Monday 6 August 2012

Gonna Have to Face it we’re Addicted to Cuts

It may not like them, but the solar photovoltaic industry needs the tariff drops

Prices are falling, and falling fast.  If you are a home-owner with only one roof to fill with photovoltaic solar panels, what’s the rational thing to do?
Wait, of course.  Wait until prices stop falling, and then purchase.

Rapidly falling prices depress demand, which in turn results in industry over-capacity, and greater price competition leading to further decrease in prices.  This vicious circle is called a deflationary spiral by economists, and it is considered a disaster for a national economy.

Perhaps by accident, the Feed in Tariff has also prevented a damaging deflationary spiral in the solar PV installation industry.

Of course, the purpose of government incentive schemes such as the Feed in Tariff is to distort rational decision-making and correct market failures where the pricing mechanism does not take externalities into account.  (Externalities are where some of the costs of the product, in this case the costs from global climate change caused by carbon dioxide emissions from conventional electricity generation, are paid for by neither the buyer nor the seller.)

Under the Feed in Tariff, the owner of a solar PV installation is paid over and above the savings they make on their electricity bills for every unit of electricity they generate.  However, the UK government has been scrambling to keep up with the price deflation in photo-voltaic solar panels.  Successive drops in payment levels have had the aim of preventing the financial returns to householders with solar panels from becoming excessive.
A side effect of the series of cuts to the Feed in Tariff has been to create a reason for the customer to “get in before the tariff reduction” and therefore not wait for installation prices to fall further.

Many in the PV industry have been calling for the government to delay or halt cuts to the Feed in Tariff to better stimulate the market.  Should they be thinking more carefully about the alternative they are proposing..?