'Aving a FiT – Subsidies and Business Risk
And lo, it came to pass. On Monday the UK Government announced a consultation on cutting the solar PV Feed-in Tariff by 50% ostensibly to reflect the fall in the price of solar panels which had led to a gold rush. The sensible majority of the renewables trade pointed out that the new rate of return on solar PV, 4.5%, was less than the target minimum of 5% and argued coherently that this could stifle uptake and threaten the progress the sector had made. A less sensible minority went ballistic, threatening legal action and marches on Downing Street, all the time using highly unprofessional language. You may remember similar histronics last time the Govt changed the FiT formula, yet the boom went on.
In my first book, The Three Secrets of Green Business, I made the rather blunt statement “A green business is not a charity”. I illustrated my point with a couple of examples where “businesses” expected public sector bodies to buy their unreliable and expensive technology because it was “green”. They got a rude awakening when those bodies went for an alternative that may have been less green, but actually worked. The idea that public servants had a duty to deliver value for money to the taxpayer passed them buy.
My own experience of working in subsidised environmental business support has made me suspicious of generous subsidies. I’ve found they create unseemly feeding frenzies, terrible back-biting and dependency – not to mention frequent hissy fits. Many organisations built their business model on servicing those subsidies and simply collapsed when a particular tap was switched off. And in much the same way as untargeted food aid to developing countries can destroy local food production, it was difficult, sometimes nigh on impossible, to operate outside the system as the market was so distorted. Frankly, Terra Infirma is doing much better since the subsidies evaporated – and, more importantly, delivering much more value to our clients.
In the FiT case, the Government’s main mistake was to have a system that didn’t track capital costs automatically, so it requires ‘manual’ adjustment (and if they had kept with the 5% limit there would have been no legitimate complaint). The mistake the sector made was to assume that something that seemed too good to be true would last forever. Every businesses has to assess risk month by month and even day to day – anyone betting the farm on a non-guaranteed subsidy such as the FiT was taking a massive risk.
The lesson from all this is the caveat in the first secret of green business:
“Treat the environmental agenda as an opportunity, not a threat. Grasp it with both hands but, whatever you do, don’t forget you are still running a business.”
So, if you are operating in a subsidised industry, you should have a short term contingency plan to cover the sudden loss of the subsidy, and a long term plan for how to wean the business off it and onto a mature, sustainable footing.
And let’s hope that the Government listens to the voices of reason and sets the FiT on the right side of the 5% target.