February 2012

In the case of the UK, the government cut short the time allowed for those installing small-scale solar installations to receive the higher level of feed-in tariff (FIT) set at 43.3p per kilowatt-hour. The new lower tariff of 21p was due to come into effect in April 2012, but the change meant any qualifying solar installations after December 2011 would only attract the lower rate. 

This about turn came about because the government admitted it had not estimated how popular solar energy subsidies would turn out to be. As a result, around 90 per cent of the funds that the government had allocated for the entire four year FIT programme had already gone.

Yet while budget constraints in the current economic climate are understood by the industry, the speed with which the subsidy was cut compromised companies and jobs already committed to initial promises. The Solar Trade Association, representing more than 450 companies, estimates that a third of companies could close as a result of subsidy loss and severely affect the future growth of the UK solar market in 2012. 

While the High Court has since ruled that changing the tariffs in this way was "legally flawed", there remains widespread confusion and concern over whether even the lower rate promised by the government is sustainable.

It is exactly such displays of government policy being reversed without notice that deters investment and further undermines the sector, according to David Donnelly, Project Finance Director at Mazars. Donnelly says such examples highlight the need for there to be a better link between business and environmental policy. “The government is keen to promote this notion of huge employment gains from transforming the economy to a low carbon economy, but such a reversal of policy as we’ve just seen absolutely flies in the face of that.”

As a result, Donnelly is seeing a back to basics approach as investors and banks factor sovereign risk into their assessment of renewable energy projects, particularly on an international basis, “People are very spooked by market conditions at the moment. No part of the investment proposition can be taken for granted any more. Investors will increasingly want to investigate to ensure it’s not just hot air and that governments can actually commit financially to environmental and climate change policies before they invest funds” explains Donnelly. 

Similarly the increasingly wide range of funders now active in this sector – utilities, large private equity funds and banks, infrastructure funds, Venture Capital Trusts (VCT), and Enterprise Investment Scheme (EIS) investors – are focusing on projects where they can see real investment returns. Unlike in the days before the credit crunch, companies cannot be overly optimistic or bullish in pitches for funding because they won’t get away with it, warns Donnelly. “This is a market in which integrity and honesty about projects are much more important. Whether it’s from the government, private equity, banks or institutional investors, there is no frothy money around for getting marginal projects off the ground.”

In addition, the degree of scrutiny applied to projects by funders is much more detailed than it was previously. Donnelly says companies need to address this in an upfront way, resolving issues and disclosing them to potential investors and banks early on because it displays a level of professionalism. A coherent investment proposition that can stand up to additional stress testing is essential.

“Incomplete, inadequate or partial presentations are just dismissed and funders won’t return to work with those companies. There are no second chances, which means there is a need to undergo the necessary investment preparation before approaching funders,” he warns. 

With the sector expected to be worth billions over the next decade as countries replace ageing power stations with low-carbon alternatives, it’s probably one bit of free advice worth taking.