GOODBYE TO THE SOLAR ENERGY INDUSTRY? Proposed Cuts to Subsidies for Investors in Solar Energy
On 31 October 2011 the Department of Energy and Climate Change (DECC) launched a consultation proposing changes to the subsidy scheme for solar power.
The Feed-In Tariffs (FITs) scheme was launched on 1 April 2010. The scheme pays those who invest in solar PV panels (which can be anyone from a single home-owner to larger businesses and investment companies) money for generating electricity (known as the generation tariff) and for exporting unused surplus electricity back to the grid (export tariff). The property owner also benefits from the chance to reduce the cost of energy bills as less electricity is taken from the conventional source.
The DECC is now proposing to cut the current generation tariff by more than 50% with effect from 1 April 2012. The cut will affect anyone who “commissions” installation of solar panels on or after 12 December 2011. Crucially, “commission” includes not only the actual installation of the solar panels, but also completion of all of the tests and procedures that normally follow installation, as well as submission of an application to Ofgem for accreditation. Investors and their chosen suppliers have only until 12 December to complete this process. Those who beat the 12 December deadline will be able to continue to take advantage of the existing FITs; those who miss it will see the rate of return on their investment more than halve from 1 April next year.
Why the change?
The DECC says that the cuts are urgently needed to ensure that the entire FITs scheme does not collapse. It blames a dramatic fall in the global cost of manufacturing and installing solar PV panels since the scheme began for a higher than expected uptake. That is, so many people have now installed solar PV panels and have registered for the scheme that the DECC anticipates that its entire budget for the scheme will be spent within a short period of time. The DECC also says that the increasingly low cost of installation has meant that, instead of the intended 5% return on investment, investors have been seeing a return closer to 12%.
The planned cuts are therefore deemed necessary in order to save the FITs scheme and are justified on the basis that investors are getting double the return they should be getting in the current economic climate anyway.
Are we concerned?
Yes we are! The proposed cuts will potentially have a major detrimental effect on investors, manufacturers, suppliers, installers, employees, and credit providers alike. We anticipate that in the coming months our clients will need to deal with issues ranging from company restructuring, redundancies, debt recovery and insolvency, to contractual disputes between investors and suppliers. We also anticipate issues arising between parties involved in “Rent-a-Roof” schemes of which we began to see a lot at the start of this year.
Manufacturers, suppliers, installers, and employees
The impact these cuts will potentially have on the solar industry is a major cause for concern. Profits for the manufacturers of solar panels have already been squeezed by cheap competition from China and the high cost of raw materials (as reported in the Sunday Times 30.10.11). Now, if the proposals go ahead, a reduction in demand will see manufacturers making further loses. Suppliers, installers and corporate investors are also likely to see their businesses affected. It is expected that there will be job losses numbering in the tens of thousands. Small and medium sized solar energy suppliers are considered to be particularly at risk.
The TIFs scheme was heavily promoted as a guaranteed, tax-free minimum payment from energy suppliers. Expected rates of return on investment were advertised at between 10% to 15%. Those who required financing to cover the cost of supply and installation were told they could expect their returns to cover monthly repayments plus provide them with a little extra on top. It was said that the £9,000 – £11,000 cost of installing solar PV could be recouped within 6 years and any money made thereafter would be pure profit. Of course, if the changes go ahead, these claims will no longer hold true and we anticipate that there will many angry investors out there looking to be compensated.
The coming weeks will also be a very stressful time for those who have already made a financial commitment to install solar PV panels on their property. Obviously they will want to see the panels installed and the paperwork completed in time to beat the 12 December deadline. Some might not want to take the risk and will want to know whether they can cancel their purchase.
We certainly urge any of our clients who are contemplating making a last-minute investment to exercise caution when it comes to taking up deals that promise to have installation completed in time. The terms of the deal should be scrutinised and reassurances sought that, not only will the panels be installed in time, but the necessary checks and applications will also be completed.
The cuts do not necessarily mean that solar energy is a bad investment; we are not financial advisors and could not possibly comment. There will also be those who approach the matter from the “green” perspective and will invest in solar energy even if that investment does not necessarily provide a great return. The DECC is claiming that investors will still be able to see a return of 5% on their investment and for some this may be enough.
The DECC consultation invites comments and recommendations regarding the proposed cuts but it remains to be seen the extent to which the cuts will realistically be open for discussion. The safest course of action would be to assume that the proposed cuts will go ahead and to plan for it.
By Kim Hurley