. If the government had waited until April, the cost would have been about  double what it will be now.”

However, the way the cut has been implemented sends  a worrying signal to industry and investors, according to the Confederation  of British Industry.

“Moving the goal posts doesn’t just destroy projects and jobs, it creates a  mood of uncertainty that puts off investors and they wonder what’s coming next,” said John Cridland, the CBI’s director-general.

Even though periodic reviews of FiTs are built into most support schemes on  the basis that costs will come down as the industry develops, policymakers  appear consistently to have set the rates too high. This is partly because one  way FiT reductions are set is to ask the industry by how much their costs are  likely to fall. “The industry is not exactly incentivised to say that it will  cost half as much as it did last year,” Ms Chase notes.

However, in addition, everyone has been surprised by exactly how fast costs  have been dropping, she adds. In 2008, solar panels cost about $4 per watt. By  the last week of October this year, the cheapest panels from China cost just  under $1 a watt.

The cost reduction has been driven by a 93 per cent fall in the price of  silicon used to make the panels – from $475/kg to $33/kg in just three years – and the extraordinary expansion of the industry in China, led by producers such  as Suntech, Yingli Green and LDK. China had 55 per cent of the global market in 2010, up  from 39 per cent in 2009.

As a result, there is a significant amount of overcapacity and the solar  sector is undergoing a massive shake-out.

A number of US companies have filed for bankruptcy this year, and a number of  others have filed cases with the US authorities claiming that Chinese  manufacturers are being illegally subsidised by their government. At the  moment, the dispute is heading to the World Trade Organisation.

Meanwhile, in Europe, solar panel makers such as Germany’s Q-Cells and Roth & Rau have put themselves up for sale  or agreed to be taken over.

According to the European Photovoltaic Industry Association, solar power will  be grid-competitive in parts of Europe as early as 2013 and across all the  region’s key markets by the end of the decade as costs continue to fall and the  price of fossil fuels heads in the opposite direction.

Generation value competitiveness, where it is as attractive for investors to  build PV capacity as to put their money into coal or gas plants, will take  slightly longer, the EPIA says.

The price of solar falls by a fifth every time capacity doubles, the  association adds. As capacity is ramped up in sunnier parts of the world, costs  will continue to fall and government support regimes should be a thing of the  past.

However, given International Energy Association estimates that fossil fuel  subsidies currently total more than $400bn, six times the amount of support for  clean energy, this may be wishful thinking.

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