David Prosser: The Government needs to firm up its energy policy to support solar

Outlook: To get a solar industry with critical mass, restricting meaningful incentives to families who put a solar panel on their roof just isn't going to cut it

Tuesday 03 May 2011 00:00 BST

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Louise Thomas

Louise Thomas


There is certainly no accusing the Government of inconsistency on energy policy. Having spent much of the previous year encouraging oil and gas companies to return to parts of the North Sea previously considered uneconomic – with hints there might be some financial incentives for doing so – the Chancellor slapped a whacking great tax rise on their production in last month's Budget. Similarly, after talking loudly and proudly about its desire to see the expansion of Britain's renewable energy sector, the Coalition is about to take an axe to its support for the most successful initiative in this area.

The consultation period over planned changes to the solar feed-in tariff system ends on Friday. But while Chris Huhne's Department of Energy and Climate Change has promised to listen to feedback on its proposals, the position of both sides of the debate has been very clear from day one.

Mr Huhne's argument is that the subsidies paid to individuals and companies that produce enough solar power to feed some of it back into the grid were aimed at households and the smallest of commercial concerns, rather than big business. It is thus proposing that the subsidy for installations producing 50kW to 150kW should be almost halved, from 32.9p/kWh to 19p. Installations producing more than 150kW will see even bigger cuts.

One sees his point. While ordinary folk putting the odd solar panel on the roof might need a bit of support to make their investment pay, ought large commercial enterprises not to be able to stand on their own two feet?

Still, the solar lobby's position is entrenched too. It is that the Government has reneged on a promise not to review feed-in tariffs before 2012 (and not to make any changes until 2013). Investments have been made on that basis which may no longer make financial sense given the subsidies now on offer.

There are two issues at stake here. The broader point is that when governments ask private sector energy companies to make long-term investments – in renewables or fossil fuels – on the understanding that the relevant tax regimes will be supportive for a time, if they go back on the commitment, they should not be surprised when people say they are not prepared to continue investing.

Second, if one wants to build a solar industry with critical mass in this country, restricting meaningful incentives to families who put a solar panel on their home's roof just isn't going to cut it. We need the larger commercial enterprises that Mr Huhne no longer seems prepared to support.

Last week, Total, the French company, made an £800m bet on the solar industry, buying 60 per cent of SunPower Corporation, the second-biggest solar panel manufacturer in America. It's not difficult to see why: at a moment when the climate change agenda is finally becoming all-important – and, post-Japan, amid fears that nuclear power may not, after all, be the answer – solar has never looked more attractive. Time to reconsider Mr Huhne.

Making a compelling case for equities

Fidelity Investments published a tongue-in-cheek note last week pointing out the similarities, economically speaking, between the royal wedding of the Duke and Duchess of Cambridge and the 1981 wedding of Prince William's parents. Just like today, Fidelity pointed out, Charles and Diana got married at a time of great economic upheaval, amid an outlook that did not offer promise.

Fidelity, which makes its money investing savers' money in stocks, said that despite the widescale pessimism, equities went on a long bull run after that wedding. Might it do so again, the fund manager wondered self-interestedly?

It does not always do to be cynical. For all the pessimism about the state of our economy, there are some compelling reasons to make the case for equities. Above all, the stock market remains good value, by historical standards, compared to other asset classes – like booming commodities, for example, or bonds. Over time, that suggests a catch-up to come – in the shorter term, it means generous yields.

Also, many companies are performing much more strongly than one might expect given the economic headlines. Away from the consumer-facing sectors, on which people understandably focus, earnings are improving fast. Moreover, many companies, having paid down debt in the wake of the credit crunch, are sitting on cash. This is one reason why the M&A cycle is back on an upswing.

Then, while western economies are not bouncing back from recession as strongly as they have in the past, they are almost all growing once again. In other words, whisper it quietly, but as the stock market in Britain reopens today, and most people return to work, Fidelity might just be on to something.

Interest rate reprieve won't last forever

A final thought for the return to work. The consensus is that the Bank of England's Monetary Policy Committee will not raise rates when its May meeting concludes on Thursday. But even if that view proves correct, do not be complacent: sooner or later, the Bank will begin tightening monetary policy.

Indeed, the UK is increasingly isolated in sticking with record low interest rates (though the US provides us with some cover). Russia, for example, is raising its rates this very day, while the eurozone has already had one increase in the cost of borrowing. Across Asia, emerging and emerged economies are much further down the track.

None of which is to say the Bank's policy is mistaken – far from it. Just that anyone with a mortgage should see this latest reprieve, assuming it proves to be so, as a further opportunity to position their finances for rate rises to come. The opportunity will not be extended forever.

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