Solar industry once again falls victim to its own success

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Time after time the solar industry has been hit by policy changes designed to rein back investment, but it doesn't have to be this way

It will offer scant consolation to those solar developers facing the third major subsidy review in as many years, but any industry executive looking for a silver lining might reflect on the fact the latest proposed changes are a direct result of the sector's staggering success.

The drastic reduction in the cost of solar technologies - by some industry estimates solar farm costs have fallen over 30 per cent in two years - coupled with the breakneck speed with which solar panels can be installed presents a unique challenge to policymakers. A challenge Whitehall is still yet to get to grips with.

Following two previous reviews of solar subsidies necessitated by the manner in which new solar projects were being delivered so fast that Ministers' feared their clean energy subsidy budget, known as the Levy Control Framework (LCF), was being burnt through, the Department of Energy and Climate Change (DECC) has again found itself in precisely the same position - proposing cuts to solar subsidies at surprisingly short notice in a desperate attempt to take some heat out of the market.

Solar developers who are angry at experiencing their very own renewable energy version of Groundhog Day may like to reflect that DECC does appear to be getting better at this exercise the more practice it gets. Today's consultation proposes changes that won't come into effect for 11 months and promises "grace periods" for projects already in the pipeline. Moreover, this time around Minister's don't appear to proposing illegal policy changes that breach their own consultation rules. I think we can call that progress of a sort.

It is also worth noting there are legitimate reasons for wanting to keep solar subsidies under particularly tight control. The hugely admirable speed and relative ease with which you can build a solar farm or install a rooftop solar panel means that, unlike a large offshore wind farm or nuclear power plant, deployment rates can quickly accelerate in a way that would result in clean energy budgets being broken. Ministers have a responsibility to retain a high degree of budget control, not least because the LCF is not a bottomless pit of money, it is paid for through the energy bills of households and businesses and as such excessive deployment of subsidised projects could and would lead to higher bills for the public.

Moreover, the rapid reduction in the cost of solar energy means frequent cuts to subsidies are needed to ensure that new projects are not being over subsidised and delivering excessive returns to developers. By repeatedly trimming the level of support ministers can ensure more projects get support from the finite LCF budget, leading to higher levels of renewable energy and lower carbon emissions at the same cost. That is precisely why the government introduced a "degression" mechanism to ensure subsidies fell over time, but as the latest consultation suggests solar deployments can happen so quickly that these automated cuts to subsidies can still be overwhelmed.

You can argue we should be willing to pay more for clean energy, and it is definitely worth noting that according to the government's own figures the entire electricity market reform delivery plan is estimated to impose low carbon generation costs of around £76 per household in 2020, or under £1.50 a week. Similarly, the whole Renewables Obligation (RO) scheme costs households £30 a year and solar PV costs from the RO are estimated to have reached a whopping £1 a year. Costs are expected to rise, but it is from a very low base.

That said, if the last few months in Westminster has taught us nothing it is that energy bills are a politically toxic subject and any technology that can be shown to applying more inflationary pressure to bills than expected would inevitably find itself vulnerable to even steeper subsidy cuts in the future.

However, the solar industry is still largely justified in its angry response to the government's latest proposal to end access to the RO support scheme for solar farms from next April and force new solar farms to compete for support with other renewables technologies, including onshore wind farms. And it is angry. The Solar Trade Association's (STA) Paul Barwell today described the proposed changes as "alarming" measures that had seen solar "singled out for harsh treatment". Seb Berry of Solarcentury slammed the proposed reforms as "unnecessary and totally at odds with the government's desire to reduce the cost to energy bill payers of delivering the 2020 renewable energy target". Others were angrier still, privately warning that the government was on track to kill off the UK's solar farm industry.

They may well have a point. If you look at the detail of what the government is proposing today and how it fits into the UK's wider long term energy strategy it is clear that solar developers are facing a staggeringly messy and unstable policy landscape that will deal a major blow to long term investor confidence.

It seems pretty clear there will now be a continuation of the current surge in solar farm development through to April 2015. And then? Who knows.

The government's stated goal is for a slowdown in solar farm development to be replaced by an acceleration in the development of large scale solar rooftops on supermarkets, offices, warehouses, and public building. But proposed changes to feed-in tariff bands for rooftop installations that were also announced today simply promise a slower rate of future reductions to support levels, not the increase in support developers argue is needed to jolt the commercial rooftop sector out of the doldrums. Will a continued reduction in the cost of solar technologies enable the rooftop sector to take off and pick up the slack created in the industry by a slowdown in the solar farm sector? Or will both parts of the industry be hamstrung by reductions to incentives that make them temporarily financially unviable, leading to a hiatus in new development and the thousands of lost jobs and millions in lost investment that will result?

Meanwhile, the outlook for solar farms is even more murky. As of next April new solar farms with more than 5MW of capacity will have to compete for support through the contracts for difference (CfD) mechanism with other renewables projects, including onshore wind farms. The STA maintains CfDs are simply not suitable for the relatively small scale developers who dominate the solar farm sector. Moreover, while the industry thinks continuing cost reductions will allow it to compete with onshore wind farms from 2017/18 it fears it will initially be undercut by wind farm developers in any CfD auctions, again leading to a development hiatus. Will these warnings prove well-founded or will sharper than expected reductions in solar costs and policy savvy developers allow solar farm development to continue? What impact would the mooted Tory ban on new onshore wind farm development have post 2015? Could such a ban clear the way for solar farms to pick up more of the CfD contracts as onshore wind farms fall by the wayside? Again, no one knows what will happen.

As with all the other policy changes imposed on clean energy developers in recent years, this latest round of uncertainty will push up the cost of capital, undermine investor confidence, and almost certainly slow the transition to a low carbon economy. No doubt Ministers can justify the controversial changes on the grounds that budgetary concerns make them unavoidable, but concerns over the LCF budget have to be taken in context. Calculations from the STA based on the government's own numbers suggest that solar technologies will account for roughly five per cent of next year's RO and CfD budget. "Even if large scale deployment is doubled to 4.2GW this year cumulatively, solar will make up £280m or nine per cent of the 2014/15 RO/CfD budget," the trade body said in a briefing note released this morning.

The focus on budgets and costs also opens up a much wider debate, about the cost effectiveness of the energy mix the government appears to be attempting to engineer. Not only is solar staggeringly popular with a recent poll showing 85 per cent public support for the technology (and little evidence as yet to back up ministerial concerns that rural solar farms could face increased local opposition), it also boasts the fastest falling cost curve of any clean energy technology. Solar is widely expected to undercut both onshore wind and nuclear power before the end of the decade, but the chopping and changing to solar policies suggests the government is happy to put those cost reductions at risk while focusing on developing more costly forms of clean energy.

Just a few weeks after Conservative MPs signalled they wanted to bring down the curtain on the currently most cost effective form of clean energy, onshore wind, the government has now dealt a major blow to the future most cost effective form of clean energy, solar farms. Meanwhile, other more costly forms of clean energy, such as offshore wind, nuclear power, and marine energy, continue to enjoy much higher degrees of policy stability. We still need to pursue the full gamut of clean energy technologies in pursuit of the most secure and cost effective mix, but following recent attacks on wind and solar energy it is increasingly difficult for the government to pretend that it is pursuing a technology neutral, lowest possible cost strategy.

The most depressing aspect of the latest proposed changes for the solar industry is that it did not have to be this way. A package of proposals worked out in conjunction with the industry could have eased pressure on the LCF budget and throttled back the current boom in development, just as a modest increase in support could have kick-started the large scale rooftop market ministers insist they want to see. Planning rules, new industry best practices, and an increased focus on community-owned developments could have continued to restrict the roll out of inappropriately sited projects. An increased focus on energy storage technologies and R&D, coupled with a more stable policy environment, could have led to a further acceleration in solar technology cost reductions. And a renewed assessment of the government's clean energy budget that was genuinely focused on value for money would have led to the conclusion that nurturing a still marginalised solar industry would lead to a significant reduction in the overall cost of decarbonisation. No one wants to see technology wars between different sources of clean energy, but if keeping the solar industry on an even keel means rowing back support for some more costly energy sources (or better still imposing higher taxes on fossil fuels) then that might be a price worth paying.

My bet is that while the solar industry is right to be angry at the latest wave of changes, it will once again win out in the end. The technology is so popular, costs are falling so fast, and its appeal is so wide-ranging that solar will survive the current wave of disruption, albeit with plenty of collateral damage in the form of a development hiatus and the lost jobs and investment it brings with it. The government will have once again demonstrated it still does not fully comprehend the critical need to prioritise decarbonisation and accelerate investment in clean energy, but solar firms will eventually find a way to make large scale rooftop solar and solar farms work. Although, judging on past form, it is at that point that they will be hit once again by a renewed effort to hamper deployment.

Thomas Edison was right when he said, "I'd put my money on the sun and solar energy". The problem is that now we have the technologies that Edison dreamed of, constant policy changes are continuing to delay its deployment. It is worth quoting the less famous half of Edison's comment on the power of the sun and the potential for solar power: "I hope we don't have to wait until oil and coal run out before we tackle that." Sadly, we're all still hoping.