Even with the Government’s feed-in-tariff beginning in April, solar energy will take time to develop in the UK. However Solar’s long term growth prospects appear strong, says Toby Ferenczi. 

 ‘Solar energy in the UK? But we don’t have any sun?’ is the most common reaction to the suggestion of solar energy. Its true that the amount of solar irradiation we get in the UK is approximately half to two thirds the amount you get in southern Europe. Therefore for the same solar energy system, you can get twice as much juice if you put it in the Cote d’azur as opposed to Bracknell. So why bother putting an expensive bit of kit in Essex?

 As far as I can tell there are two reasons why we British residents, may bother – principles or money, and the latter of those two has historically been shown to be the more effective.  

 To those in the principled camp, you may like to know that despite having less sun in the UK, we still get a fair amount of solar energy hitting our island. To be precise, in London and across the south of England you get an average of 1000 kWh of energy per square metre of land (or roof) over the course of 1 year and with an average photovoltaic system you can capture about 150 kWh (or 15%) of that as electricity. Therefore, by covering a 10m2 portion of roof or garden you can get enough energy to cover 50% of your domestic need and save about 400kg of CO2 (and help save the world).

 To those of us burdened with the need to consider their finances, a few words of the costs of such an endeavor. Announced this summer the Government have agreed to give you between 30 – 40p/kWh for solar energy from next April. We don’t know exactly how much it is yet but it should be in that price range. That means that the energy you produce per year would earn you 500-600 quid a year for at least 20 years.

 Now for the key question: how much does it cost? At today’s prices such a system may cost on the order up to 7500 (5 pounds per watt peak for 1.5kWp system). That means that you would stand to benefit 2000 over the lifetime of the system, or an annual return of about 2.5% per annum. This is not a great return on investment. Most savings banks would undoubtedly serve you better, however it is a positive number. Previously those who wanted to help the world with a photovoltaic system would have to pay out a fortune for the privilege.

 A further critical point is that the price of solar energy systems is falling. During the first half of 2009, the cost of solar modules fell by as much as 50%. Couple this with the range of subsidies available and the initial cost of installing a system should fall significantly. As these cost reductions get passed on to the customer, the return on investment will increase.

 It is possible to envision that as costs reduce a 5-7% annual return on investment should become possible. For savers, such a system will become a credible alternative to an ISA, and for those with no capital but who have the willpower it should mean that a bank loan can be used to cover all the initial costs.

 Right now, solar power in the UK is only for those with time, spare cash and strong wills. From April, the economic benefits of solar will make it easier for those with principles to get involved. The decision to invest in solar energy from your home will always be based on a combination of financial interest and environmental concern. Overtime, financial benefits should become the primary motivator, with environmental benefits an additional.

China provides perhaps the best example of a genuine solar revolution. In recent years China, and in particular the capital Beijing, have become synonymous with heavy air pollution with carbon emissions a natural result of being the largest manufacturing base in the world. The Olympic Games held in Beijing in 2008 highlighted to the world the problems that China is having with pollution in urban areas where population density and heavy road traffic has contributed to a situation where on some days visibility is severely reduced.

The televised images of the Beijing skyline obscured by a murky cloud of smog offered a grim reminder of the contamination which is of course an inevitable by-product of a rapidly industrialising economy. However, China has embraced the concept of renewable energy with a massive shift towards solar energy. Legislation introduced by the Chinese government has been designed to spark investment in renewable energies and has so far, proved to be successful.

As the largest manufacturer of photovoltaic (PV) components, China has been a market leader in developing new products for markets elsewhere. Certainly, the Spanish market which experienced its own boom following the introduction of a feed-in tariff in 2007 relied massively on Chinese PV imports with the market experiencing a glut of Chinese produced PV plant when the Spanish industry went through its downturn and failed to install the solar plant which had been ordered. However, in a bid to alleviate some pollution problems and help meet climate change targets, the Chinese government has recently sought to increase the number of solar installations within the country.

In order to do this the government introduced a feed-in tariff system. Essentially, the feed-in tariff (FIT) was designed to attract investment in the new solar industry by offering financial incentives to investors. The FIT mechanism operates on the basis that the law guarantees a fixed, premium rate for units of electricity fed-in to the grid by solar energy generators. The utility companies are obliged by the legislation to purchase the solar electricity at above market prices, the costs of which are passed on to the consumers. In China this mechanism which has been successful in areas such as Germany, Spain and California has also proved successful in China. In July 2009, the New York Times ran with the headline, “Green Power Takes Root in China” heralding the arrival of the Chinese PV market on the world stage.

The arrival of the Chinese PV industry has come in the form of a national renewable energy law which decrees that utilities must generate 8 per cent of their energy by renewable means by 2020. The fact that this 8 percent figure does not include hydroelectric power adds to the importance which the Chinese are now placing on green energy. The growing awareness of the lack of long-term sustainability in traditional coal energy sources has prompted the Chinese government to take action to maintain China has a major industrial power well in to the future. There has also been somewhat of a frenzy among private companies seeing the opportunities that will undoubtedly present themselves in the Chinese renewable industry, with a growing activity particularly in sectors such as wind and photovoltaic technology which will inevitably boom in China in the near future.

The New York Times was keen to use this Chinese government action to make comparisons with the comparatively weak efforts being made in Washington to spur the renewable sector in the United States. Indeed, in the United Kingdom, with the recent feed-in tariff legislation, members of the green energy industry will be hopeful that government action in the UK will have the same effect it has had on the Chinese market.

The New York Times asserted its almost neurotic view of Chinese renewable growth compared to that of the US by warning,

“You won’t just be buying your toys from China, you’ll be buying your energy future from China.”

China has a target in place to produce 8000 megawatts of energy by wind energy by 2010 which they are set to smash. If China continues apace to move towards green energy, they will surely shame efforts currently being made in the West to develop their own sustainable renewable industries.

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Spain has been one of the most successful countries in the public promotion of electricity from renewable energy sources (RES-E) , particular ly wind electricity. This support has been based on a feed-in tariff (FIT) scheme. Although the basic structure of the system was implemented in 1998, it has been modified in 2004 and 2007.

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Spain gives perhaps the best case example of how a strong feed-in tariff system can either make or break the solar industry in which it is introduced. The Spanish feed-in tariff (FIT) was designed as a mechanism for incentivising investment in solar installations and was introduced in 2007. Traditionally, the high cost of solar plant and installation deterred investors who identified that despite the high levels of solar radiation across the Iberian Peninsular, yields would be minimal at best simply due to high initial outlays.

The FIT is a system which guarantees fixed, premium rates for solar producers who feed electricity in to the national grid. The high rate paid for each unit of electricity is met by the utility companies who in turn spread that cost over their customers. Therefore, in Spain with the introduction of the tariff system in 2007 with the rate of 0.44 euros offered for units of energy fed-in to the grid by solar producers the interest generated in the Spanish photovoltaic (PV) market was overwhelming. Indeed, combined with extensive coverage from the Spanish media along with Zapatero’s PSOE government’s commitment of making Spain the leading producer of solar energy in Europe by 2020, there was a phenomenal boom in the PV sector with the number of solar installations rising dramatically.

The UK government and in particular the Department of Energy and Climate Change (DECC) since passing the Energy Act in 2008 have been moving towards a similar tariff system and in June 2009 announced that they would introduce a Clean Energy Cash Back system in the first quarter of 2010. In order to do so, they have undertaken a meticulous consultancy process in order to ensure that the mechanism which is introduced does exactly what it is intended to do i.e. make the UK solar industry strong and viable in the long term by attracting investment in the young sector. Spain certainly offers an example of how to attract investment in the short term. However, the Spanish example also offers stark examples of how not to set up a tariff system for long term industry health. The essential problem with the feed-in tariff which was established in Spain was that it was unable to cope with market fluctuations which arose as a result of the initial success of the tariff.

A recent report by the New York Times highlighted the failings of the Spanish solar legislation. Problems stemmed from the fact that politicians expected a steady stream of investment over a period of years. However, the massive interest which was generated in the fledgling industry encouraged a wave of investment in the first few months. The massive take up of solar installations was unexpected and caused the Spanish government to reduce solar incentives by 30 per cent without warning. Because the Spanish feed-in tariff failed to be market responsive, many investors who had already ordered deliveries of solar product from China, were left in the situation that they had no market in which to install it. With regards to the Spanish legislation, Julie Blunden of SunPower Corp was quoted in the New York Times,

“The most important lesson, which everyone has learned, is that if you’re going to establish a feed-in tariff, you need to figure out how to make it market-responsive.”

This will be the key lesson for the British government, how to introduce legislation which encourages growth in the new solar industry without setting a tariff level which is too high. In Spain, the government’s level of 0.44 euros was artificially high and therefore created the problem of an influx of investment which the government could not manage. Therefore, when the PSOE government reduced incentives by 30 per cent with many investors having already ordered large quantities of solar plant from manufacturing bases in China, the proverbial rug was pulled right from under them. Talking specifically about the legislation changes which had the detrimental effects on the Spanish PV market Santiago Seage, the CEO of Abengoa Solar SA commented on the situation saying,

“What’s important for the regulation of solar is stability. Unfortunately, up to now, we have had too many changes and if the context changes, you can make mistakes in business decisions.”

Spain has already experienced a dramatic reduction in photovoltaic installation in 2009 with 375MW compared to 2008 installations of 2,500MW. Spain will now fail to live up to its ambitions of becoming the European Union’s leading renewable energy producer by 2020 essentially because Zapatero’s government has neglected the tariff scheme across the country. The introduction of a 500MW project cap along with the withdrawal of essential subsidies has seen the solar industry stagnate and since the new year, decline. Members of the solar industry in the UK will therefore be hoping that the British government emulates the example of Germany rather than Spain in the way that they choose to roll out the much talked about feed-in tariff next year.