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Solar Photovoltaics (PV) is considered to be a market with significant potential in the UK because there are very few planning issues and, if costs were reduced, almost 4% of UK electricity could be supplied using this technology – in addition carbon emissions could be reduced by 3%. However, if Photovoltaics is to become a commercially viable product, significant government support and incentives will be required, combined with major cost reductions to improve investment paybacks. The Feed-in Tariff scheme was introduced by the Government in 2010 and has had a major positive effect on the sector during its first 18 months to September 2011.

Our estimates indicate that in 2009 there were annual sales of around 6,000 – 7,000 photovoltaic units and around 24,000 solar thermal units into residential, commercial and industrial applications. Solar thermal is dominant, reflecting lower costs and wider usage in domestic properties, compared with much higher investment costs in PV installations – though the balance is changing rapidly in 2011.

Feed-In Tariffs (FIT's) became effective from April 2010, as a means of increasing the market value of both renewable electricity and renewable heat. As a result of these changes, the marketing efforts by a wide range of companies have been significant in promoting the benefits of all renewable technologies, with solar well placed to provide solutions in both residential and non-residential applications.

At the time of report publication, DECC has announced a virtual 50% reduction in tariffs to take effect from 12th December 2011. While some reduction has been anticipated, the scale and speed of the change has caused widespread concern in the sector that the development of the industry will be significantly impacted. The changes are subject to discussion with consultation due to close by December 23rd .

According to Ofgem, in the first twelve months of the Feed-in Tariff scheme (April 2010- March 2011) more than 30,000 renewable installations were registered with FIT Licensees. In the fourth quarter of FIT Year 1 alone (January-March 2011), 11,824 FIT installations were registered, which represents a 30% increase in the number of installations registered in just the third quarter. Renewable installations include Hydro, Photovoltaics, Wind, Micro CHP and Anaerobic Digestion, but by far the largest share of total installations in 2010/11 was taken by Photovoltaics at around 94%.

Given that the annual sales of PV in 2009 were around 6,500 units, the Feed-in Tariff scheme has certainly made a significant impact in its first year with sales increasing rapidly to over 25,000 installations in the first half of 2011 – with provisional estimates of around 34,000 installations in the July-September 2011 quarter.

In terms of future prospects, the changes to tariff levels have thrown any market projections into turmoil. A wide range of scenarios have been highlighted already and our forecasts are assuming a significant reduction in 2012, though medium term growth projections are still high to meet targets in the UK. Current Government forecasts are to achieve around 800,000 installations by 2020, which would represent a major growth on 2009 levels but given performance in 2010/11 it is clear the impact of the recent FIT scheme indicates the potential for strong growth exists in the UK – if the subsidies are sustained at an ‘attractive level’ .

In contrast to Solar PV, solar thermal has seen some significant decline in the majority of European countries in the last 2 years although in the UK there has been growth in both 2009 (10%) and in 2010 (18%). The government's aim is that the recent introduction of the Renewable Heat Incentive will help drive a significant increase in the level of renewable heat and that by 2020, 12% of heating will be generated from renewable sources, saving up to 44 million tonnes of carbon (MtCO2) by 2020. Market growth for solar, therefore, will be heavily dependent on a combination of installation costs and grants and subsidies to encourage significant market acceptance, with many industry participants encouraged by recent interest levels. However, the recent proposed changes have severely dented market optimism and it is difficult to assess the full impact, at least in the short term, if the changes are fully implemented.