Why solar rebates are so hard to get right

This week I attended a rally held by solar installers in Victoria who were protesting the negative consequences of the Victorian solar rebate.

Irrespective of the intentions, efforts or politics around the scheme, one thing is unarguable – there are some very serious and material negative consequences that have occurred as a direct result of the scheme that extend even beyond Victoria.

It is also true that there are some very positive benefits, predominantly end users, who have and will benefit from a reduction in PV price of around $2000.

So, pro’s and con’s.

A number of Victorian solar companies have gone broke, lost their assets and savings and employees are now unemployed. I personally spoke in detail with several, and watched as voices cracked, tears flowed, as the harsh reality of sudden bankruptcy dawned on hard working men and women simply trying to make an honest living by supplying, selling or installing solar systems.

A number of end-users have expressed privacy concerns, suffered anguish and frustration and ultimately walked away from buying solar all together. Some have been ripped off by being forced to pay for systems excluding the rebate, after unwittingly signing confusing contracts.

The Victorian government has stated that they have lifted the bar higher than ever before, liaised with industry and have done their best to ensure everything would run smoothly.

They are unapologetic about investing in making solar cheaper and driving higher standards. However, they have also taken a very tough stance on complaints about the scheme, mostly from industry. And in their refusal to acknowledge fault, have implied it must be the solar company or consumer’s fault if they suffered unintended consequences.

It’s not a pretty situation at the moment.

It’s also not the first time the Australian solar market has been faced with such a scenario or, that industry has had to resort to protesting about solar rebates. So protest we did.

Breaking it down

I’ve been thinking about this issue for decades, having witnessed the pros and cons of solar rebates over and over again. Ultimately, I’m not a conspiracy theorist so I don’t believe the majority of people involved intentionally set out to create problems, quite the reverse.

Here’s my take on the core issues at play, which can be whittled down to two key themes: Politics and Businesses.

Politics

The complexity of how politics works is at the heart of the issue in almost every single rebate scheme. Good intentions almost inevitably become overwhelmed by the nuances of potential political gains and fears or, unintended consequences.

I have witnessed this first hand many times before, for example in the design of the NSW 60c FIT. Along with many industry peers, I attended stakeholder forums during the design phase recommending much lower rates (35c), lest we overheat the market. Once the government heard that the opposition was considering a more generous scheme and with an election pending, they ignored industry and ramped it up to 60c with a myriad of unintended (or ignorant) negative consequences.

In the Victorian case, the solar rebate has emerged as a crucial deciding factor in the election of Daniel Andrews. And so admitting to faults in its design and implementation, or negative consequences, or revoking the scheme is politically bad. Very bad.

In defense of the government, I have heard some claims that industry was not consulted on the design of the rebate, but this is simply not true.

I know a number of great solar business people, industry associations and advocacy groups who were consulted at length about the design and even some changes to the scheme. Everyone in the solar industry had the option to contact, lobby and discuss the scheme’s implementation with their local members – and a number did exactly that.

I also happen to know that many of the advisors to and staff of the government are incredibly intelligent, experienced and well intentioned advocates for growth in the solar industry. Ultimately, their best designs and advice are often overwhelmed by the forces of politics.

However, after speaking to some of these people, it is clear that the government ignored the feedback in some cases or made changes that had the consequence of creating more problems.

As many solar people I spoke to agreed, unintended and negative consequences were absolutely, 100 per cent predictable. Whether they were intentional or not, or who is to blame for them, is a separate issue from whether we should have foreseen them, or not. History tells us we should.

Wherever solar rebates are connected to government policy, and the indisputable attempts to leverage political gain from such program announcements, there will be market distortion and negative consequences for someone.

Business and market impacts

I’ve personally lost a significant amount of money as a result of solar schemes over the last 25 years, on more than one occasion. I’ve seen revenues suddenly plummet, profit erosion, bonuses lost and had horrific cash flow impacts that ended up costing me my savings. In fairness, I have also benefitted from some of these schemes, too.

I’ve also witnessed the collapse of literally hundreds of businesses, good and bad, as a consequence of rebate schemes or changes to schemes or market distortions over the years. Sadly, I met some more this week.

Running a business is hard enough without the consequences of massive market distortions. Despite having your eyes wide open, bad luck, bad timing or unforeseen consequences can wreak havoc and destroy a solar business very quickly if the stars align badly for you. A very reasonable point made to me by several solar installers this week was:

“The market was actually trucking along quite nicely before the Victorian Solar rebate with almost the same level of market volume. It wasn’t perfect, but we had pretty tough standards, strong industry bodies and mostly, good operators making an honest living. We didn’t ask for this rebate, we didn’t need this rebate but here it is.”

This is not exclusively a solar industry issue, of course, but as an emerging technology the solar industry has needed support over the years to get going, so we have been both the beneficiary and victim of rebates time and time again.

According 2018 CEC reports, there were 1316 accredited solar installers in Victoria, which is a reasonable estimate of the number of solar businesses. While this sounds like a lot, Victoria’s population is the second highest in the country at around 6.5M and equates to 4,962 people per installer, the second highest ratio of potential customers to installers in Australia.

So, there should be plenty of market opportunity.

When the head of Solar Victoria (Stan Krpan) was interviewed recently on Solar Insiders, he stated that in July 2019 “the top 35 companies by volume only got 15% total market share”. With the market capped at 3,333 rebates per month, this equates to 495 successful quotes or an average of 14 jobs per company (although there was undoubtedly a bias).

Krpan also stated several other interesting statistics. He said that around 330 companies uploaded “successful quotes” and abut twice that number tried to upload quotes in total (660 companies).

This reveals several things.

Firstly, it reveals that, of the roughly 1316 solar installers in Victoria, only a quarter of them successfully uploaded quotes although almost half of them tried (note unsuccessful quote uploads could be for a variety of reasons).

The fact that only half the companies in the market participated and only a quarter actually succeeded in their applications does not suggest a big spread, as implied by Krpan.

It also implies that another 660 solar installers either didn’t bother to, or couldn’t, apply to participate for some reason, which is a stark finding. Residential solar isn’t the only segment of the market, but it is the majority, representing around 70-80 per cent of all sales in most states, on average.

Unless I’m misunderstanding Krpan’s statistics, it suggests half the industry isn’t even participating and potentially and other quarter tried to but couldn’t. If indeed only 330 companies took the work that was previously shared by a round 1300 companies, this suggests a very big problem.

Now, it has be acknowledged that I’m using averages and a lot of assumptions here. The solar market tends to have a very long tail when it comes to market share. Few individual companies have ever exceeded 10 per cent market share, but a number have got close over the years, so we do have examples of organic market concentration.

I can’t quite fathom how the top 35 only got a total of 15 per cent market share and remain viable – it implies an average market share of 0.42 per cent and 14 approved jobs per company.  That’s not exactly a barn storming result.

On top of this, being a signatory to the CEC Approved Solar Retailer (ASR) program will be mandatory for all solar companies by November 2019 and is already a requirement for the top 35.

Already 100 Victorian solar companies are approved and 150, or so, should be through soon. Unless all solar companies become signatories, this will cause a further, potentially significant concentration of market power to the detriment of any solar company that won’t, or can’t get approved.

Many solar companies detest the ASR as an ineffective, additional cost burden and hate the monopolisation of participation. I get that, and I think hard about its value too.

However, I remain adamant that in the absence of any other specifically solar related consumer protection scheme it’s a)better than not having a targeted scheme; b)it’s been developed with industry input by an industry body; and c) although imperfect, it has shown that only around 65 per cent of companies get approved, and if the rules are proven to be broken, you will be booted out. It’s imperfect, but it does have an impact.

I don’t yet fully understand the spread or impact of the scheme on solar businesses in Victoria but a) 3,333 jobs per month is not growth compared to last year’s volumes; and b) it certainly doesn’t look good in terms of market concentration.

What next

The government must admit that there are unintended negative consequences for solar businesses if they want to appear genuine and honest. Anything else will result in continued anger, frustration and criticism.

Improvements can and should be made to avoid, at all costs, damage to business and employment. Solar Victoria should get on the front foot and sort it out quickly and the Premier’s office should be prepared to listen and act on the advice.

Solar businesses really only have two choices:

One, get out of the residential market and re-tune their business to markets that are ineligible for or unaffected by the rebates.

Two, get ASR approval, engage and invest time and money with your industry peers, associations and government to help improve the program and stay incredibly well informed so you can maximise your chances of participation.

I would also suggest that they should add some non-rebate affected diversity to their business, so they are not 100% dependent on the scheme.