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PV Feed-in-Tariff Review: Impact on the private householder with capital market

by Mel Starrs on November 14, 2011

in Feed In Tariff

In this second installation of my posts on the recent PV FiT review, I am going to concentrate on the private householder market. These are individuals with capital in the bank who have the roof space available and have decided their money is better off invested on their roof rather than in the bank.

Firstly, a note regarding tariffs and subsidies in general. They distort markets. In fact, this is why they exist. If the market did not ‘need’ distorting, there would be no need for a tariff. Keep this in mind as we go through the next set of figures.

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So, similar to yesterday’s table except I’ve opted for the largest installation you can get for the current rate of 43.3p (i.e. just under 4kWp). This decision was driven by this post on YouGen today which flagged up some real figures for installations – it seems my estimates yesterday are way above what some people are paying.

So in the first column using all the same assumptions as yesterday our IRR is now 14.4% (beating the 12.11% assumed yesterday). And like I said yesterday – massive!

The second column looks at what the price would need to drop to to get back to our original (arbitrary) 6.30% (remember, this includes inflation and assumptions about electricity price increases) – £11,423 if the new tariff is assumed. What I did not include yesterday was what price panels would have to fall to to keep 6.3% at 21p – in yesterday’s model it comes out at around £6000, or a 40% fall from April 2010 prices.

What is interesting is the offer the post on YouGen was able to give – this is shown in column 3 and shows an IRR of 9.51% – which is still very credible.

What does all this tell us? Panels have been overpriced this year. However, had the installers let the panels come down to £9,500 in November (column 4), the IRR would have risen to 19.93%!!! I’m going to make some sweeping generalisations now about the profit margins of installers – if I am way off base, by all means let me know in the comments.

As a relatively new business model and as a specialist sub-contractor, I would assume that the profit margins are higher than other construction activities (which in a mature market we would expect to be low – typically 5-10% for consultants, lower for large contractors). Let’s assume 15-18%. Now with the IRR at 14% the installer feels happy – his customer is not earning more profit than he is (remember that the FiT is paid to the panel owner by the utilities so the installer does not get involved in that transaction – this is merely a perception of ‘fairness’). He could drop the price of the panel, but the reported high FiT earnings would signal to the government that there is something wrong with the price set (yes, this is what has happened). So there is no incentive for the installer to decrease the installation cost any further and they pocket the increased profit.

Fair? Probably not, But is it the fault of the installer? Not really – it’s a function of the design of the tariff. What we need is a better designed tariff.

What can we conclude? The private householder market will likely survive – prices of panels will be ‘allowed’ to come down with the new tariff. Profit margins will shrink for the installers but probably not below 10-12% (this is speculation – I have no sources for this!). There will be survivors from the chaos of the next few weeks, but some will inevitably fail where cash flow becomes an issue. This will in turn ‘help’ those survivors who will be able to pick up fire-sale stock. None of this feels fair, but it does feel inevitable. Private householders will still be incentivised to invest in solar panels, with a lower upfront capital cost. Those who have space to fit a 3.96kWp array today but can only afford a 2.5kWp array may find they can now afford the whole 3.96kWp, actually increasing the amount installed (this is perhaps wishful thinking on my part).

In my next post I will turn my attention to the rather more sticky topic of social housing and fuel poverty and what the FiT cut means to that market.