Yesterday, the following article was being shared on my Facebook timeline, amid much wailing and gnashing of teeth and general condemnation of our inept and shortsighted government:
Here’s a quick summary of that article:
- The government decided to cut solar feed-in tariffs (subsidies for generating electricity through solar panels) by more than was expected – this is partly because the subsidies have been slightly too generous recently, resulting in a budget overshoot.
- The changes will take effect from January 2016, in just over four months’ time.
So, is this a bad thing? and if so, why?
My opinion is that this is far from the biggest thing wrong with current government policy, and that this change to solar subsidies will not change much. It may even be a good thing in the long run. Here is why.
Fact no. 1: the government has legal targets to meet for decarbonising the power sector – and subsidies are part of meeting them.
Let’s not forget that the UK Department for Energy and Climate Change (DECC) has a remit driven partly by the Climate Change Act 2008, the world’s first ever legally binding carbon emissions reduction target. In it, the UK promised to itself that it would reduce its carbon footprint by 80% from 1990 levels by the year 2050 (in line with EU plans, although the EU doesn’t yet have any legal commitments for 2050). Power generation accounts for about 35% of UK emissions, so DECC has a goal of switching the sector from coal and gas to renewables. Renewable energy also carries benefits in terms of energy independence and public health. So far, so good.
However, because renewable power is historically more expensive than fossil fuels (though this is less and less the case), they have until recently needed a lot of help to get any kind of deployment at all.
- Sticks – targets and obligations, with penalties for failure
- Carrots – something to sweeten the deal for renewables
While you can, broadly speaking, coerce and cajole and regulate big companies quite easily (especially if they are unpopular!), it is harder to enforce behaviour change from the top down onto consumers – especially since they also happen to be voters. To incentivise domestic or small-scale renewable power, then, the government uses carrots and not sticks.
The government therefore offers a feed-in tariff (FiT), a subsidy on the income per unit of energy generated. Compared to the alternative, which is to subsidise the cost of the panel at point of purchase, FiTs also encourage panel owners to maximise the energy output from each panel, by, for example, installing it on a south-facing roof, rather than anywhere less sunny. This is just fine, since DECC is only offering the subsidy in order to actually make solar electricity, rather than to simply sell large numbers of solar panels.
Fact no. 2: solar panel costs have been declining fast for 40 years.
Solar panel costs follow an experience curve, whereby the cost per of each solar panel is seen to fall exponentially the more you manufacture. Specifically, each time the installed capacity is multipled by 10, we see a cost reduction of about 30%. This is a trend that has been observed in solar panels for about 40 years. It’s equivalent to Moore’s law for computing. Like Moore’s law there are physical limits, but unlike with computing we’re a long way from hitting them with solar panels.
In 1978 Jimmy Carter was paying over $76 per Watt for solar panels on the White House. By 2012 the cost had fallen by a factor of 100, to only $0.80 per Watt.
There are some quite good charts outlining the cost trend in solar cells and comparing them to other energy sources here.
NOTE that the experience curve from 2013 below is actually plotted on logarithmic axes, meaning that the price is dropping by multiples of ten – that’s fast. Note also that you have to actually manufacture more solar capacity for the cost to keep falling.
Fact 3: right now in the UK, other renewable energy sources are more cost-effective than solar power – particularly wind power.
As with all renewable energy sources, it’s important to only build appropriately according to the resources you have available. In the UK, it is cloudy and gloomy most of the time, especially in the winter months. For solar power to be economically competitive here on a cost-per-megawatt-hour basis, solar panels either have to be really, really cheap, or the subsidies have to be quite high.
On the other hand, wind power is now cost competitive with coal, according to recent cost figures by NREL and the US EIA. Unfortunately the numbers are changing so fast that reliable data are hard to come by. Moreover it isn’t always possible to compare energy sources in abstract because the cost depends on the level of resource at that location and how far you have to take the electricity once you’ve built the plant.
But in any event: per pound (£) of subsidy money spent, you will very likely get more renewable energy if you put it into wind than into solar.
Fact 4: solar subsidies are designed to distort the market, to allow solar power to compete with other forms of energy.
Under a feed-in tariff (FiT) scheme, solar panel owners are awarded a fixed amount of money per unit of energy produced, in addition to whatever cash they get from selling the energy. This offsets the cost of the solar panel, making it more attractive economically.
Here’s how it works.
Let’s say I’m thinking of buying a solar panel at a cost of £1000. And let’s say that if I put this panel on my roof, the energy it generates is worth £30 per year, on average. After 20 years it would have given me £600 worth of energy, so I’ve made a loss on my initial £1000 investment. This might be worth it if, for example, I live on an island without mains power and it’s expensive or difficult to bring fuel from the mainland. But for an average house or an investor in solar farms, it doesn’t make sense to buy a solar panel.
Now let’s say as well as my £30 worth of energy per year, I also get a FiT worth £25 per year. Overall, I now get £55 per year, or £1100 over 20 years, and I’m happy because this is actually a 10% return on my £1000 investment.
So far so good. But as I said earlier, the cost of solar panels is declining. Fast.
Fact 5: if subsidies are too high, they can produce a boom, which may actually harm the renewable industry as a whole.
Let’s take our scenario above, with a solar panel costing £1000 and the income from FiT-plus-energy over 20 years giving us £1100. Now let’s say six months later the income is still the same, but the upfront cost of the panel has fallen by 10% to £900. If I buy a panel now, I’ll be making a ridiculously good 22% return on my initial investment. And in a world where the stock market offers an average of 5% (if you’re lucky), a 22% return is an absolute no-brainer, and everybody wants in.
A quick aside on thresholds: in general, something is only worth buying if it gives me more value than I would get by putting that money elsewhere. Say I’m an investor (like a pension fund), and I think the stock market is likely to grow by an average of 5% per year: I will then only buy solar panels if I can get a higher return than this. All other things equal, that’s my threshold for investing in solar rather than in stocks and shares. Any higher than about 6% returns for solar is a nice bonus, but if I’ve already decided to invest in solar by that point, it doesn’t change anything about the amount of renewable energy I will be building.
Subsidising very high returns in solar energy is basically a wasted subsidy, as far as the government’s objective to generate more renewable energy is concerned.
High subsidies can also mean solar farms get built that produce less energy. If the costs decline but the subsidy stays the same, then sites with lousy levels of solar resource (e.g. a roof in total shade) will be economically viable, even thought it means installing solar panels that don’t produce any energy. The government will end up shelling out billions for all the solar panels in the dark.
From DECC’s perspective, this is not a desirable policy outcome.
Finally, because of Fact 2 (the cost of solar reduces exponentially in line with total installed capacity), if you have a boom, the costs of solar panels will decline faster. In other words, a boom makes itself worse.
Germany had a huge solar boom in 2011-12 when the government’s FiT levels were just a little too high for a little too long. In a fairly short space of time, 14GW was installed, far above what the government expected to pay for, or that the grid could handle at the time. The sheer number of Watts of solar panels resulted in the power grid being crippled on sunny days, when the equivalent of a dozen nuclear power plants suddenly started chucking energy into it, nearly doubling the load.
Some of the consequences of Germany’s solar boom include:
- The country was forced to invest in making its grid more flexible, and as a result the problems of grid stability are much less than they were – in fact, Germany is showing the world that it’s possible to absorb far more solar power than anyone had ever dreamed of.
- Germany built up a domestic solar manufacturing industry, which can then export to other countries and boost the German economy in the long term. Some of these companies have since gone under, thanks to harsh competition from China and Taiwan, but overall the solar subsidy payout can be (sort of) justified on the basis that Germany became, and is still, a big-league player in an industry whose importance is only going to increase.
- However, the country now has a very subsidy payout of something like £8bn per year for the next decade or so, in the form of feed-in tariffs to all those people who bought solar panels. Thanks to this and the cost of having to invest in the grid, German energy prices are among the highest in Europe.
In the UK, despite having strong decarbonisation laws, we do not have a national strategy to build up a big solar manufacturing industry, nor does trying to put one in place now really make sense. We are also not a sunny country, and solar is unlikely to form a large part of our energy mix until it is dirt cheap (which it will be).
Fact 6: governments must reduce subsidies for new installations over time, but impose retroactive cuts at their peril.
In Spain, a boom similar to Germany’s was combined with an economic slump across the board, so the cash-starved Spanish government decided to impose retroactive cuts on solar subsidies in 2012. This means that they cut the feed-in tariffs going to installations that had already been built, and that had been promised to them for 20 years. People who had invested in solar farms on the basis that the feed-in tariff would cover their costs found themselves making huge losses. Feed-in tariffs are essentially a contract between the government and the owner of the solar panel, and the Spanish government broke them. Since then, Spain has found it incredibly difficult to attract investment or loans for any government projects at all, because investors and pension funds are scared that the government might pull the plug. After all, if the government feels it can do that to renewable energy, why not railways?
Fact 7: solar power – and wind too, but less so – needs effective energy storage before it can really come into its own.
Very little explanation needed here – if you don’t have a battery or something to store energy with, you can only have solar power when the sun is shining or when the wind is blowing.
Fortunately, the cost of batteries is also declining on an experience curve.
Conclusion: the change in solar subsidies doesn’t matter all that much, and might actually help.
With the cautionary tales of Spain and Germany, it’s easy to see why governments now fret so much over getting subsidies just right. It’s a tightrope walk: set subsidies too high, and you risk another expensive solar boom. Too low, and you throttle the industry. That said, the global solar industry is growing fast, so installers will only have to wait a while for costs to fall before their business picks up again.
By giving four months’ notice of the change, DECC is giving people and companies just a bit of time to adapt. This is more notice than they have given in the past.
Reducing subsidies for solar might free up more cash to put towards wind or other cheaper forms of renewable power. As per Fact no. 3, this would likely end up allowing the UK to have more renewable energy overall, other things being equal. (Granted, this is probably optimistic: DECC is probably just reducing the overall budget rather than reallocating funds to other sectors.)
Ultimately, we want solar to be so cheap that it doesn’t need subsidies – and it will be. It already is cost-effective without subsidy in certain sunny places where energy from other sources is already expensive. Soon, though – and according to Deutsche Bank this will happen in 2 years – even the trickle of photons descending from the skies above the UK will be able to justify the price of the panel without any subsidies.
And at that point, everything will change.