Wednesday 5 October 2011

FITs and Starts

It doesn't have to look rubbish
According to a former US President, the nine most terrifying words in the English language are "I'm from the government and I'm here to help ".  The UK solar PV industry is preparing to demonstrate the truth of this in spades.

Many in the solar industry describe the development of  the UK solar PV market as a massive success for the government's Feed in Tariff (FIT).  Nothing could be further from the truth.

The FIT has inflated a bubble in solar PV, which may well burst in 2012 with spectacular results.  At home, we regularly recieve a couple of calls a day from telesales centres trying to get an appointment for a high pressure sales visit.  So called "PV for free" companies are installing panels onto houses with offers that seem too good to be true.  In my own village, a meeting promoting a bulk-buy PV scheme was standing room only. 

So just how has PV replaced double glazing as the short-hand industry for pushy sales tactics?

The Department of Energy and Climate Change (DECC) set the tariff levels based on PV prices in 2009, and created a clumsy review process which has tied their hands for making changes.  Subsequently, a perfect storm has hit global PV manufacturers causing a crash in prices.  The result - returns on investment that would make a loan shark blush.

Realizing that their own FIT schemes were becoming unaffordable, Germany, Spain and Italy have massively scaled back the levels of support for PV.  Rates of PV installations have fallen as a result.

At the same time, the Chinese government has identified PV as a strategic market, and offers cheap loans and incentives to Chinese companies to invest in PV manufacturing.  Business plans based on projections of continued growth supported investment in capacity.  We have seen factories in China that are fully equipped, with staff practicing assembling modules as they await orders.

Overcapacity has resulted, and inevitably a race to the bottom on prices.  It is reckoned that the cost of PV modules has fallen by about 33% in the last 12 months.

To be absolutely clear, this price reduction is all about in a global market where the UK demand is still an irrelevance.  It is not to do with technological breakthroughs, or economies of scale.  It's simple supply and demand.

Where does this leave the UK PV industry, as DECC ponders how to change the "unaffordable" scheme it has in place?

Any business person will tell you that rapid growth is difficult to manage well.  It is normal for businesses to accept losses during a scale-up phase as they invest in capacity - training and equiping new staff, investing in developing new processes and systems.  They do this in the expectation of future profits.  As the early growth rates slow, and more stable conditions emerge the early investments are recouped.

What is absolutely unhelpful is stop-start government support that creates massive demand up to an artificial deadline, followed by a collapse.  How can you expect sustainable long-term businesses to develop under such conditions?  Expect announcements of redundancies and business closures if the FIT is reduced.  Consumers will be left high and dry if they have subsequent problems, but the installation company is no longer around.

The madcap race to install systems before April 2012, when the next review of tariff levels comes into force is likely to lead to installation issues that could harm the image of the industry for years to come.  Systems are being crammed onto roofs to maximise financial yield, and with no consideration for other issues, such as the resulting aesthetic of the roof and its visual impact in our villages and towns.

So, where to go from here?  DECC needs to try to find a way to deflate this bubble gently, perhaps with a steady programmed reduction in the value of the tariff, rather than a single large drop.  The solar industry needs to lobby for a realistic tariff scheme that would support sustainable business growth rather than the simplistic strategy of fighting for the highest level it can get.