Could there be a silver lining amid all the gloom created by the government's mishandling of solar feed-in tariffs?
With apologies to Mark Twain, reports of the solar industry's death have been greatly exaggerated.
There is no doubt that the industry has been grievously wounded by the appalling mishandling of the current feed-in tariff incentive review, and the pace of the proposed cuts will almost certainly result in significant bankruptcies and job losses if they go ahead as planned.
The industry is entirely justified in resorting to legal action to try to avoid a bizarre situation that would see deep cuts to incentives come into effect before the consultation proposing those cuts is complete, just as it is justified in its plans to mount a series of protests against a government that is busily undermining a flagship policy that it used to support.
In this light, it is hugely encouraging that The Daily Telegraph reported this week that Climate Minister Greg Barker is considering phasing in the proposed cuts, although it is worth noting that the logic-defying timeline for the consultation means that Barker could not legally announce any delay to the changes until after the crucial 12 December cut off date. As such, the mishandling of the proposed changes will have a chilling effect on the solar industry over the next few months regardless of whether some form of compromise can be reached.
However, while much of the reporting of the controversial consultation has focused on the impact on the solar industry, it is worth asking what the proposed changes mean for those businesses and households considering deploying solar technologies.
The negative implications of the changes are now well understood. In cutting feed-in tariff incentives for small domestic installations from 43p/kWh to 21p/kWh, and slashing tariffs for aggregated community and solar financing schemes by a further 20 per cent, the government has effectively called an end to free solar schemes. With average rates of return expected to hover around the 4.5 to five per cent mark, solar firms will find it near impossible to attract investors to cover the upfront cost of such schemes, meaning that those admirable social housing schemes bringing renewable energy to poor households will be forced to ditch their plans for expansion.
The 21p/kWh rate will, as required to avoid the scheme over-spending, result in a significant contraction in overall demand from businesses and households looking for a relatively fast return on renewable energy investment. As solar firms have warned, a payback period of nearly 20 years for a standard solar panel will discourage all but the most committed green consumer, while few finance departments will be tempted to sign off on corporate investments that deliver such modest rates of returns.
And yet, all is not lost. There is a silver lining and your business needs to be aware of it. The government's proposed average rate returns of 4.5 to five per cent are just that, an average. As a rule of thumb it will be much harder to get finance departments to sign off on new solar installations when, and if, the proposed cuts come into effect. But it may still prove possible on a case-by-case basis.
If you have a site in the north of Scotland it is highly unlikely that you will be able to justify the investment without a significant reduction in the cost of solar installations. But if you have a well located south-facing roof in the south of England, calculations from some solar firms suggest that you could still generate returns of around seven per cent even after the 21p/kWh rate comes into effect.
It is still unlikely to excite finance departments as a pure financial investment, but once you factor in the tax-free, index-linked nature of feed-in tariff payments, the likelihood of rising energy prices, and the numerous 'soft' benefits associated with solar energy, such as the boost to employee morale and brand profile that tends to result, you can make the case for a viable investment. Add in the inevitable reduction in greenhouse emissions and it becomes a pretty compelling case for any company seeking to reduce its carbon footprint.
This same analysis gains just as much traction at a domestic level, where returns of over 4.5 per cent may well put off many households, but still exceed returns on offer from ISAs and other conventional savings options. If you are lucky enough to have £10,000 to spare, solar could still represent a good investment.
Moreover, while the chronic mishandling of the proposed feed-in tariff cuts will have a potentially devastating effect on solar installers, the knock-on impact could be a reduction in prices for those businesses and households considering deploying solar panels. The pace of the proposed cuts look set to leave many installers holding excess stock as a result of orders they will not be able to cancel, a situation that is likely to result in over capacity in the market and inevitable downward pressure on prices.
None of this is to suggest that the government was right to rush through such deep cuts to incentives. As we have argued previously, the coalition is about to do serious damage to a growing green industry for the want of a relatively small amount of money. It remains absolutely critical that a workable compromise is reached that gives the industry more time to prepare for reductions in incentives that are phased in at a manageable rate.
However, for those businesses committed to cutting carbon emissions and considering solar energy as means of doing so, it is worth remembering that, despite all the negative headlines, solar installations can still make sense.
If you are currently considering a solar investment, don't shelve it until you have talked through the viability of such an installation with a number of suppliers. It could still work for your business.
And even if the feed-in tariff cuts are too far and fast for your firm to stomach at the moment, the steady reduction in solar panel prices means that solar installations may be an idea worth revisiting a few years down the line. Assuming, of course, that the government hasn't killed off the solar industry all together by then.
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