The UK is being hailed as the new solar capital but recent cuts to feed-in tariffs show that the industry is not immune to government tinkering. While incentive schemes and subsidies can boost new energy businesses, their removal can also bring burgeoning industries to their knees, as seen in Germany. What can UK Solar companies do to avoid a similar fate?
Dr Annerose Tashiro, Schultze & Braun’s Head of Cross-Border Insolvency and Restructuring, says that UK companies should beware of treading in the footsteps of German solar companies where more than half a dozen companies have failed in recent years. Solon and Solar Millennium went into administration in 2011, followed this year by Scheuten Solar, Solarhybrid, CentroTherm and Q-Cells.
Stark impact of tariff cuts
The predominant reason why these German companies became insolvent is because they were unable to support themselves once government subsidies were dramatically cut. This was partly because, once the funding and support were stripped away, poor company management and structures were revealed. But it was also the product of a large drop in confidence in the industry as a result of government policy.
Last year, the UK government cut the subsidy for domestic solar schemes and there was a drop in demand in the UK as a result. This August, a planned cut to the feed-In tariff (FIT) had a reduced [rather: reducing?] effect on the market. The impact of government policy on whether to promote or withdraw its support for the industry is undeniable.
The German company Q-Cells is an example of what can happen when confidence in government support for an industry is knocked. The company was not loss-making, but went into administration when its financing was withdrawn following the announcement that the German government was to stop subsidising the industry. Q-Cells were financed by a two-year bond which became due for renewal around this time. Investors declined to renew the bond leaving Q-Cells high and dry. The company’s share price dropped 200% in what was a very short time, prompting even more concerns about the German solar industry.
Germany was one of the first countries to renounce nuclear energy following the Japanese Tsunami. The expectation was that the Government would increase its support of new greener energy technologies. What it got instead was drastic cuts to the programme of support which pulled the rug from under the solar industry. Not only did this erode the confidence of investors, but also customers.
The quick change in policy deterred home-based businesses both, large and small from buying solar products. Buying solar panels for the roof of a large factory plant, hospital or shopping centre is a large purchase decision. The cost needs to be amortised over a long period of time, probably decades. There was a lack of confidence in government support for the industry after constantly changing FITs. Once solar companies started to go into administration, doubt over the longevity of solar providers for on-going support and maintenance, substantially weakened demand, further damaging the industry. For these non-domestic purchasers a stable market is critical. The cut to the FIT affected energy companies so badly in Germany, they demanded compensation for damages.
The solar industry operates in an international market. It was not only changes to subsidies in Germany that caused a drop in demand, but particularly cuts to generous incentive schemes in Italy and other southern European countries.
One result of these cuts was that businesses started opting for cheaper imports of solar equipment, usually from China where the industry is heavily subsidised. It remains to be seen whether the recent complaint to the EU by European wind and solar manufacturers against Chinese imports will result in any positive change.
Forward-thinking investments needed
On the face of it, German solar companies were the victims of external events and the vagaries of multiple governments’ policies across Europe. But the reality is that although cuts to subsidies in Germany and elsewhere were a genuine blow, the companies themselves were not well run. The management was not robust and the companies were only able to survive on hand-outs, unable to stand independently on their own two feet.
This is where UK solar companies can benefit from their German competitors’ misfortunes. While it is a difficult task to be immune to government policy changes, being prepared will help. UK companies need to invest in market intelligence: understanding their markets, their market places, and all the political, economic, social and technological changes that affect them. Policy U-turns will happen, but there is no excuse for not being properly prepared for them.
Equally, it’s important for a company to be compliant with financial best practice. Robust financial systems and practices are vital to withstand large swings in demand, rapid technological advances and quick entry to new markets. Founders of many of these companies might be excellent in the field of energy, but don’t make great business men. It’s important for a company to employ someone who is independent of its product in order to run important day-to-day operations in a financially proficient and business-like manor.
Frequently, founders of new German energy companies were content to pocket the profits from their subsidised sales and swan around in expensive cars. The R&D ratio (R&D as percentage of turnover) for solar companies in Germany is said to have been only 3%, much too low in order to keep the pace of a fast developing technology. Accordingly, UK companies should reinvest profits to constantly refine and develop their technology. The only way to counter cheap exports of commoditised products from China is by staying ahead in the technology stakes and offering a better quality of product and services.
While there is no expectation that the UK Government will suddenly withdraw its support for solar energy as fast and to such a degree as in Germany, the UK can certainly learn from the German experience. Germany is no longer the capital of the solar industry. Fortunately, some companies defied the storm. Sharp Solar unveiled a restructuring plan that will include moving its German headquarters to north Wales and will be a major boost for the UK solar power industry. It will certainly be interesting to see what comes of the industry in the UK and how these companies react in this ever-changing, often unpredictable environment.
Schultze & Braun is specialist insolvency and restructuring law firm with offices throughout Germany, as well as in France and the UK. As well as acting as insolvency administrator for Solar Millennium AG, the firm is involved in other cases related to the solar industry and the alternative energy sector at large.
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