Analysis: More cuts ahead for solar as UK funds run out

LONDON Tue Nov 1, 2011 6:58am EDT

LONDON (Reuters) - British solar plant developers can expect to see government subsidies slashed even further than a proposed 50 percent cut, because tariffs still are likely to eat up the 860 million pound ($1.4 billion) renewable subsidies budget before its planned 2015 end-date.

This week's proposed cut in state aid was the second to hit solar plant installers, manufacturers and developers within 18 months of the support scheme's launch, but it is not likely to be the last.

"Despite the cuts to date, the current FIT spending envelope is likely to run out before March 2015," said Daniel Guttmann, director of the Renewables and Clean Tech team at consultancy PwC.

The firm's research shows that current tariffs -- before the 50 percent cut announced on Monday -- amounted to 55 million to 70 million pounds for every 30 megawatts (MW) of retrofitted residential solar capacity, around 7 percent of the total FIT budget, which is aimed at rewarding other types of renewable energy sources as well.

The government has set a solar installation target of 2,680 MW by 2020, compared with 255 MW in place last month.

Energy Minister Greg Barker proposed on Monday to halve state subsidies for solar panel schemes of up to 50 kilowatts (kW), which will be applicable to projects that start operating on or after December 12.

Leaders of the solar industry campaign "Cut Don't Kill" say the 50 percent tariff cuts will destroy 25,000 jobs and 4,000 companies in the sector.

Even though Monday's accelerated rate cut has somewhat mitigated the risk of overspending, there is still a chance the investment rate will exceed the budget, Guttmann said.

"The government has two principal options -- either reduce tariffs or increase the spending envelope."

The second option is far from likely as the government institutes harsh austerity measures, which leaves the need to slash tariffs for more mature technologies.

POLICY INCONSISTENCIES

The solar industry understands of the need to adjust tariffs to reflect market realities, but developers says they are shocked by government policy inconsistencies and the short timeframes offered to adjust to new rates.

"Government has to provide stability for industry to adapt to these changes," said Andrew Lee, general manager for Sharp Solar UK, a module manufacturer which owns a factory in Wrexham.

"The government is asking us to change our business structure in just over five weeks, which is impossible."

The minister had already angered solar plant developers earlier this year, when a first fast-track review of the solar FIT scheme was announced to prevent a small number of large-scale projects from scooping up funding designated for domestic and community projects.

When the FIT program was launched, the first rate review was not scheduled to take place until 2012.

"It is deeply regrettable that this technology, whose prices are falling so fast and which will inevitably have a bright future in the longer term, has had such a traumatic start in the UK," said Gaynor Hartnell, chief executive of the Renewable Energy Association.

Meanwhile, a forecast drop in module costs over the coming years is likely to spur interest in solar power over time, helping demand recover after tariff cuts.

Consultancy Ernst & Young estimates solar module prices will fall 13-17 percent in each of the next two years.

Such a steep drop is likely to spur interest in installing solar panels, but that may result in another surge in activity that will then require a further cut in government subsidies to prevent an overshooting of the subsidies budget.

As a series of solar subsidy cuts looms, some British installers and developers are likely to diversify to other renewable technologies, such as anaerobic digestion that could be recipients of any spare funding stripped away from solar plants.

($1 = 0.620 British Pounds)

(editing by Jane Baird)

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