Subsidising the Sun: Should the government support solar?

10th January 2012


Why is the government in court?

The High Court said just before Christmas that the government's decision to cut subsidies from 43p/kWh to 21p from December 12 – two weeks before the end of a consultation process on the cut – was illegal. The government had promised that the higher rate would remain until April but slashed it because it was on course to overrun the subsidy scheme's budget.

The problems with the Feed-in Tariff

The government has handled the Feed-in Tariff for photovoltaic equipment poorly at every stage. The first problem was that the tariff was set too high at about eight times the market rate for electricity. In the current low interest rate environment, solar panels offered the best return around and canny investors piled in. Given that the tariffs are funded by other power users, this was not what the government had intended.

In fairness to the government, the whole industry has been surprised at the speed at which the costs of solar equipment have fallen thanks to plunging silicon prices (93% in three years) and the rapid expansion of production in China. Module prices fell about 44% in 2011 alone, according to Bloomberg New Energy Finance. Other countries, including Spain, the Czech Republic and Italy have also struggled to strike a balance between encouraging customers to adopt the technology and providing a deal that is too good to be true. But the UK's rate is twice that on offer in Germany, the world's biggest solar market.

Having realised belatedly that it had got its sums wrong, the government moved to bring forward the tariff cut but did so in the most cack-handed way possible. Setting the deadline for a fortnight before the end of the "consultation" process roused the solar industry, MPs and business groups to oppose the move and invited the legal action that was duly instigated by Friends of the Earth and two solar companies.

The Government creates a mood of uncertainty

This is not just about renewable energy. The case has shades of the last government's energy review, which it undermined by deciding nuclear power was the path it should follow. It also raises memories of the windfall tax on North Sea oil and gas producers last year. The government needs to create a stable environment if it wants to attract the investment needed to upgrade our energy system. "Moving the goal posts doesn't just destroy projects and jobs, it creates a mood of uncertainty that puts off investors and they wonder what's coming next," said John Cridland, the CBI's director-general.

The way the Coalition handled the FiT cut removed much sympathy for the government even though it had a strong case and gave the impression that ministers did not know what they were doing, creating uncertainty and reducing investor confidence. It needs to take the opportunity to set out what it wants to achieve with its policy.

Tougher measures for joining the Feed-in Tariff

The requirement that future installations will only be eligible for the FiT if they have already installed other energy efficiency measures may have the industry up in arms, but it makes good sense. As climate change minister Greg Barker wrote in the Guardian recently: "In fighting climate change there is a clear hierarchy of action, and reducing energy consumption, whether you are a big business or a domestic customer, should always be the first priority. We really shouldn't be offering a costly subsidy to people to generate renewable energy when in the same building it is being unnecessarily wasted."

‘Solar will be cheaper than fossil fuels in 5 years'

There are those that think the government should not be subsidizing solar at all – and it does appear strange that some of the world's biggest solar markets are in gloomy northern and central Europe rather than sunnier climes. But as the green technology investor Ben Goldsmith argued in a recent Economist debate, "correctly phased renewable subsidies are by their nature temporary. The very purpose of subsidies is to kick start new and desirable industries. As those new industries stand on their own two feet subsidies can be phased out." And indeed, for every doubling of solar capacity, equipment costs have fallen by about 20%, which is why companies such as GE suggest that solar will be cheaper than fossil fuels in three to five years.

It's only fair. Isn't it?

In a world where global fossil fuel subsidies rose by more than $100 billion in 2010 to $409 billion and are on course to hit $660 billion by 2020 according to the International Energy Agency, cleaner energy still needs a helping hand – for now. But costs will continue to fall, subsidies will come down and in a few years, people will be installing solar panels as a matter of course, not because they want to parade their green credentials, but because it makes sense financially and environmentally.


More from Mindful Money:

Power Play: Is it renewable energy’s time to shine?

How far can ethical investing really go?

A Brief History of Socially Responsible Investing (SRI)

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