Thursday 14 September 2017

The MCS Pricing Mess and How to Fix it

New homes often have smaller solar installations.  Image: Viridian Solar

A government sponsored monopoly raises its fees by 233% .  Cue outrage from the industry, not only from the fact of the raise itself - most people accept that the Microgeneration Certification Scheme (MCS) must live within its means - but mostly from the way it was implemented.  There was no consultation, all was decided by the small, self-elected group who run the scheme.  Little thought had apparently been given to how the change would affect the diverse businesses that rely on certifying their installations to the MCS, and have nowhere else to go for this service.  The transition arrangements were wholly inappropriate.

It's not like they didn't know this was coming.  The consultation to slash the Feed in Tariff was announced in August 2015, at which point it was obvious to everyone that the MCS was facing an existential threat to its income streams, 90% of which derive from solar PV.  This could have been implemented with a lead-in time if the managers of the scheme had acted sooner.

The worst affected are  those that do a large number of low value installations, they are hit disproportionately hard by the £20 increase per certificate.  Businesses providing solar installations to house builders are right at the sharp end.  Solar installations can be as modest at one or two panels - representing only a few hundred pounds' worth of business per house - and when you're in the business of doing hundreds of these each month, those extra £20 sure add up.  To compound their situation, they are installing based on quotations accepted and ordered many months ago, and the contract may be expected to run for many months more.  One business owner estimates that this change has taken more than £100k a year from his bottom line.  Oh, and if you were about to suggest that they should just ask for more money from their housebuilding clients - forget it - that is not how it works in construction.

The other reason for the outrage is that the increase throws into stark relief the many ways that the scheme has failed the industry it purports to be there to benefit.  The purpose of the scheme was to  increase consumer confidence in the new clean heating and electricity generating technologies.  Time and again the scheme has shown itself to be incapable of tackling abuses by the small number of bad apples that have the potential to drag down the reputation of the industry.  People would be more supportive if the scheme had ever bared its teeth and kicked a few companies off the list.

So how to fix this?

If you accept that the MCS needs more income, then you have to accept that prices must rise.  But why must they be the same for every single installation?  The scheme covers 'micro generation' which means systems right up to 50kW in size.

A £35 certificate is a vanishingly small cost for a 50kWp solar installation, which might have a contract value of £50,000.  0.07% to be precise.  On the other hand £35 is a much, much larger proportion of the cost of a small 0.5kWp system on a new home.

To those that say "but the certificate costs the same for the large and the small installation" I say "so what?"

Does my seat on a plane cost the airline the same as my neighbours?  You bet!  Did I pay the same price as they did?  Almost certainly not - especially if I bought mine in a big rush last night and they are more organised and planned ahead.  Does a Gucci handbag cost 1,000 times more to make than an unbranded one.  No chance.  I could go on.

Businesses left cost-plus pricing behind years ago - you price your product at the value someone attaches to it.

A fairer way to apportion the cost of running the scheme is to charge a different amount for a certificate based on the size of the system that is being certified.  By way of example, I'm going to propose how it could work for solar PV - similar approaches could be applied to the other technologies covered by the scheme.  I don't have access to the MCS figures on installation size and number, so I'll use the Feed in Tariff (FIT) statistics to illustrate the concept.

The table shows the number of installations registered with the Feed in Tariff in the 12 months to July 2017, and the number of MWp installed, split by the FIT tariff bands.  If the MCS had been charging £35 per installation, it would have netted £1.25m of income from the 35,815 installations.

If, instead, a certificate had cost £10 per kWp installed, the scheme would have netted £1.315m - a very similar number.

I've just used a straight £10/kWp formula - as I'm working with average values.  A formula that had a minimum of say £20, for installations below 2kWp would collect more from the smaller installations, meaning that the increase for the large scale installations could be kept smaller.

Could something like this work better for industry?  What do you think?