By Paul Latham, Managing Director, Octopus Investments
The announcement this week from the Department of Energy and Climate Change (DECC) on solar feed-in tariffs (FiT) came as shock to the solar industry. But this shock wasn’t just from the FiT reduction, as Government had widely flagged its intention to reduce the subsidy designed to make solar panel installations economically viable – even if the size of the cut was larger than had been hoped.
What has been more contentious has been the fast-tracking of the process, effectively ensuring that subsidies would be cut from December 12, 2011, instead of the end of March 2012, as had previously been expected.
Since the announcement, the rights and wrongs of DECC’s decision, the implications for solar investment and the potential impact such a reversal would have on the solar industry have been well publicised elsewhere. Let’s just say Government’s handling of solar FiTs has been alarmingly inconsistent from start to finish and leave it at that.
Investing in solar installations has been a key activity for Octopus Investments throughout 2011. It began with the implementation of our large-scale solar installation programme during the summer. Together with our development partner Lightsource Renewable Energy, we had to work hard to meet Government’s accelerated deadline of having a number of large scale (+50kWp) solar installations connected to the National Grid before August 1. We were able to achieve this ahead of schedule and many of our investors are already benefitting from the higher FiTs that our solar installations are collecting. The vast majority of commercial solar sector sites such as these have been built with money that has additional incentives for investors, for example the tax advantages that can be gained from investing in Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS).
The second phase of this plan involved installing and connecting around 1,000 medium-sized (around two tennis courts in area) solar sites before the end of March 2012. Once the announcement was made, we spent a lot of time fielding calls from advisers and investors, wanting to know the implications for Octopus solar-focused products. We were able to reassure them that we think we will still be able to deploy the funds already raised, as well as those funds still flowing into open products. But as a result of DECC’s most recent announcement we’ve been forced to revise our investment timetables drastically and tell our investors that the window of opportunity has shrunk considerably.
As the largest commercial installer in the UK, we see ourselves as a good barometer of the solar sector. We are financiers so we are best placed to work out whether the returns are truly economic over the long-term. We don’t think any financier without additional incentives over and above the FiT would be building any further solar installations under the new FiT, which is a shame, not only for the solar industry, but also bad news for investors and bad news for the UK economy and for the future of renewable energy programmes in general.Businesses trying to compete in this sector cannot hope to survive and thrive if they fear that the legislation they are required to work within will keep changing and leave them at a disadvantage.
For now it appears that Government would prefer to leave FiTs available primarily to a niche group: the middle class homeowners who can afford to fund it themselves, and organisations who are installing for non-commercial reasons. This isn’t likely to change any time soon, as it will therefore require panel prices and construction costs to fall considerably.
But is the solar industry dead? No. Government has made life exceedingly difficult for the solar industry, but the economics in the industry are already adapting to the lower FiT levels announced last Monday. Panel providers and EPC contractors both recognise that they need to be cheaper or they won’t succeed.
It’s unsettling when the goal posts are moved half way through a game, but so far we’ve been encouraged by the response we’ve had from the adviser community. Clearly they trust us to do the right thing and put customers first, and we plan to repay that trust by communicating regularly and clearly with both advisers and investors so they know what to expect. In the meantime, we’re focused on putting the solar money we’ve received from investors to work as soon as we can.
