Solar sector braced for subsidy decisions

The UK’s solar industry is holding its collective breath. In under a week the government is expected to issue a swathe of announcements on the future of financial support for the sector, which could cause the clouds to close in on an otherwise glaring success story for renewables investment.

In May this year the Department of Energy and Climate Change (Decc) announced plans to close the Renewable Obligation (RO) regime to projects over 5MW from 1 April 2015, two years ahead of the original 2017 deadline. The move would effectively force developers to compete for contracts for difference (CfDs) in the new regime.

After what may well have felt like a very long summer of consultation, solar investors are now poised to find out where they stand: the government has until the end of September to give its final decision on the RO for solar, and give the final budget allocation for renewable through the CfD regime.

The decisions are expected to draw a line under what has been an increasingly destabilizing period for solar investors. The Solar Trade Association’s Paul Barwell told Utility Week that reports of the government’s dramatic cut to solar support came as “an enormous shock” to the industry after such a “roaring success” over recent years.

Fierce disagreement between government and industry over the future of its financial support persists, but both sides can agree on one thing: ultimately the solar industry is a victim of its own success.

“It’s a phrase even used by Decc – the solar industry has seen continued cost reduction over recent years, in part due to competition from overseas, but also due to a sustainable build up in a successful UK supply chain. And this has meant a huge outcome for deployment over the past couple of years,” Barwell said.

STA data shows that in Q1 2013, there was just over 500MW of solar capacity deployed, of which over 400 MW was large-scale. But by the same time this year there was 1GW of solar capacity rolled-out of which 90% was large-scale solar through RO regime.

“The underlying issue is that the [levy control framework] is overspent and this has been unfairly blamed on the higher than expected deployment of solar capacity,” Barwell said.

Although the government’s intention was only to impact projects set for 2015, the STA has already seen the industry take a hit and says the uncertainty has “severely undermined” both current investor confidence and the future cost reduction potential of the industry.

If the government does alter the playing field through the RO mechanism it would effectively force industry players to become early-bird adopters of the “untried and untested” CfD regime, which Barwell says favours companies with bigger balance sheets over smaller companies which dominate the solar sector.

“Solar is one of the lowest risk investment options,” Barwell explained, “[making] it perfect for SMEs who are able to invest in solar projects of between 5-10MW at around £1 million per MW.”

But to take part in the rapidly approaching first round CfDs small companies would need to have secured both planning permission and connection agreements before applying. And delayed eligibility for funding could have disproportionately detrimental impacts to small companies which have seen recent growth, Barwell said.

“One of the key success stories of the past couple of years was the supply chain and installation network which helped drive industry costs down. Some of these companies have quadrupled their headcounts in the process and could face collapse if there is a delay to income longer than six months,” he warned.

In effect, those companies which drove the dramatic early growth in the sector could feel the brunt of the pain.

The STA argues the change threw up more obstacles for the renewables sector, and the government’s own goal of supporting low carbon generation to achieve grid parity in a technology-neutral energy landscape.

“Solar is set to be the first renewable technology that is driving its own cost reduction. By following this steadily declining path we could be subsidy-free by 2020,” Barwell said.

But hopes of the solar being “cheaper than gas” by the early 2020s could be “severely delayed well beyond this” if the government’s planned cuts move ahead.

The levelised cost of solar currently stands at £112/MWh, and by some estimates could fall as low as £75 by the end of the decade, while gas costs £78, and is widely expected by analysts to increase.

The industry just needs one final vote of confidence from government, Barwell said.

Failing that, the sector may take scant comfort in finally knowing where it stands.