If the government does not quickly withdraw its ludicrously self-fulfilling consultation on the feed-in tariff review, a near future beckons for the solar photovoltaic industry where it is no longer the recipient of any ‘help’ from government. 

The inevitable conclusion of the FiT review is a boom in installations as consumers and businesses rush to get their installations completed before the deadline, resulting in the proposed cap on spending for the second phase of the FiT being breached before we’ve even begun.

The consultation makes it clear that should this occur, generation tariffs will be withdrawn. People and businesses installing solar after January 1st 2016 will only get paid for exported electricity.

This has massive implications for an industry used, as it is, to selling solar purely as an investment opportunity.

A world without generation tariffs will look very different.

First of all the economics

Financial benefits from installing solar will either be from avoiding purchasing electricity from a supplier, or for exporting what you can’t use at the moment you’re producing. 

Because purchased electricity costs around 15p per kWh for a domestic customer and perhaps nearer 10p for a business, while exported electricity is sold at just under 5p, the optimum size of a solar installation is likely to become somewhat smaller.  

The larger you make a solar system, the lower the cost is per kWp.  Industry has gotten used to aiming to ‘max out’ a roof.  For domestic properties the goal has been to get to 4kWp at all costs, at which point the generation tariff steps down.

But the larger you make a system, the greater is the mid-day peak and the higher the chance that the power you produce will be more than the building can use. 

In a world without generation tariffs (which pay you for what you produce – irrespective of whether you use it yourself or export it), the industry standard assumption that you’ll use 50% of what you generate (irrespective of system size or household) will no longer do.  In fact there is increasing evidence that as costs have fallen and installed power has increased, the self-consumption percentage has fallen below the value assumed in the feed-in tariff.

I’ll be speaking on this topic at Solar Energy UK and showing some real-life case studies of power consumption patterns from data kindly provided by Immersun and Rtone.

In the future, the economic optimum is likely to be a smaller system that ensures that a higher proportion of generated energy is used in the building. 

Power diverters help the economic case for larger domestic PV systems, but most often are displacing gas heating at 5p per kWh.  Battery storage will also enable larger systems as their costs reduce.

Households and businesses vary greatly in how much energy they use, but they also vary in when they use it.  The solar industry is going to have to offer customers a more bespoke service.  One size will no longer fit all.

Analysis of half-hourly electricity data could become necessary before a solar system can be properly sized to suit the usage pattern in the building.  Where half-hourly data is not available, it may become commonplace for a solar installer to install a data logger for a period to gather this information before making a meaningful recommendation to the customer.

Second on business models and financing options

A vast quantity of solar has been installed by local authorities and social housing providers to their building stocks.  Much of this has been installed with third party finance.  In this situation the owner of the solar system is a third party that collects the generation and export tariffs.  The householder benefits from lower electricity bills (to the extent to which they use electricity during the daytime).

It’s hard to see how this model survives in a world without generation tariffs.

In the commercial rooftop sector much hope has been pinned on so-called PPAs (Power Purchase Agreements).  In these, the business contracts with a finance company to pay for the solar installation on their roof in return for the business paying an amount for the solar energy they use.  This amount is normally lower than they would pay for electricity from their usual supplier.  The finance company collects the feed-in tariff and the energy payments from the business. 

This model neatly avoids the very high hurdle rates that businesses apply to investment decisions.  If the company is paying for the solar installation with their own capital, then the solar investment is competing with all other investments the company could be making (for example in a new production line or IT system), and for such investments payback periods of less than 5 years are commonplace.

If the solar is funded through a PPA instead, the company will look at the opportunity less as an investment decision and more like an attractive offer to provide energy at a low, stable cost for 20 years.  Unfortunately the FIT review has come at a time where these kinds of arrangements were really starting to gain ground.

It is a model that may survive in a post FIT world, but the discount offered relative to grid electricity may have to narrow significantly to make the sums add up for the finance company, at least until solar costs fall further.

The marketing of solar to home-owners has been very significantly driven as an investment under the feed-in tariff.  This has been helped by historically low interest rates for savers during this period.  In future the economics of energy savings will still be important, but the emphasis is likely to be just as much on home improvement and less as an alternative to an ISA.  The impact of solar on the kerb-appeal (and resale value) of the property will become more important.  With smaller systems, tailored to the household demand, there’s more likely to be space for an aesthetically pleasing roof integrated system.

For sure, 2016 is going to bring challenges as the drivers for the solar market shift rapidly, but at least we’ll be more free from government interference.  There’s no doubt in my mind that the solar industry is here to stay – the future basis of our energy system is becoming clear – and it’s solar.