Joining Germany and Italy in their efforts to slow down government spending, the United Kingdom has lowered its subsidies for solar power installations, both large and small. Large, utility-scale projects got the worst of it, but funds have also been cut for roof-top installations. Overall, though, it may not be as bad as it first seems for the solar industry. In fact, the UK’s new rules may actually be good news for the larger, high-volume solar makers like First Solar, Inc. (NASDAQ: FSLR), Trina Solar Ltd. (NYSE: TSL), and JA Solar Holdings Co., Ltd. (NASDAQ: JASO). More on that later.

Under the new rules, small solar installations of up to 50 kilowatts will be unaffected. Beginning August 1st, installations of 50-150 kilowatts will see feed-in tariff rates drop from 32.9 pence to 19 pence. Installations of up to 250 kilowatts will receive 15 pence/kilowatt and those of up to 5 megawatts get 8.5 pence/kilowatt. Previous rates for installations above 250 kilowatts were 30.7 pence/kilowatt.

A feed-in tariff requires utilities to pay above-market rates for electricity generated by alternative sources like solar or wind. The utilities recover their costs through consumer rates.

The government claims that its intention is to build a more de-centralized energy economy, which is not really a terrible idea. Solar developers, trade associations, and clean-energy advocates object to the uncertainty that the cuts will bring to the industry and to the manufacturing jobs that solar energy provides.

The feed-in tariffs were begun in April 2010, and resulted in more than 30,000 solar panel systems being installed in the UK since that time. Before that only a few hundred had been built.

The government’s arithmetic calculated that 20 large-scale installations of 5 megawatts each would cost about $2 million annually. For the same amount of money consumers could install 25,000 small systems.

When the previous government established the feed-in tariff, the budget was set at about $1.44 billion. The new government is treating this figure as a cap on spending for solar subsidies, where solar’s supporters say it was always intended to be a guideline.

Feed-in tariffs are probably the most popular renewable energy policy in the world, except in the North America. The National Renewable Energy Laboratory estimated that the tariffs are responsible for about 75% of all solar PV and 45% of all wind power development worldwide.

An interesting wrinkle on this argument comes from a recent analysis which indicates that solar power may be reaching parity with fossil-fuel generation at times of peak demand. Falling prices for solar panels due to a production glut are the largest contributor to the cost drop for solar PV.  The industry is also learning how to reduce the costs of other components of a solar PV system, known as “balance-of-systems” costs.

The big players in the industry, such as First Solar, Trina, and JA Solar, are also the low-cost suppliers. These companies eagerly anticipate the day when they no longer must rely on government regulation to juice the market. Far better for them is a market where they can compete on price and service.

High-cost producers and small project developers will struggle as the day of parity approaches because they live and die on government subsidies, which will inexorably fall as module prices fall.

The direction of solar subsidies, at least in Europe, is to reduce the subsidies as the module costs fall. And fall they will as new capacity comes on line and technology improvements follow.

Paul Ausick

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