I start this article by iterating that past investments in solar assets are safe. I just left DECC’s offices and they reconfirmed that past investments (pre 22 July 2015 eligibility) are safe from any tariff challenges. Any changes to them would be retrospective, and counter to law and policy.
We always expected a reduction in tariffs and were fully supportive of the ROC degression strategy (as was). We would also be supportive of accelerating such a degression path where an evidence-based government opined that costs had reduced ahead of expectations and/or capacity was ahead of expectations and needed calming. This is normal across all infrastructure markets that have government support. And we welcome consultations to further drive value for money as this will ensure a long sector life.
NextEnergy Capital has been at the forefront of investment over the complete solar lifecycle. In Italy for instance, where the feed-in tariff has reduced over time and sometimes quite aggressively, we remained at the forefront of driving costs down and supporting a process that has led to major deployment and greater consumer benefit.
So, I write this article in the spirit of ensuring that the right things are done and seen to be done.
When it comes to the UK government consultation on solar energy, the cat is amongst the pigeons on many levels. The consultation is confused and poorly thought through, and its delivery challenges the core fundamentals of investment stability.
Retrospective change is bad. Imagine buying a house in a well-established estate property built with much needed investment from an investor on, say, Monday. On Friday, the government reclassifies the area as a zone of outstanding natural beauty. On Sunday it sends in the bulldozers to protect the great British countryside from investor profiteering. Now you’re out of a house, and much needed investment has been wasted. But the government says the law was created for the benefit of hard working British families, as this reduced dog-walker parking costs by £1.80/pa. This sounds unreasonable. It is unreasonable.
The removal of LECs and the closing of ROCs are retrospective acts in effect, as companies have been making investments that they cannot now recover – like employing people, technology and so on, not just in product.
The truth is stability reduces the cost of capital. It makes stuff cheaper over time because investors believe that their investments are safe. The capital markets love trust. Being trustworthy is good. Investors like it and act accordingly. Governments that renege on strategies reduce trust and governments that get simple economics wrong reduce trust. This government risks all of these. Nuclear is not green, shale is not proven safe and gas is carbon.
The hard working British family will not be better off with the end of solar subsidies. Let’s remember that solar subsidies are not a tax, they are a levy on energy companies and so any cost is borne directly by consumers. So is there actually a consumer cost? Solar has shown to reduce generation prices. Germany and Italy have reduced brown power prices and can have negative energy prices at times. Killing solar now may reduce direct costs for consumers by c£0.50 to £1.20 (average £0.80) pa out of the £800 to £1,300 pa current average cost.
The reality is that the Levy Control Framework ceiling on subsidies is half the picture. True consumer costs ebb and flow with subsidies on new energy and consumption reduction resulting in a reduction in actual living costs (i.e. less energy used and cheaper energy to boot). So even the £1.20 may be netted off against actual brown power prices as they fall. The government’s rhetoric on consumer costs is either flawed or spin. So not much actual savings when considering nuclear costs a lot more and shale needs a 50% increase in gas prices to be viable. So why?
The long term security of the much needed and overdue infrastructure investments across Britain is now fundamentally in question. This consultation risks becoming a cause celebre. One that may define a government.
We would recommend that the government pursues change without so much dissonance. The 22 July consultation means that any ROC projects without grace are un-investable and any projects with grace not commissioned ahead of the likely banding review are un-financeable for construction. It’s ok for long-term holders of assets like my firm, NextEnergy Capital. It means that we buy lots of secondary market safe assets or invest in Scotland and Northern Ireland.
What it means for the hard working British working family is increasing energy bills as gas (therm) prices recover.
And the loss of 30,000-60,000 jobs will have a significant impact. The sector that will re-emerge in years to come will struggle to support UK employment. The solar industry cannot employ and train people as it needs to when there is this level of uncertainty and therefore will import the talent again as we have had to recently.
In 1966 Dr Beeching wrote a politically viable report that led to the dismantling of a world leading rail network that is now being rebuilt slowly and expensively at taxpayers cost. The current government risks doing the same to our solar industry. This is in stark contrast to the USA and India investment programmes and a French intention to massively increase carbon taxes.
The government came out in the election aiming to be the Greenest government of them all. Solar is the lowest cost green technology and anything left over in the Levy Control Framework will cost more, so I hope that the government listens during consultation. We need low cost, clean energy. Costs are coming down and maybe, just maybe, the hard working British family will get the break it deserves.