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Tinkering with solar panel subsidy risks making bad policy worse

19 February 2011

6:57 PM

19 February 2011

6:57 PM

The fallout from Chris Huhne’s sudden review of the government’s system of subsidies for
small-scale renewable energy gathers momentum. Solar firms, who built business cases on the system of subsidies, are
threatening judicial review over the Energy Secretary’s change
of direction. So why did the government raise concerns about the policy? Apparently, because it has been too successful.

The scheme encourages householders, communities and businesses to cover their roofs in solar panels and erect wind turbines by offering them a generous subsidy for the electricity they produce. It
was introduced by the Labour government with three aims: to cut carbon emissions; to help reduce the costs of the technologies; and in the hope that once solar panels are commonplace, green-eyed
neighbours will rush to install their own roof-top power stations. Peer pressure is the driver the low carbon revolution.

In our Greener, Cheaper report, Policy Exchange argued the scheme was unaffordable and should
be scrapped. Costing £460 per tonne of carbon reduced – paid through consumer energy bills – it is one of the most expensive ways possible of reducing carbon (the cost of reducing
carbon through the European Emissions Trading Scheme is around £12 a tonne). George Monbiot called it "the definitive example of a great green rip-off".

Unsurprisingly, considering its generosity, the policy has been a roaring hit (21,000 installations registered since last year’s launch). Also unsurprisingly, one of the most heavily-subsidised
technologies, photovoltaic solar cells (the shiny panels that produce electricity), has been very popular. In a further unsurprising development, solar panel businesses have been the most
aggressive in grabbing the subsidy, installing the largest possible schemes. In a yet further unsurprising development, the sunniest parts of Britain have been keenest to install them (more sun = more electricity = more subsidy payment = more

One person who does seem at all surprised by this is Chris Huhne. In announcing the review earlier this month, he said he has "become increasingly concerned about the prospect of large scale
solar PV projects under FITs, which was not fully anticipated in the original scheme." So have the original aims shifted?

Firstly, the scheme still reduces carbon, albeit at a very high price. In fact, by creating bigger installations it is doing so more efficiently (these installations are still small-scale –
the biggest will only satisfy about 0.00006 percent of the UK’s current peak demand). Secondly, if you want to reduce the technology cost, it does not matter if installations are smaller or larger.
And, thirdly, if you believe that seeing lots of solar panels around makes solar panels more desirable, does it matter if they are in fields rather than on houses?

Whether you agree or disagree over the wisdom of the scheme, creating this kind of uncertainty is bad for businesses who are quite sensibly making investments that offer a good return. What do they do now? Continue to invest in renewables, as the government asked them
to? Or halt progress until DECC has made up its mind? The threat of judicial review was inevitable.

Consultations are now open on almost all of the government’s acronym-rich energy and climate change policy (CRC, CCL, CCA, CPS, RHI and EMR are all being examined). The one thing businesses want
from government is a clear direction and long-term certainty, something that was often missing from Labour’s energy policy. This latest tinkering is a worrying sign that those mistakes may be

Guy Newey is an environmental policy researcher at Policy Exchange

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