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Drastic cuts to UK solar subsidies

Following leaked government documents, it has been confirmed by the government that Solar Feed-In-Tariffs (FiTs) will be cut after the 12th of December by over 50%. The reaction from solar companies has, predictably, been negative, and they are claiming that jobs will be lost, and some companies may have to close.
The Feed-in-Tariff is a payment from the government to the owner of the solar panels for any energy they produce, the payments come directly from taxes on consumers’ energy bills. The amount was 43p per kWh, which is expected to be cut to just 21p for panels put into place after the 12th of December. This drop will mean that it will take longer for solar panels to ‘pay for themselves’. Which? estimate that this payback time will rise from 9-10 years to around 17-18 years. While it has always been noted in legislation that cuts to the Feed-in-Tariff will occur, companies are worried that this cut is too much too soon.

The Energy Minister, Greg Barker, has justified the decision by noting that the total amount spent on payments has been rapidly growing and would have reached its pre-determined limit if these changes were not made. The government also appeal to the falling costs of installing solar panels, and argue that as the industry is becoming more competitive it will require less government support.

Response to the changes

Jeremy Leggett, of Solarcentury, has argued that although he does not want there to be a bubble in the solar sector caused by FiTs, but that this move was too fast. He tweeted to ask Greg Barker if he was “ashamed that DECC announces 1,000 jobs for big6, cost of £1 billion, on day you cut thousands in solar 4 2 parts nothing?” Referring to the approval of two new power stations by the Department of Energy and Climate Change (DECC).

According to BusinessGreen “Solar power companies and green groups have united in warning that companies ‘will go bust’” and there may be a demonstration against the changes to legislation.

The uncertainty about policy is one of the main issues, this article from the BBC notes that “analysts say the frequent changes in support levels may make investors abandon the market altogether”. These short term fluctuations may be a issue for some investors, but the true potential for the solar industry lies in the long run.

Long Term Outlook for clean energy investment

Whether or not the government should have changed the FiT, it seems that even if the legislation is revised, there will be cuts. In the short term then, this looks like bad news for Solar companies in the UK and for investment funds with holdings in that sector. However, there are companies that are well placed to survive this setback, and as solar panels get gradually cheaper, it is predicted by the European Photovoltaic Industry Association that PV panels will become competitive with other forms of electricity some time this decade in the EU. This, together with a continued government dedication to reducing carbon emissions and have 20% of energy from renewables by 2050, shows solar energy as investment opportunity with great potential over the long term.

Fund context:

All of the funds listed in the Worldwise Investor Clean Energy theme are Global, so they are regionally diversified against these UK-specific issues. They are also diversified over different types of energy. Many often also invest in energy efficiency companies, such as those providing more efficient lighting, or batterie. For example Sarasin New Power which has Siemens in its top 10 holdings, who are producing energy efficient technologies and batteries for Electric Vehicles, and Pictet Clean Energy that invest in Johnson controls, who provide energy and emissions reductions services for vehicles.

Related funds:

Pictet Clean Energy
Sarasin New Power

Useful links:

Worldwise Investor: Clean Energy theme

Worldwise Investor: National grid provide the background to the energy challenge

Simon Webber: Schroders feel the time may be right for Alternative Energy

Guardian: Greg Barker - Britain’s solar energy boom is built on unsustainable foundations
DECC press release: Boom and Bust for Solar must be Avoided
Business Green: Solar feed-in tariff review – the reaction
BBC: Solar tariff cuts risk jobs, industry warns
Mark Hoskin blog: Investors do not despair, but Mr Barker 'what are you committed to?' 
McGrigors: Energy Briefing Note
Business Green: Delaying cuts to feed-in tariffs would cost households less than £1 per year 

Tags: UK | Clean Energy |

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Louise Fallonall articles

Louise Fallon starting working for Worldwise Investor as an intern over the summer and has written a number of articles during that time.

Louise is studying for a degree in Mathematics and Economics BSc at London School of Economics and Political Science, and graduates next summer.

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