Solar industry’s subsidy lesson

It seems ridiculous that less than a year out from the start of Australia’s carbon tax the nation’s solar sector is in disarray.

But the collapse late last week of South Australian industry pioneer Solar Shop Australia suggests that is the case.

Solar Shop, which employed more than 300 people at its peak, was definitely one of Australia’s longest-standing solar panel groups and probably one of its best known, with an estimated 20% share of the residential solar market.

Established in 1999, the company’s growth accelerated under the ownership of Adrian Ferraretto, who bought the business outright in 2003 and sold a controlling stake in May 2009 to Harbert Australian Private Equity in a deal that valued the business at $50 million.

At that stage, the solar sector was flying thanks to generous Federal Government rebates and attractive feed-in tariffs from state governments that meant households could effectively sell any solar power they generated over and above what their property required back into the electricity grid.

But a massive spike in solar panel sales (and the lingering impacts of the GFC) meant governments have had to drastically scale back their support for the sector.

In the last few months, the sector has been hit particularly hard by cuts to feed-in tariffs in New South Wales and Victoria – the operators I’ve spoken to say the NSW industry has all but stopped and demand in Victoria is poor too.

It is the dramatic drop in sales combined with the sharp fall in the value of the renewable energy certificates which are attached to each solar installation that hit Solar Shop.

Not even a restructure that appears to have reduced the workforce by about a third was enough to stop Solar Shop’s secured creditor Westpac calling in the corporate undertakers.

The business will continue to trade while a buyer is sought, but industry observers are already wondering how likely that is for the simple reason that most potential buyers are currently struggling to restructure their own operations and plot a course through the current chaos.

The central lesson from this collapse is that building a business that feeds off government subsidies is potentially very dangerous.

Government programs can be scrapped, changed or cut back as quickly as they can be announced. And in fact, the ones that are successful in generating a lot of activity (such as the insulation and solar schemes run by the Federal Government) are actually more risky – the more the schemes are taken up, the more expensive they become for the Government to maintain.

It does appear that the solar sector was hit by a sort of land grab, where new entrants flooded the sector trying to cash in on governments subsidies.

When the music stopped – as it clearly has now – the fallout was always going to be ugly and ironically the bigger players can be left most vulnerable if they are limited in the way they can scale down.

But the fall of Solar Shop does raise some big questions about the state of the sector as carbon pricing approaches in less than a year.

I am no expert, but it would appear solar power is an important way for Australia to tackle climate change at a household level. However, the rollercoaster of big-subsidies-and-then-no-subsidies has left the sector with little stability – as highlighted by the collapse of one of its pioneers.

John Grimes, chief executive of Australian Solar Energy Society, has called for the establishment of solar safety net, a national baseline feed-in tariff that encourages solar panel installations and helps shift the country away from coal-fired power use.

That’s probably wishful thinking given the state of government budgets in Australia. But the question of how to stabilise a sector in chaos might be exercising the mind of bureaucrats trumpeting the move to a “clean energy future”.