Creative Destruction: Feed In tariffs - are they doing their job?

In a new industry such as the solar PV industry initial prices can be high and government incentives such as the Feed in Tariff  (FiT) can help an industry grow.

Since April 2010 the FiT for solar PV installations on homes has been 43p per kW. In April 2010 prices of installations were quite high. Quotes being banded about at the time for a 3/4 kW installation were £15-20k.

Today the FiT is 21p and quotes being banded around for the same system are between £7500 and £9000.

Clearly prices have come down. This is due to the knowledge, scale of production, and general competitiveness within the market place improving. There are a variety of companies, all of whom have to select their panels on a basis of price and quality, and there are some good solutions for customers to choose from.

As a potential investor the best time to buy Solar PV was just before the rate came down when prices were at their best. However long term the industry is still supported and its general awareness in the population is growing.

Today there is a challenge to the government over the cut and that 29,000 jobs depend on the subsidy. Is this really the case?

My thoughts are that the subsidy cut was declared at very short notice and implemented immediately. On the ground home owners take time to consider installations and when they book them in it is sometimes some weeks or even a month or two in advance. They had no prior warning of the cut and so when it was announced there were many "jobs in progress" that would fail to meet the 12 December deadline.

This cut is therefore very inconvenient as it did not allow home owners and installers to plan effectively. However the basis of the cut seems to be fair and in line with the quotes that can be offered. Home owners will still get a return on their investment, just not as great as it could have been a few weeks earlier.

How can governments take account of this situation?

Possibly they can review the market on a more regular basis in a light touch way. small and regular adjustments in the tariff that are planned ahead leave time for individuals to act and make reasonable decisions.

Creative Destruction: Branding to be "banned" in the UK

Branding and associated packaging, advertising, point of sale literature etc is wasteful and to some extent impossible to police.

The UK government have recently expanded the powers of the Office of Fair Trading to include "the internet". How can they possibly do this in an era of cutting costs?

The only way forward is to ban branding and related advertising.

The branding ban is to start with cigarettes. Cigarettes will in future be plain, no adverts, no logos and no graphics. Further announcements are to be made on Wednesday on "National Non Smoking day".  Possibly this will extend to alcohol and other "harmful goods". 

Creative Destruction - Business models?

As part of the process of creative destruction the market renews itself. Many people imaging that it is the business service, the product that is better, or an innovative advertising campaign. For instance meerkats are now indelibly linked to insurance. Perhaps that is because it is visual, talked about, or just easy to understand.

Within the book market Amazon came up with a business model that drove most sales of books onto the internet. The business model was entirely different to a bookshop on the highstreet.

Within the renewable heating market the advent of the Renewable Heat Incentive means that there will be more wood pellet, log, heat pump and solar heating systems installed in the future. What will be the winning business model in the domestic market?

There are a few online companies that take leads and offer them to heating companies. Established boiler manufacturers like Valiant, Worcester Bosch, and Baxi have traditionally been much larger than the installation companies. Installers have a seemingly higher investment to make to be able to install. They have to become MCS accredited, and in doing so they find themselves in a smaller pool than previously. Other interested parties include architects, energy assessors, and surveyors, who perform part of the function of installation.

At the moment it is difficult to tell where customers will go first. A local installer? A trusted make? A local specialist such as an architect?

Part of the issue for customers is that they do not have good knowledge of the products. Clearly product manufacturers are biased, so where do you get your information from? Some installers may be franchised or licensed by one make of heating system. Again not offering choice to the consumer. Online companies offer ease of access, but little discussion. Local professionals such as surveyors may not have the full information to offer, they are only one step ahead of the consumer.

Key factors to consider in the UK include the development of the market in Europe. For wood pellets the Austrian and Italian markets have developed significantly over the last 5 years whereas the UK market has developed very little. A scant glance at the renewable installed today show the UK at the bottom of the league. The danger for the UK boiler manufacturers is that they loose market share to other manufacturers and therefore dilute a market that has traditionally been 3 or 4 major players. This will decrease their market power and offers more choice to both the consumer and the installer.

In the wood stove market you may think that the shops that have acquired a local base should be able to branch out. The difficulty is that they install using contractors who are probably not accredited to install heating systems. The installer needs to be competent with wood flues, with wet heating systems, and therefore needs a background of both plumbing, probably gas or oil, and wood. This does not give the stove shop the easy access to labour.

The large energy companies are flirting with renewables also. As they are involved with the FiTs, they have found solutions for solar PV. British Gas has taken a stake in a biomass installation company. AS they deal in heat they also do not want to loose market share. British gas especially has a history of installing gas solutions and seemingly this is no different.

For solar and heat pumps, expense aside, you do get a unit that is essentially unbranded. This suits a market that adopts a one size fits all strategy - ie big marketing, big install teams, big processes. It may be that a large company with resources therefore does have the presence of mind to step in and go for growth within the sector.

For wood pellets and log gasification the market is more complex. There are a number of solutions and they do have different characters. The best model has not yet emerged, yet seemingly customers are adopting a range of solutions and all seem to be happy. This suggests a more fragmented market where the consumer will want to explore all the options before choosing one. This is hard for a manufacturer to do, and probably the retailers as well.

Creative Destruction - government support for new markets and innovation

Joseph Schumpeter suggested that growth comes from innovation (creative destruction) rather than just capital investment. This innovation is "fundamental", rather than a twist on an existing formulae. Here an innovation is not a scientific breakthrough, but the full innovation process ie customer adoption. This therefore suggests that the goods or services concerned are indeed needed.

The difficulty governments have is how to support innovation or new markets. If they do not other economies will become better in those markets and competitive advantage is lost. Full intervention can be messy, administratively poor, and picking winners eludes even the best of us.

In the UK you can see 3 clear examples at the moment.

Messy - Firstly there is a call from the government for the economy to reduce carbon emissions. The regulator Ofgem was reviewing its procedures as prices have risen in the very confusing retail gas market. This suggests that there is ineffective regulation of the energy industry, especially as the same industry is asking for "subsidy" to invest in low carbon technology. What the government would like is lower prices and sensible research and development.

Administration - Secondly the Government introduced the Climate Change Act in 2007 and became law in 2008. This gave the government powers to intervene in the energy industry and bring on lower carbon technologies and introduce them into the market. Whilst FiT's were introduced last year to introduce regional production of electricity the RHI (Renewable Heat Incentive), is to be introduced in June 2011. This is 4 years of discussions and at the moment the market has not got a clue how much or what the government will support. The announcements were expected in July, then "Autumn", then during the spending review, and now "by the end of the year". If you take into account the research prior to the act you can see that it stretches several parliaments.

Picking Winners - Thirdly for new technologies the government used to support "innovative ideas" in the DTI. Then we had the Regional Development Agencies who "supported" R+D, but did so in a far more competitive way, which meant fewer companies being supported - which inevitably meant less winners. The Technology strategy board now asks for bids for particular technologies that have been identified and the RDA's have been shut down. We seem to have moved towards the governments deciding "what" should be invented and by whom from an original model of encouraging innovation.

At the moment there is a clear gap between the funds available in the market through debt or equity finance. With the demise of "Quango's" franchises like Business Link may not exist in the future, and whilst this may save funds it does not give industry or entrepreneurs clear pathways to move forward.

If you came up with an innovation to save carbon emissions - you might think that you had struck gold. However confidence in investment is low, and unless you match a competition that the Technology Strategy Board have at the moment (and get chosen), your chances of succeeding are lower. There is "support" in word form from the government. They would like growth and to be competitive as an economy. Their first act has been to "reduce" the size of the public sector, but these things take time......

Creative Destruction - is biomass not just for the rich

Various people have suggested that biomass, and in particular wood pellet heating is only for the wealthy. In particular the Renewable Heat Incentive would benefit those who can afford the capital outlay, ie the better off.

The proposed Renewable Heat incentive is an investment. After the capital outlay there would be regular payments for 15 years that estimate a 12 percent return. This would be attractive to landlords who are landlords because they are looking for a good return - perhaps this is attractive. If they do invest the benefits are the tenants who would then get cheaper fuel as a result. Wood pellets are currently cheaper than gas and oil.

Some local councils have teamed up with affordable loan companies to provide loans for sustainable developments. For example Wessex Home improvement loans target the older and less well off and cover a variety of local counties to Wiltshire.


For those who have some equity in their mortgages then this also represents an investment opportunity where the payback on an increased mortgage may be covered by the incentive payments.This is probably the cheapest way of purchasing unless the "green deal" and green investment bank also loans to those wanting renewable technologies.


What is discouraging is that in rural areas the older may well be having their winter fuel allowance cut. Oil prices may well rise. If there is no alternative then they will just have to put up with increased prices.


Whilst distribution of wealth is rarely perfect the Renewable Heat incentive and the Feed in Tariff does give alternatives for all those in accommodation that is appropriate. It is, however, opportunity focussed, ie those people must seek the information and want to do something about their energy needs. 

Creative Destruction - Biomass - a big dead end?

Debating, debating, debating..... Much of the heating and building industry is look for crumbs at the moment. Some decide to use their critical prowess to feather their own nest at the expense of others. Large companies use their marketing power to lobby papers like the Telegraph. Vested interests form "power" groups and issue papers that look to have substance on first glance.

The net result is confusion. Somewhere at some point some leadership is needed. This could be from the government or from industry - but at the moment it is not clear in the confusion which direction we are heading in.

Builders (and I include all brands of architects, surveyors, bricklayers etc) want to build and make money. Carbon Neutral houses do not make sense to them. New forms of heating from new industry players also do not make sense to them. The costs of building increase and their commercial nature is threatened. The result is uneducated twoddle that only builders can comment on. Alternatively misinformed comments abound for instance:

"For they argue that growing wood (or other biomass crops) just to burn is really just another form of offsetting. And that, as wood burning releases more CO2 than mains gas (per kWh), pretending biomass is a near zero-carbon fuel is a conceit. And to subsidize wood burning, which is what the Renwable Heat Incentive proposes, is a nonsense."


The Renewable Heat Incentive has not been announced - but the discussion document did not suggest what to do with the wood waste made probably as a bi-product of the construction or paper industry ie not a crop to burn. In that sense the waste is destined for landfill or incineration - why not use it for home heating!!!!!! Wood pellets are not "wood burning" - and subsidising log burning is not on the agenda. I am at a loss to see what the motive is for these sorts of articles - other than it is a "cause" to fight motivated by politics or greed or both.

The problem with articles like the two above - or even from Ryan Air boss - saying that the whole carbon argument is flawed ("please let me burn more fuel") - gets airtime as he has power.

What is really scary is when an article is in the paper it gets jumped on by lots of people - repeated, reblogged, tweeted, and then blogged again.

Unfortunately governments and scientists have the same problems even though they may have "clever people". Most of us do not trust governments and some may not like to admit that they simply have not got the brain to understand what scientists are on about. The whole thing is too difficult - that will either make you think that you should do more research and not make a decision - or take some action as you have a strong gut feeling - or believe something as someone you "like" has said something. Alternatively if you are in business you defend your position for what it is worth.

We think pellet boilers look really nice!

Somewhere in the middle the consumer will get a small percentage of the facts, some of the opinions and have to make their minds up on who is right. Perhaps they could all go to Brighton on the next Bank holiday and have a fight - the modern equivalent of mods and rockers.

The reality is that business has to take a position based on greed - and then fight for position. The right and wrong of it all at this point is irrelevant - its what other people "believe" is what counts.

We believe that biomass boilers made to a high standard and can supply controllable heat to small and large buildings alike. The fuel cost is currently less than gas.

So is biomass a dead end?

At the moment Wessex Installations is getting enquiries, we are doing surveys, and installing. On a micro level it is not a dead end for us. Some support would be nice - and whilst you cannot expect interested parties to drop their baton and take yours - clear leadership in any direction would make our jobs more straightforward.

We would prefer to be discussing whether individuals want fuel stores (at an increased cost) or whether they are happy to pour in the fuel themselves. Austrian boilers like Windhager and Oekofen do provide high quality automated solutions.

Governement incentives such as the Renewable Heat Incentive seem to be supported by the Guardian, the Climate Change Committee, the civil servants at the Department of Energy and Climate Change, the Renewable Energy Association, Friends of the Earth, the Centre of Alternative Technology, most of the companies selling renewables and possibly a few others including a much diminished Labour party.

Those against are the Energy companies, builders, right wing conservatives and their think tanks, anti climate change lobby, the Telegraph, and anyone who thinks their heating bill and/or tax bill will rise as a consequence of the policy (that may be a larger amount of people than I would like).

In the middle are the liberal democrats who both support in principle yet do not come off the fence at the same time.

A sobering thought is that many people have not seen a biomass boiler working. In fact "a survey said " 93%. During a show in the summer I had lots of wood pellets available to look at - and for many who visited the stall - it was the first time they had seen them.

For those that still do not know - a virtual look!

All this argument and many people do not know what they are arguing about.

On the other hand wood pellet producers such as Balcas on a national level or http://Energy2burn.co.uk on a local level have been working to ensure that there is a supply chain of wood pellets nationally. They are also working hard to show people little pellets of wood and explain how it burns.

Boiler manufacturers have ensured that their boilers are saleable through putting them through an arduous accreditation process. Installers have also become accredited. There are therefore a number of people who can supply heat. They are not as big as British Gas - and they do not get the subsidy that the big energy companies get for Nuclear or research and development or Renewables Obligations.

These are people who are taking some action - you can argue whether it is forwards or backwards - but they are largely investing their own cash into their businesses and taking a risk that a growing number of people will like what they do - and I do think it is "like" rather than feel it is "the right thing to do".

I am sure that within the "spin" we will find out what turns people on - whether we should be talking more about remote controls and modems, the cost of the fuel, the design, or the price and availability of oil. Strangely it never seems to be about how "green it is" it is almost as though it is a given.

Meanwhile no doubt British Gas and RWE National Power will continue to argue about who is "greener" despite the evidence. The marketing campaign last year had many rolling in the isles - but perhaps it worked on others. The building industry will squeak at the pressure they have been put under to provide carbon neutral homes and even more about renewable heating. The present UK government will continue to be "the greenest government ever" against little competition this side of the industrial revolution - (although Maggie helped to shut 150 collieries).

Until there is a puff of smoke from the Autumn revue very few of us know what to believe in reality. In the pro biomass camp we take heart from the fact that people still have jobs at DECC and the Renewable Heat Incentive (RHI) is still on their website. The Climate Change committee were appointed to find out "the truth" and they want the RHI. The UK is signed up to meeting carbon targets. 47% of carbon produced in the UK is heat - and the RHI is the only strategy in the melting pot that reduces carbon emissions.

On the "dark side" the lobby power of energy and construction companies is not to be ignored. RWE National Power do refer to electricity as "clean energy". For those of you who have not been to a power station please see Didcot below:

Chris Huhne has said repeatedly that he is a supporter of "renewable heat" and that "they" are investigating the RHI ........ support but no action (as yet).

Creative destruction - "Old typewriter" used to control Earl's Court Tube Station

In today's Times there is a report on the London Underground showing a control machine being used at the Earl's Court tube station that is 55 years old.

For more information see

Whilst the article is a deliberate lobby attempt to preserve the upgrade budget for the underground - it is amazing how individuals and organisations hold onto "the old ways" of doing things.

My favourite example is that Vasco de Gama reported the use of citrus fruits to prevent scurvy in 1497. The Royal Navy took until 1790 to finally adopt lemons as a preventative measure. The merchant navy a little longer - The Merchant Shipping Act in 1867 made it law that every service man should be given lime. The UK sailors were called "limeys" thereafter. Also in 1867 Lauchlin Rose patented a method of preserving lime juice without using alcohol. You can purchase Roses Lime Juice today for £1.65 in a large supermarket near you.


Adoption has its hurdles. One of the uses of wood pellets has been as animal bedding and cat litter. I am told reliably that wood pellets are more convenient to store, cheaper, and easier to use than straw or shavings for those that keep horses in stables. Whilst some have changed quickly - especially the commercially driven stables - the market will take some time before it is accepted as a good way forward for all.


Evidence collected by McKinsey consultants at the turn of the century suggested that the rate of creative destruction was increasing. ie people are getting quicker at adopting new solutions to problems and the information is more available. Perhaps Vasco de Gama did not really solve the problem of scurvy elegantly - that was Lauchlin Rose, but that was nearly 400 years later. Today we see replacement items with better specifications coming out every few months - I am not sure that that is really making significant improvements to our quality of lives - and can be termed "creative destruction" - but online shopping has and can be.