Firms feel the brunt of solar subsidy cuts

24 November 2011

by Graeme Davies

Government subsidies can be both a benefit and a bane for businesses, as proved by the sudden turmoil thrust upon the UK’s nascent solar power sector by the sudden and dramatic reductions in solar feed-in tariffs.

A whole industry had grown up rapidly around the supply and installation of solar panels in the UK, bolstered by some of the most generous feed-in tariffs in the world for the electricity generated. But tens of thousands of jobs are said to be at risk now that the government has decided to more than halve the tariff offered, setting a cut-off point of early December.

It is not the first time, and it certainly won’t be the last, that businesses have been caught out by a change of government policy. And it is not just small local operators who were caught out this time. Among the companies who were benefiting from the solar boom were a number of utilities and several support service businesses which had all spotted the opportunity the tariffs offered and established operations to take advantage, many of which are now either under review or being shut down.

And the costs of shutting down such operations are not insignificant. Social housing specialist Mears, which was taking advantage of the long term tariffs to stick solar panels on the roofs of the social housing developments it maintains, this month said it was going to take a £3.3 million hit to its profit expectations this year and a one-off £2 million write down fee to shut down its no longer viable solar panel business.

Thankfully for Mears, its core social housing and domiciliary care businesses continue to trade well, but the withdrawal of the subsidies has shut off what could have been a decent bit of diversified business.

Usually, businesses go into government-supported industries with their eyes wide open and have contingency plans for when the support is withdrawn, which is usually well flagged and gradual. What caught many out this time was the speed and severity of the government action. The government itself justified the withdrawal by pointing to the huge success of the scheme, saying it did not have the funds to allow installations to continue at such a rapid pace.
Participants in the industry were aware that cuts were coming, but no-one expected to get a six week deadline. Most expected a more modest cut to tariffs from next April then a tapering away over several years.

Shockwaves
The shock therapy the government has delivered to the industry could just choke it off before it has reached critical mass. For companies such as Mears and Carillion, who were also fitting solar panels to the roofs of social housing, their hefty balance sheets and other profitable divisions mean the hit is manageable. But for smaller companies who had been formed on the back of this solar boom, the collapse in demand could be terminal. The figures, according to Carillion strategy director, John Swinney, are potentially significant. He reckons up to £2.5 billion worth of projects on social housing schemes are now uneconomical.

Governments cannot go on giving money away, especially one as strapped as ours is, but at the same time the withdrawal of subsidies should always be handled carefully, especially when they have been as successful as this one. Unfortunately, the government may have just shot itself in the foot with this one in terms of meeting its longer term emissions reduction targets.
 

Graeme Davies writes for Investors Chronicle