Tuesday, November 1, 2011

Sunset for Solar Panel Subsidies

Subsidies for solar photovoltaic panels are set to be slashed after the Department for Energy and Climate Change (DECC) launched a consultation on halving the main ‘generation tariff’ available through the popular Feed in Tariffs (FiTs) scheme. The proposed cut will apply to new installations only: individuals and businesses who are already receiving the subsidy will continue to get the full rate.

The Government’s reasoning for the proposed cut is a fall in the cost of the solar panels themselves. Whilst this is true, it is largely the result of a glut in the supply of solar panels which would be expected to reverse as the manufactures scale back production in response - the actual costs of producing them is little changed. Behind the scenes though the cuts reflect increasing nervousness by the Government around the impact of ‘green’ commitments on our fuel bills.

The cuts may bring to an end a boom in solar installations where solar photovoltaic panels became the best investment in town. The FiTs scheme aimed to give people installing solar panels a 10% annual return on their investment for a period of 25 years, and that's before the actual value of the electricity generated by the panels was taken into account. In an era of ultra low interest rates this made purchasing solar panels one of the most lucrative investments available. The subsidies also made possible a business model where panels were offered to homeowners for no upfront cost, in return for signing over the subsidy rights to the installer.

The resulting boom in solar installations has not been without its critics. Environmentalist George Monbiot denounced the subsidy scheme as a ‘Great Green Ripoff’. Social commentators have criticised the scheme on the grounds that it transfers money from the poor to the better off: the subsidy is funded through levies on fuel bills, therefore everyone pays for a scheme which only directly assists people able to raise the upfront finance (or credit) for an installation.

But perhaps the most damning indictment of the scheme is hidden in the Government’s own assessment of its effectiveness. Policies that aim to cut carbon emissions (as this one does) are assessed on their cost effectiveness – the cost per tonne of carbon saved. At £430 per tonne the costs of the FiTs scheme are vastly higher than alternative options such as energy efficiency, large scale renewables and nuclear power.

Solar installers will rightly say that the Government is stoking a boom / bust cycle for the solar industry. The ‘free panels’ business model is also unlikely to survive the cut, as the reduced subsidy on offer will make this system unviable. However, there are still chinks of light available for the renewables industry. The Renewable Heat Incentive (RHI) has recently come into operation, and will be extended to domestic installations from October 2012. This supports technologies that generate heat, as opposed to FiTs which supports technologies that generate electricity.

Technologies supported by the RHI include solar thermal (hot water) panels, ground source heat pumps and biomass (wood) boilers. Crucially these technologies can all offer lower cost carbon savings than solar photovoltaic panels, particularly if they’re installed in locations where natural gas is unavailable was here they substitute for high carbon fuels such as coal, oil and electricity. For the immediate future the RHI will be paid for through general taxation rather than levies on our fuel bills, which should help to reduce opposition to the scheme.

In the longer though there is considerable disagreement in the Government regarding the scale of support for renewable energy. Fuel bills have risen significantly over recent years plunging millions into fuel poverty, whilst energy intensive industries have complained that rising fuel costs will make them uncompetitive. Ultimately this argument will be settled by the direction of the UK economy. If fuel costs fall and the economy recovers strongly low carbon policies may continue on track. However, if the economy continues to struggle solar panels grants may not be the last subsidy to be scaled back.

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