The Simple Piece of Psychology That Killed The Solar PV Market

Here is a little experiment in motivational research. Award one of your staff a pay rise - out of the blue up their wages by 10%. On the motivation scale they will be up around +6 (out of 10). In non-scientific terms, they will be ‘as happy as Larry.’ It would be higher than +6 if they thought they deserved the rise. Now, a couple of months later tell the same employee there has been a mix up in the accounts department and the rise should have been 5% and not 10%. Now logic dictates that this re-adjustment would see their motivation drop to +3 (mildly chuffed) – after all they are still 5% up on their original salary and the guilt of an unwarranted reward has been halved. But in reality their motivation drops to –6 (sick as a parrot). In fact you may see them fitting toilet doors with no handles on the inside until you give them another 10% boost - and a couple of tickets to see the dancing girls and next years Fit Show

People are more sensitive to loss than gain. People who won a jackpot during a rollover week were in open revolt after discovering they shared the top prize with over 500 other players. Instead of £20 Million they received £40,000. Now to most of us £40,000 seems quite a good return on a £1 punt. Think of what you could do with that much money: pay the gas and electricity bill for a start (OK, so maybe £40,000 is not so much money.) However what for us looks like a £40,000 win for the lottery players was a £19.96 Million loss.

So now we come to the point. A year ago you could have invested £12,000 in solar panels that produced around 3500kwh of electricity per year and you would have been paid 43.3 pence for each of those kwhs. This earned you around £1,500, or an annual return on investment of over 12%. If you had invested that £12,000 in a cash ISA you would have received just over 3%, or £360 per annum. So you are £1,140 up on the deal each year for 25 years. (Happy as Larry.)

Now the feed in tariff has dropped to 16 pence per kwh - still a premium over the 10 pence you pay for the electricity you use. And the price of solar panels has also dropped: so you can get a system installed for £6,000 – half price! Doing the calculations again we get a payout of £560 which equates to a return of 9.3% - three times what a cash ISA pays out. So what is the problem and why has the solar PV market hit a brick wall?

Because this is how the householder sees that deal. They are earning £560 from their £6,000 worth of solar panels but the rest of their £12,000 (the amount their neighbours invested a year ago) is still only yielding 3% or £198. So their total earnings are £758 whereas their neighbours, who bought into the deal at the start, are earning £1,500 on their £12,000. They are not seeing the deal as a £758 gain but as a £742 loss. (Sick as a parrot.) When the conversation in middle class dining rooms gets around to solar panels – as no doubt it still does – no one wants to look like the loser who spotted the opportunity too late.

The government knows only too well the public perceives gain and loss in an irrational way. Even dropping the feed in tariff by a few percentage points would have killed the program. And the program had to die as, had it survived, it would been another weapon power companies could have used to beat the government around the head with during the battle over energy prices.

Any company about to dive head long into the Green Deal should pay close attention to how the solar PV program has played out. They should understand that the financial instrument that drives the program could, at the press of a calculator button, make the householder regret choosing 1,2,3,4,5,6 as their lottery numbers.

Peter Kruger

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