UK Solar Subsidy: FiT Or Fiasco?

Hardly more than a week has passed since Climate Change Minister Greg Barker announced the proposed changes to the UK FiT scheme and already there are rumours of impending changes to these new proposals.

Despite previous assurances of a graduated approach to subsidies the government announced cuts greater than 50% and placed a new deadline on existing projects that is actually before the consultation is due to finish.

The proposed date of December the 12th as the new cut off point, instead of the original April deadline, is likely to be the major sticking point for the government and the detail most likely to change as companies and organisations look to legal options to combat what many believe is an illegal constraint on the consultative process.

The government would have expected legal challenges from companies who feel they have been put at risk from changing policies that ignore the investments some have planned but they may not have expected high profile organisations such as the Friends of the Earth announcing they are seeking a legal challenge to the government's proposals. The main focus of their argument is of course a deadline that is previous to the completion of the review. The deadline dates have also become a touchstone for the opposition with Labour's Shadow energy secretary Caroline Flint confronting Barker in Parliament asking why the consultation deadline is the 23rd of December when the proposed cut off point for the new changes is the 12th of December. Barker's response was to suggest that waiting next year would see a gold rush sucking up the budget and six weeks was enough for projects in the pipeline to be completed. He then revealed his understanding of industry concerns by stating, "˜We may be out of touch with the solar lobby but not the energy bill payers.'

The underlying political motivations are key to the sudden changes with arguments within the government regarding climate issues well known even if they are not mentioned publically. In parliament recently, Barker provided an excellent example of how our political process muddies the waters rather than providing clear vision for the future of energy. At one point, in response to Flint's questions, he blamed the entire logistical mess on the opposition as the initial bill went through at the end of their watch stating the entire fiasco lay with the poorly defined and presented initial bill. Less than half an hour later and in the same session Barker tried to claim that the only reason there was any subsidy was because the Tories and Lib Dems voted the Bill through whilst in opposition. The point scoring nature of political communication rarely provides reasonable discussion for long term issues.

To many within the industry it would appear as if the government has totally messed up the entire process but the issue is more complex than simple budget cuts. A key feature of this messy process has been the poor quality of factual information that has been produced by all sides involved.

There are some industry spokespeople stating that such cuts will destroy the industry, others are declaring their intentions for bankruptcy before the process is complete. Statistics have been slippery and inconsistent as disparate voices and ideas try to be heard. An excellent example of this is how much the FiT subsidy process actually costs tax payers. Depending on whom you speak to, this ranges from 30 pence a head to £30 pounds a head to fund the process. Of course everyone has a source to back their claims.

The truth is that the solar FiT scheme that was announced at the end of the last government's tenure was not a well thought out document. It was a last minute addendum to a nuclear bill that was rushing through the parliamentary process. The solar scheme was big on intention but was not well geared to cope with changing industry dynamics and was based on cost assumptions that were out of date almost before they were announced.

The global solar industry has continued to make technological advances that have continuously reduced the cost of modules but the FiT subsidies remained the same increasing the return of investment to double figures for some companies.

Unfortunately there was no mechanism within the original legislation for the subsidy to respond to price changes and there was a lack of industry definitions that allowed projects to be viewed as commercial, domestic or social meaning all the projects were lumped in one group allowing the current government to view the industry as a single number of output when in truth there is a variety of solar technologies and applications. The UK industry, like the rest of the global solar industry, has not helped in such matters with no combined approach to the issues at hand ensuring the government was hearing different things from different people. Any government must act on the information it is given and an attendance or interview with the different groups endeavouring to be the "˜voice of the industry' reveals very different viewpoints and opinions. I have found that individuals I have spoken with in the industry all agree that a change to the scheme was required but there is no agreement on how these changes should occur. One company operator told me that he would need 32 pence to be able to maintain viability whereas another operator expressed pleasure that the review would be so quick stating that it would shake out those companies who only came to take advantage of the subsidies.

With such extreme views within the industry it has been easy for anyone stating any view to find facts that best suited their perspective. This lack of a cohesive message has turned out to be a key factor in allowing decision makers to choose whichever option they prefer and be able to choose the data that best suits the outcome. In the case of the government it was the high rate of return that had become available.

The fact that companies and individuals were able to receive such high rate of returns seemed to be the bedrock of the government's arguments in supporting the need for change. Greg Barker made it clear in his speech last week in Birmingham at the Solar Power UK conference and in the subsequent press conference that such a high rate of return on an investment was intolerable. He went as far as calling it morally intolerable in a meeting of local counsellors. This sort of commentary is a bit hard for many people to take at a time when there is anger towards the monopoly behaviour of the big 6 energy companies and complaints of their soaring profits. 

There is no doubt that subsidy levels needed to change for a range of reasons for both government and industry but the method and execution of change creates a platform for cynicism.

The government claims they are saving energy bill payers the excess burden of subsidising clean conflicting figures on what it would cost the government chose to state that £30 would be added to every bill if the breaks were not put on now. While the cost is a factor there were so many methods of achieving the goal rather than a six week window for companies to re-organise schedules, resources and labour when they believed they had six months. The initial loss of jobs and projects and investment is what should be seen as morally wrong.

Sadly the solar industry has been caught up in internal government bickering in how best to deal with long term climate issues. It is the long term that has been forgotten as governmental departments argue about short term financial services and savings. There has been a rush of studies and surveys and reports all pointing to conclusions that renewable energy and microgenerated energy are too expense to pursue. A recent KPMG report suggests that the government will now be able to meet its international carbon emission targets at a much cheaper rate by NOT investing in wind energy and instead move to gas fired energy producers. This of course suits the big 6 energy companies and reduces micro-generation which is a major threat to the big 6's morally objectionable future profits. 

There is another group that has lobbied the government to slash the subsidy rate and that is the financial community. Pension funds and middle class investors have realised the potential double digit returns far outweighs anything banks can offer and there had been a steady trickle of funds from that sector moving to renewable efforts. A number of multi million pound projects are unlikely to go ahead now as pension funds seek safe but profitable rates of returns for their precious funds.

With recent financial mistakes many are nervous about long term financial security as well as energy security. Sadly the most impacted from such projects are community and social based projects.

Long term energy is one of the most convoluted and poorly represented topics in policy decision making. It is another area that is too easily reduced to dichotomies with some choosing to argue it is only about global warming whilst others argue it is about resource control and profiteering. An area the government accuses the solar industry of. Sadly our political mechanisms does not cater very well to long term visions and democratic governments are well aware that their success depends largely on the here and now and posterity rarely provides votes for the next election.

Many of the companies complaining the loudest are those that are likely to lose the most. Many companies built their business plan based on the subsidies that the government provided and secured large debts or investment to ramp up as quickly as possible to take advantage of the high paying returns. From a purely capitalist point of view they took a gamble and lost. These companies have continued to charge and cost as if their had been no drop in module pricing since they begun their programmes ensuring their rates of return hit double figures without ever passing on these savings to the customers, whose behalf they now claim to be arguing for. Despite their protests such a gamble not paying off is no surprise and all involved in such risks have little argument that the FiT programme would change. This includes the lending banks who cannot claim due diligence.

The unfair manner in which the game was changed is reminiscent of the unfair playing field that current "˜Occupy' protests are arguing around the world.

The changes to the UK subsidy programme will hit the industry and there is sure to be increased unemployment as well as folding companies but it would be inappropriate to suggest it will kill the industry. Solar has built momentum in the UK and once the dust settles from the eventual subsidy review people will beginning to realise that even at the now proposed rate of 21 pence installing solar panels after the deadline can still see returns between 4 -7% which remains attractive when compared with other financial options. Factor in the continuing lower prices and the savvy consumer could do very well. None of this changes anything for companies suddenly facing a 6 week instead of 6 month time frame. As soon as the announcements were made I began to receive communication from companies announcing layoffs and even closure as companies struggle to fill orders within the 6 weeks further compounded by a lack of product in the supply chain. Any new product to fulfil the time line will need to be sourced through Germany or China due to a lack of manufacturing in the UK. It is unlikely many orders will be fulfilled in such a short time scale as you would be hard pushed to get product here in time from Germany, let alone China. For many companies it will be the end of the industry.

Luckily not all companies have bet the company fortune on government subsidies staying at such a high level and some of these are actively supporting the changes believing that the high rate of returns only attracted cowboys and greed lending a bad name to the overall industry. One company director was quoted requesting they close the door on the way out. These companies will ensure that the industry moves forward but noone is yet aware in what size or format.

The one thing all seem to agree is that the government decision making process has not being handled well leading to confusion, investor mistrust and conflicting messages to the public who are the eventual end customer. The UK solar industry has being hit with an enormous amount of negative propaganda meaning many in the community do not understand the benefits of solar micro generation whilst many politicians and industry people believe solar is more expensive than traditional duel sources.

On a like for like basis, solar is more expensive than traditional fuel sources but only if you look at initial set up costs. Over the expected 25 year life span of solar modules there is a greater saving as there is no need to mine for raw materials. Unfortunately there has been little effort by the industry in exploiting these figures or to combat the negative propaganda that competitive industries have propagated. With the continual reduction in prices that will ultimately occur it will not be long before initial solar costs are comparable to main stream industry.

The government has let the industry down but not just the solar industry. They have let down the long term energy plans for the UK with mixed messages and loose policies that seem to be chasing quick financial fixes rather than a real long term strategy.

The UK needs strong leadership and long term choices in the future energy needs. Neither is obviously present at this stage. The government will not have an easy ride with the choices they have made and already the U.K. Parliament's Environmental Audit Committee and Energy and Climate Change Committee has launched an inquiry into the Department of Energy and Climate Change's (DECCs) proposed photovoltaic feed-in tariff (FIT) cuts.

With opposition coming from all quarters on the timing of the change I would expect to see the date of change push out to early next year. If a private company tried to change tender rules or policy standards in such a manner they would be breaking all sorts of corporate laws. It is unlikely the government will stay unscathed in this matter. 

Recent events in the UK industry have left a sour taste in the mouth of most involved but there is something everyone needs to remember. The announcement is a proposal and part of a consultations process that does not conclude until the end of the year. 

Despite the negative feelings, people need to understand the consultation is not complete and there is time for voices to be heard. Already there are plans for a march on the Prime Minister's quarters later this month and an on line petition is attracting thousands of signatures and is the first instance that the competing industry bodies have truly come together. Hopefully not too late to create a more coherent and consistent message that is about the industry without the self interest that dominates the landscape. There is no doubt the government has handled communication and change very badly in the FiT process leading to international investor confusion and a lack of clear guidance to a burgeoning industry. I think it very unlikely that the FiT review outcome will be as currently proposed and expect to see changes announced shortly especially in regards to the time scale. 

The government issues are not confined to solar and are only a part of a bigger dilemma facing governments required to make long term decisions. Despite the bad process the result still allows for decent return on investment for canny consumers.

Another area I expect to change is the defining of socially responsible projects as the proposed changes will wipe out companies who have based their business model around providing free panels to consumers. Many have indebted themselves based on unlikely assumptions and are paying that capitalist price. 

This is another area the industry can provide real data to ensure a better deal is reached as currently  the suggestion is only greed is motivating such projects. It is a chance for the government to win back some positive feedback from both industry and the community. The UK industry needs to decide how it is representing itself. With such division within the industry it is too easy for competing industries to belittle solar or move ahead as if it did not exist. 

A good example occurred on the BBC Panorama programme which claimed to be asking where the real costs of renewable energy were coming from and where it was heading. The show became a poster event for off shore wind projects with solar barely mentioned in one sentence.

The government's current handling of subsidy change may be a fiasco but it is only one of the many facing the industry, both internally and externally. Energy supply is a long term issue facing the country and the world at large requiring long term strategies combined with clear short term goals. Battling the lobbying power of large energy companies may appear difficult but the solar industry has some simple and positive messages it has failed to capitalise on. 

Telling governments want you want to happen in a cacophony of voices is unlikely to achieve a great deal. Convincing the voting public it is in their best interests is where the industry needs to move towards. Mr and Mrs Consumer need to be demanding cheaper and renewable energy sources. They are the ones that will determine the future of energy in the UK. It is up to the industry to ensure they have reason to get excited enough to help create a long term sustainable industry.