Market News

 February 16, 2012
Industry to challenge solar cost report in fight against deep incentive cuts

 Solar companies are hoping to secure revisions to a key piece of research into solar panel costs, which formed the basis for the government's latest controversial proposals to slash feed-in tariff incentives from July.

The government last week issued a consultation on plans to introduce an automatic degression mechanism to the solar feed-in tariff to ensure the scheme remains within budget.

The consultation sets out plans to cut feed-in tariff incentives from 21p/kWh to 13.6p/kWh for installations with less than 4kW of capacity if deployment has exceeded 200MW by July. If deployment reaches 150MW to 200MW, it proposes reducing the tariff to 15.7p, and if less than 150MW is deployed, the tariff would drop to 16.5p.

The proposals prompted an angry response from many within the solar industry, who warned that the Department of Energy and Climate Change's (DECC) own impact assessment suggested the proposed cuts would result in job losses and a contraction in the solar market this year.

The government maintains that the proposed cuts are in line with its long-term goal of ensuring solar installations deliver returns on investment (ROI) of between five and eight per cent.

The consultation is based on a report by consultancy Parsons Brinckerhoff (PB) that predicts capital expenditure costs for solar installations are likely to fall 10-30 per cent by the end of 2012, with further falls of 5-25 per cent in 2013-14, and smaller ongoing reductions in 2015 and beyond.

But solar installers have questioned some of the PB report's conclusions, including the rate at which capital costs will fall over the coming year. They are also concerned the report was written over a few days in January, and as such offers only a snapshot of the industry.

The government maintains that while the PB report was produced in just three days, it contained research that had been collated over the past year.

But David Powell, economics campaigner at Friends of the Earth, stressed that any ROI calculations for solar projects completed after the proposed July cuts come into effect would depend on the accuracy of the Parsons Brinkerhoff report.

"If the PB report is right, the rate of return might be what they say it is," he said. "But if the report is overestimating how much costs are coming down, then there won't be any ROI."

Ray Noble, PV specialist for the Solar Trade Association (STA), told BusinessGreen he was concerned the PB report contained inaccuracies over the rates of deployment and costs of technology, and said the trade body was now seeking to work with PB to iron out any anomalies in the report.

He predicted that the lower feed-in tariff rates proposed by the government would only offer a five-to-eight per cent ROI for the very best locations -- a scenario that would significantly restrict the size of the industry.

However, he also argued that any cuts to incentives could increase competition in the market, driving down installation costs for businesses and homes.

"We need to make certain that DECC's assumptions are right," he said. "We want to sit down with PB and go through the report, find anomalies and revise the approach."

Dave Sowden, chief executive of the Micropower Council, predicted a five per cent ROI could be delivered under the new rates, but only if the government opted for the upper end of its proposals.

"There's a big difference between 15.7p and 13.6p, which is two ends of the spectrum for the July differences," he said. "If [the higher rate] were implemented and nothing else changed, then five-to-eight per cent could be met."

But he warned that uncertainties remained over the future costs of PV, particularly because of recent increases in the price of silicon, and China's plans to introduce its own feed-in tariff in April this year, which could reduce supply in the UK and increase module prices.

"The big issue is that nobody knows what's going to happen to prices and there's a fairly rapid degression planned," he said. "Module prices have probably thawed out, so we don't see a great deal of scope for a further drop."

His warnings were echoed by other sources who warned that their modelling suggested the price of solar panels could rise later this year as manufacturers respond to rising raw material costs and global supplies become constrained.

Concerns have also been raised that DECC's proposals for a cost control mechanism fail to include an option for raising tariffs if deployment rates do not meet expectations, and only include the option to cut feed-in tariffs if demand suggests the scheme will exceed its budget.

"There should be room to go up as well as down if we are seeking to grow the solar industry," said James Higgins of consultancy JDS Associates.

Separately, some solar firms are now predicting they will have to diversify their business models to protect themselves against the impact of the proposed incentive cuts and ensure that installations comply with a new requirement for properties to achieve a band D Energy Performance Certificate (EPC) before qualifying for the subsidy.

Daniel Green, chief executive of solar firm HomeSun, told BusinessGreen that solar companies would have to diversify their revenue streams and offer other green building improvement services if they are to survive in the medium term.

Similarly, Noble predicted some solar firms may seek to partner with green building firms that are qualified to issue EPCs.

"I think there's going to be a bit of scratching of heads to understand what they need to do," he said. "They might seek to form relationships with a company that does EPCs. It's going to be difficult to work in the same way as the past, but there's still going to be a market in my view."

He urged solar companies not to be too disheartened at the prospect of further cuts to incentives. "It will slow the industry a bit, but when I think back to before feed-in tariffs, we had installed 30MW in 15 years," he said. "But now we're talking about gigawatts and it's a totally different industry.