Original URL: http://www.theregister.co.uk/2011/05/10/australia_cuts_solar_subsidies/

Australia cuts solar subsidies, and not before time

It's becoming competitive, and doesn't need support

By Richard Chirgwin

Posted in Science, 10th May 2011 01:00 GMT

Before anybody denounces me as being “anti-solar” I want to put this on the record: I own 16 solar panels, a largish inverter, and because the system was built in the days before grid-connect arrived in Australia, a decent-sized bank of batteries.

Australia is now host to a lively – in fact, heated – debate over the way governments are winding back various solar power subsidies. Last year, the NSW government reduced the “feed-in” tariff that consumers would be paid for power coming from their solar panels; this month, the federal government cut the subsidy it will pay for installing solar power.

That subsidy, which peaked at more than A$6,000, will now be around A$1,200 for a 1.5 kW system.

That is, of course, a trigger for doom-and-gloom statements from interested parties, environmental lobbies, and the solar power industry – but I wonder whether things are as bad as they seem.

One thing that people forget is just how far the price of some solar components has fallen in recent times.

I have on hand a 2008 price list from a solar components supplier. In that price list, a 130-watt panel from Kyocera costs A$1,100. Today, from the same retailer, the best price is under A$800 – a fall of nearly 30 percent in just three years.

That is a pretty dramatic reduction in price – not so much as you might expect if you were accustomed to the computer industry, but significant. And that price deflation has happened in the presence a significant subsidy, which would tend to put a floor under prices.

The removal of the subsidy should tend to drive down prices. Retailers need to keep the stock turning over, and if the prophets of doom are correct, they will have to do so in the face of bankrupt stock hitting the market sometime soon.

Of course, panels aren’t all there is to a solar installation. The other big-ticket items are inverters (grid-connect or standalone, depending on system type) and batteries (for off-grid systems).

Grid-connect inverters have seen some small price deflation – about 10 percent; standalone inverters haven’t fallen at all; and battery prices have risen. Note that standalone inverters and batteries are characteristics of off-grid solar, which doesn’t attract the same government support as grid-connected systems.

All this combines to suggest to me that the market dynamics here are more complex than “subsidy equals success, no subsidy equals disaster”.

Grid-connect system cost

The change in system costs – panels with grid connection as a bundle – over the last three years is quite startling. Thanks to the Wayback machine, I can check off solar system costs in 2008 and now.

Whole-of-system costs – excluding the subsidy – have fallen faster than panel costs. To pick just one installer, Aussie Solar (mainly because they build the system I bought with a house, so I’ve dealt with them, and therefore know they’re at least more substantial than some dude on eBay with a Website, a lockup and a van):

2008 price for a 1.5 kW system, pre-rebate: A$15,400

2011 price for a 1.5 kW system, pre-rebate: A$9,195 (the sum of the subsidy and the user capex)

The change, more than A$6,000, is more than the difference in panel price alone (yes, I realise these systems use different panels to those I priced above, but the gap between 130W panels and 175W panels isn't enough to invalidate this point).

If I apply the rebates in 2008 and now, the customer’s capex for a solar installation has risen from A$6,160 in 2008 to A$7,995 now (at the new A$1,200 level of rebate).

The price deflation (which I didn’t actually expect when I started looking at these figures) suggests, quite amazingly, that at least one of the tree-huggers’ assertions was right: with the right support, the solar industry would reach sufficient size to start enjoying economies of scale.

The growth in the market made it worthwhile for international manufacturers to compete on price, while at the same time expanding the number of distribution channels (leading to local price competition as well).

The existence of the parallel market in off-grid systems seems to support a hypothesis that competitive pressure is bringing down prices. In the less-contested off-grid market, there’s less evidence of price pressure. The 2008 price list I have shows a Latronics inverter at exactly the same price as it’s listed for today.

So it would appear that the government’s support had at least one of the outcomes that subsidy advocates believe it ought. But once a market becomes self-sustaining in its own right, it’s time to wind back the subsidy.

Is the market close to sustainability?

Ignoring ideology, the pragmatic question is whether or not the subsidies have created a market that can survive without them. I can’t say “yes” for certain, but the market looks more sustainable than it did five years ago.

Some industries – in Australia, childcare is a notorious example – use subsidies to lift their prices. Since the government’s going to pay half the fee, the market can slap on a premium, and the end user still gets to book a small saving.

The price falls in the solar industry in Australia, I argue, indicate that the market is sufficiently competitive to respond to changes in its circumstances, and might no longer need a direct installation subsidy.

To return a lower-subsidy industry to where it was in 2008, solar power needs to trim its installed prices by around 20 percent. In three years, it’s achieved double that – 40 percent, more or less.

Setting aside labour costs, the rising Australian dollar alone could do the trick, since there appears to be enough competition (and desperation) to stop the market simply gouging the consumers.

For some reason – perhaps it’s the level at which you can expect payoff while you’re still alive – A$6,000 seems to be a psychological price point for entry-level solar panel installations. Even with the reduced subsidy, the industry isn’t that far off the mark, and could well reach it by market dynamics alone.

The outcome would be a country in which solar setups become worthwhile in their own right, without all the downsides of the government subsidy. Is that a bad thing? ®