Starting in August 2012, the number of UK homes that install solar panels is dropping sharply.  The reason isn't hard to uncover.  The government announced a cut in subsidy for homes generating their own solar energy.

Households will now receive less money because of the lower subsidy, with power from solar panels receiving 16p per kilowatt hour of electricity as compared with 21p previously.  The duration of subsidy has also been lowered to 20 years from the earlier twenty-five years.

While the Department of Energy claims that it still leaves solar panels as a good investment, householders do not seem to agree.  While there was a rush in the weeks preceding the August 1st deadline, the drop since then has been steep.  As compared to 2011, nearly 75% less capacity was installed and the drop is attributed directly to the changes in the feed-in tariff scheme that compensates home owners for generating clean green energy.

Running the numbers on the altered subsidy shows that installing solar panels still returns a modest 10% annually on the investment.   And as installation costs go down, this may even become more attractive.  Unfortunately, this message doesn't seem to be getting through to the market.

In an interview to a newspaper, the chief executive of Solar Trade Association said that despite the tariff cuts, solar panel installation continues to provide good returns on the investment because of the costs becoming lower.  A 4 kilowatt solar power system used to cost 9,000 GBP earlier.  It can now be installed for 1,500 GBP less.

Trying to deflect the significance of the drop in installations, officials are also insisting that August is typically a slow month for setting up new solar energy systems anyway with most families away from home on summer vacations.  However there are further cuts in subsidy expected in the future, which might further impact solar panel installations.

The big question is whether home owners will view their solar panels as an investment option and decide on the merits of the case.  While banks and other secure investment options provide returns far below the 9% that can be expected from solar power even after the slashed subsidy, the perception of green energy solutions as the equivalent of financial investments needs to be worked on.  That is a challenge for the marketing divisions of government and manufacturing enterprises.

Given that conventional electricity is growing very expensive, solar power offers the chance to take control over soaring home utility costs while simultaneously moving away from the environmental damage that comes from using fossil fuel as sources of power.  Ongoing maintenance costs of solar power systems is another concern that home owners face, which could cut down on the return over the solar panel's lifetime of 20 to 25 years.

To compensate for these issues, manufacturers are lowering the cost of production and installation through better processes and technological innovation.  Solar panels are becoming more efficient and generate more power per unit area of installed space.  In concert, these could compensate for the loss incurred through slashed subsidies.

Reduction of solar panel installations because of tariff cuts may turn out to be a short-sighted strategy.  If home owners grow disenchanted by the lower immediate return, they may well turn out to be setting themselves up for much greater utility expenses when the soaring energy costs catch up with their growing domestic consumption.

The roller coaster effect of high subsidies, booming installations and higher feed-in tariffs, followed by the opposite effect that comes from subsidy cuts will continue to keep the industry in turmoil for a while longer.  Seeing beyond these periodic fluctuations to future-proof household energy generation is the need of the hour.