The end of boom and bust?

In October last year, the solar industry was yet again singled out and forced to swallow prohibitive legislation – this time in the form of a minimum EPC requirement. In May this year, the pattern was continued as DECC announced the introduction of a new tri-monthly degression model, a model no other renewable technology under the FiT received.

The Energy and Climate Change Minister, Greg Barker, told us that such action was necessary, stating: “My priority is to put the solar industry on a firm footing so that it can remain a successful and prosperous part of the green economy, and so that it doesn’t fall victim to boom and bust.”

The Minister’s justification seems suspect, primarily because it has been his department’s interventions that have triggered every single boom and bust cycle the industry has experienced, right from 5MW scale down to the smallest domestic installation.

The self-proclaimed ‘Certainty for Solar’ regulations introduced by DECC provided “a strong, sustainable foundation for growth for the solar sector.” Broadly speaking the changes meant that eligible tariffs for solar installations would reduce by anywhere between 3.5-28 percent every three months, depending on the capacity installed. If uptake stalled then the tariff cuts could be skipped for up to two quarters.

Barker once more ramped up his rhetoric, stating: “I want to send a very clear message today. UK solar continues to be an attractive proposition for many consumers considering microgeneration technologies and that having placed the subsidy support for this technology on a long-term, sustainable footing; industry can plan for growth with confidence.”

Since the proposals came into effect on August 1, Barker’s promise of an end to the boom and bust cycle is looking a little premature.

In the run up to the latest reference date, installations exploded by 226 percent over June and July. Now that the axe has fallen and the FiT rate has been chopped down to 16p, installations have predictably contracted by 75 percent.

The measures intended to curtail the solar boom and bust cycle have demonstrably fuelled it – albeit at a smaller scale than the previous cycles.

The new tri-monthly degression model will further exacerbate the problem. It is an inherent reaction from a consumer considering installing solar to want to secure the highest FiT rate possible – this will lead to those consumers in the decision phase of purchasing a solar array to either; commit to the installation or abandon the purchase altogether for fear of ‘missing out on the deal’.

What does this mean for the industry?

If installations continue to rise and fall every three months, industry must adapt to the changes.

Obviously, the severity of the swings is going to be the primary issue. The latest 75 percent drop in installations is much smaller than the 90 percent drops experienced in the aftermath of previous tariff changes. The next round of FiT cuts may well see another smaller drop in installation levels post-FiT cut. 

The historic data points to the continuation of a boom and bust cycle in response to the tri-monthly tariff degressions. However, if the rise and fall in installations is much milder than previously experienced industry might have to adapt to a more ‘seasonal’ model.

Under a seasonal model solar companies should hold back some revenue in anticipation of a lull in work directly after any tariff reduction. Conversely, companies should expect an increase in install rates in the run-up to reference dates and free up assets accordingly.    

It remains to be seen what effect on installation rates such a regular degression will have. For example, Germany has adopted a system whereby the FiT rate is reduced monthly – this has had a negligible effect on installation rates. However, the German market is a much more mature market than the UK and drawing comparisons between the two could prove inaccurate.

As mentioned in a previous blog, another important aspect fuelling the boom and bust cycle is industry’s insistence to push customers to install before a certain reference date, in order to secure a higher feed-in tariff. This sales tactic works in the short term but leads to customers who miss out on the higher FiT rate feeling like the solar ship has sailed.

The real proof of the degression model’s success or failure will become far more apparent when the first round of cuts proper are introduced in November. However, the latest installation figures do not offer much comfort to those in the solar industry looking for a settled period of activity. In order to thrive in the UK solar market, installers must now work hard at maximising their assets and adding value to their product.

This year’s upcoming Solar Power UK seminar programme will provide solar installers with all the tools they need to move their business forward – from marketing advice right through to how the Green Deal can work for you. Solar Power UK 2012 will be running from October 2-4th at the NEC in Birmingham.