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Guest Article: Are You Overpaying for Solar Energy Operations and Maintenance Services?

To date, I have focused on the revenue management of a German renewable energy asset. Today, I am switching to the money-grinding cost side. A unique feature of photovoltaic (PV) investments is that their costs are rather predictable; revenue estimates are also less susceptible to wild swings versus, for example, a retailer or a manufacturer who do not benefit from offtake contracts. Investors must demonstrate to the project financier that debt can be serviced while meeting the internal return targets.

Operations & Maintenance costs are essential for finding finance for renewable and solar energy projects.

Operations & Maintenance costs are essential for finding finance for renewable and solar energy projects.

A typical PV park, regardless of whether built in Germany or elsewhere in the world, has a fairly uniform operating cost structure comprising:

– Operations & Maintenance (O&M) Services
– Land lease (if not purchased)
– Insurance
– Accounting
– Legal
– Other Expenses (electricity consumption of monitoring systems…)

The most important cost item by far is O&M services, an integral part of any project finance facility. If you don’t have these in place, either you need to provide certain guarantees to the bank or your project will most likely not be financed. The comprehensiveness varies immensely depending on the expenses and risks covered, emulating an insurance policy, ranging from minimal coverage to the premium all-inclusive package (sounds like going on vacation). Some contracts are quite limited and will only cover costs up to a few thousand Euros, others are customized and will comprise differing degrees of reaction times, spare parts, as well as inverter repair services. As with other multi-year projects, the ready supply of spare parts 15 or 20 years down the road is difficult to predict, particularly in a fast-moving, roller-coaster sector such as the PV industry, where once global reference companies have disappeared or are suffering serious financial distress. Thus, many investors and their financing banks insist on reputable, bankable, financially stable heavyweights, although this does not avoid surprises. Who would have foreseen the demise of Conergy, Q-cells, Suntech, Gehrlicher, Isofoton and Co. 10 years ago?

In the solar heydays on the back of serious buyer competition, time was of the essence. If you did not connect your park within a planned time frame, you risked foregoing a significant margin (would anyone’s strategy have changed if retroactive measures were anticipated?). This led to O&M contracts being signed without seriously questioning the service level. Developers would pressure buyers stating there was no time for lengthy negotiations, either they signed or lost out on the deal. Presently, the European PV industry is at a crossroads: what geographic areas and business segments should the diehards focus on? Due to evaporating PV construction activity in Europe, uncertain regulatory regimes (e.g. Spain, India…), significantly lower margins, the remaining EPCs and O&M suppliers are fighting for survival bidding down the cost of their services. This is hurting margins (asset owners are clicking their heels) and may actually accelerate the excess-capacity purging process. When selecting a new supplier, be sure to study their financial muscle, recent earnings and screen the news for potentially negative incidents.

If your O&M contract dates from 2011 or earlier, requesting the remaining, financially sound O&M companies for service proposals is a good first step (Milk The Sun also circulates your request for proposals). Due to the complex nature of the legal agreements, forwarding a copy of the current O&M contract would probably simplify the process by saving analysis time. New O&M service proposals, guaranteeing the same operations and maintenance conditions, can offer considerable savings – the older your O&M contract, the greater the probability of overpaying per kWp of installed capacity. Contracts signed in 2011 can save anywhere between 1 to 7 EUR/kWp/year, depending on what is acceptable to the investor and the bank – the higher the savings, the greater the risk, either because the service package is reduced to a minimum (asset owner will have to bear incidental cost risk) or because the company is desperately seeking new business. Provided the asset owner, bank and new supplier reach an agreement, the current O&M contract needs to be prematurely rescinded. Seeking legal advice on “how to” will be useful. At times, it may not even be necessary to switch your provider given the market situation, the risk of losing business is a surprisingly sufficiently incentivizing “carrot” to submit a more attractive offer going forwards.

Of the remaining expenses, land lease, accounting and legal costs are items that are difficult to optimize further, if at all. Accountants can be cheaper in certain parts of a country, but they also need to be reliable and experienced. Competition among insurance companies for a mature business may yield “small” savings. In a recent case, the asset owner could have saved some EUR 2,000 to EUR 3,000 per year. Simply contact an insurance broker or enlist German websites such as Milk The Sun, Verivox or Check24 as your footsoldiers. The most fat will likely be cut in the electricity consumption of the monitoring system. If extreme swings in energy consumption are noticed, a technical consultant may need to evaluate the system components. Requesting energy supply bids from various utilities (via previously mentioned websites) quickly leads to an optimized cost per consumed kWh.

Now with this “food for thought”, enjoy the sun!

This is the third part of a series of guest articles written by Martin Supancic. You can find the other articles in his series here:

1. How to Tune Your German Green Energy Asset Without Getting Sun Burnt in the Attempt

2. The German Direct Marketing Framework and Potential Benefits for your Assets

3. Focusing on the German so-called “Market Bonus” Scheme

 

Solar in the City: How urban community solar projects can both improve the lives of residents and offer future investment opportunities.

As the mercury rises across the capital, London’s tower blocks and estates are basking in the summer sun. But beyond the beer and BBQ’s, Councils and Housing associations across the UK are feeling increasing pressure from central government to make their buildings and housing stock more energy efficient. This stems from dual concerns regarding both the environment and the increasing cost of energy, a cost which comes directly from already stretched local authority budgets.

Tower Blocks offer a great opportunity for inner city solar PV energy production.

Tower Blocks offer a great opportunity for inner city solar PV energy production.

In response to this, several proactive councils and community organizations are beginning to install PV solar panels in order to meet this demand and reduce bills for both councils and residents. Under the governments Green Deal scheme, the Edward Woods estate in Hammersmith, West London received £16m in grants to upgrade its energy efficiency, this included installing a PV solar array on the roofs of the blocks to provide electricity to residents. This scheme has so far proved helpful in reducing bills for a largely deprived community, where a large proportion of residents would be described as in ‘fuel poverty’.

 A scheme across the city in Brixton is developing community funded solar PV installations that do not rely on council money or government grants, but instead rely on private investment from both the estate’s residents and external investors. Its mission is to create ‘cooperatively owned renewable energy projects’ that benefit the community, bring down the peoples carbon footprint and substantially reduce energy bills. Run as a not for profit ‘Brixton Energy’ already has three sites across the area and is seeking investment to expand further. As a community project Brixton Energy seeks to benefit from the governments reformed FIT rates, these give higher rates to community owned energy projects that produce over 10 Megawatts of power. Investors also benefit from the governments Seed Enterprise Investment Scheme (SEIS) which gives a 50% tax break to those investing in the scheme. This helps to encourage small scale investment in innovative community run projects.

 Although returns on these types of investments are small (estimated at 4%), harnessing private equity for these projects is crucial, and with the government’s continued support, these projects can benefit the communities involved and yield returns for investors. These schemes, both council and privately lead, also reduce the burden on peoples and the councils pocket by sourcing organised housing units’ power needs from renewable and sustainable technology. Although problems with this approach have been identified. An  article produced by the BBC states that ‘Shares (in community solar projects) may be difficult to sell, as there is no real marketplace to do so.’

 Source:BBC News, London School of Economics, Brixton Energy

 

Interview with UK’s Green Party Jason Kitcat

In May 2011, Jason Kitcat was elected member of UK’s first Green party led council administration. He represents the Regency Ward in central Brighton. Before being elected to Leader of Council, Kitcat was Cabinet Member for Finance & Central Services. He has been a Green city councilor for six years and a Green candidate for European Parliament in 2009. He is known for leading successful campaigns including his own by-election and the 2009 European Elections. His special interests include technology, politics, and the environment.

Milk the Sun is interviewing Jason Kitcat, Leader of Brighton & Hove City Council.

Jason Kitcat from UK

Jason Kitcat from UK

Milk the Sun: What are the Green Party goals for implementing renewable energy in the UK and how will you try to achieve these?

Kitcat: We already know that green industries are creating more jobs than any other part of the economy. So we believe that investing in renewable energy, in all its forms, would benefit the environment and create much needed jobs. We believe that instead of subsidising nuclear power and a dash for gas, government should be properly incentivising energy efficiency, new renewables plus retrofitting homes and offices.

Milk the Sun: How has the decrease in Renewable Energy Feed-in Tariffs (FiTs) impacted investment into renewable sources?

Kitcat: In Brighton & Hove the FiTs cuts had a significant impact on the council’s ability to move to a wide-scale roll out of solar panels. The uncertainty over government policy also made it incredibly difficult for the many solar businesses in this area to keep developing and attracting customers. Fortunately solar panel prices have kept falling so the business case for installing them is often still viable. As a council we are rolling out panels as best we can, but the finances aren’t as attractive as they were.

Milk the Sun: There are several community energy projects in Brighton such as the Brighton Energy Co-operative and the Brighton & Hove Energy Services that is making it easier for communities to get involved in renewables. How do energy projects such as these benefit the community and the individuals? Will there more projects coming up soon?

Kitcat: I think they are a fantastic example of the more democratic nature of renewable energy technologies. Communities can take local ownership and responsibility for energy generation, and reducing their carbon footprint. It’s also brilliant for children to see and understand what the renewable future can be like with panels and wind turbines going up around them.

The move to smaller scale local renewables isn’t just about devolving power (in all its meanings) but it is also an economic shift, like that from analogue to digital. We have exciting new co-operative and social business ideas like the ones you mentioned coming forward. They can viably compete with well established ‘factory’ model energy suppliers. These new groups are from their communities and often contribute back to their localities in many ways. I think we are going to see many more of these ideas blossom as renewable technologies continue to evolve.

Milk the Sun: There have been many new developments in solar technology such as better storage capacity and new materials like organics for solar panels that are sure to improve solar energy technology.  What kinds of technological innovations do you believe are essential for the future of solar energy?

Kitcat: Reducing cost, easing installation and ensuring reliability have to be key goals for renewable technology development. Often the business cases for installing solar depend on 25 year models, so we need to have confidence that the technologies will keep delivering as promised over that period and beyond. In Brighton & Hove we are seeing lots of innovation in this area, we recently hosted the second Eco-Tech Show and Conference in the city focusing on all the great developments in the field. The 2014 show promises to offer more insights into these innovations, see http://www.ecotechnologyshow.co.uk

Milk the Sun: What do you think are the possibilities and benefits that will come with initiatives in Europe and the North African deserts like Desertec and EU-MENA supergrids to provide renewable energy to the world?

Kitcat: Personally I’d prefer to focus on smaller scale, decentralised and local energy solutions. I’m yet to be convinced that these super-scale projects are the answer. There is also a risk that such projects could be exploitative and won’t actually meaningfully benefit the local communities in which they are being placed.

Milk the Sun: Solar energy is especially popular in Southern UK, will you expect to see that popularity extend to the rest of the UK? How are renewable energies perceived in the UK?

Kitcat: Technology always needs to be applied appropriately, and the same is true for renewables. There is no point putting up solar panels if they aren’t going to return a reasonable amount of energy. I certainly wouldn’t characterise renewables as being focused only on the South. Yes there might be more sun for solar down south, but there are viable spots for wind, solar and tidal across the UK. Ultimately we need to challenge the NIMBY (not in my back yard) attitude to installing renewables. A well insulated, energy efficient home is going to be more comfortable and cheaper to run. To me that should be an easy argument to make to those yet to be convinced.

Milk the Sun: What should the UK expect to see in regards to renewable energy in the next decade?

Kitcat: What I’d like to see is a far more significant switch to renewable energy and a radical programme of energy efficiency retrofitting. However I fear that the state of the current big three parties in central government means much of the drive and funding that could deliver these is being diverted elsewhere to things like new nuclear and gas exploration. That’s extremely disappointing but we shouldn’t give up the fight to change minds in government.

Milk the Sun would like to thank Mr. Kitcat for his interview. You can find out more about Jason Kitcat on his personal website and blog.

UK’s Draft Strike Prices Announced After Report Warning that the UK May Not Reach its Energy Goals

The UK government recently announced the strike price that large-scale solar projects can receive under its new Contracts for Difference scheme. This new scheme is part of the government’s Electricity Market Reform. The prices depend on the type of power being generated and guarantee that generators are paid a fixed sum or a strike price for the electricity they generate. Large solar generators (>1GW projects) will receive £125 in 2014 and £110 in 2019. However, other sources like hydro and biomass will receive the same amount from the 2014-2019 period.

The government confirmed this capacity mechanism will begin next year for existing generators and investors in new plant biddings through auctions for UK’s electricity demands. Participants that successfully bid will receive a payment in the year they agree to make capacity available. To receive payment, they must provide electricity during stress periods or else, a fine will be paid.

The idea behind the new strike prices is to make the UK energy market more attractive for renewable developers, to promote domestic business, to decarbonize the economy, and to reach the goal of over 30% renewable sources by 2020. Of course, there have been some varying opinions on the draft prices. UK’s Renewable Energy Association believes the draft prices are less than was expected and have omitted too much from biomass. While the trade group, RenewableUK, believes that the draft strike prices are a step forwards towards long-term market function. Maria McCaffery, the chief executive, states that although the prices could be challenging, it will be possible considering the shorter time period and in comparison to the Renewable Obligation Scheme. Investor confidence requires some time as well as the knowledge that government incentives for renewable energy are a long-term commitment.

Yet, most agree that there are still details that must be stamped out to overcome the uncertainty. One of UK’s largest utilities, RWE, adds that a lot of uncertainty remains including the need to receive EU state aid approval and the complexity of proposals.  Investor confidence depends on long-term support and certainty. When the final details are set, the UK will be able to see how UK energy investments change.

The announcement of the strike prices were announced soon after reports that stated there was a significant risk that the UK may not reach its renewable energy goals. The energy regulator, Ofgem, has done its second annual report on UK electricity capacity stating, “without action, risks to electricity supply could increase during the middle of this decade faster than expected.” The Committee on Climate Change has stated that although, the UK has made strong progress towards their 2020 emission targets, the report emphasizes that they must stay on track. New policies such as the strike prices should be developed and implemented to maintain UK’s renewable targets. If this does not happen, the risks and costs of moving to a low-carbon economy will rise. The Energy Bill must be implemented into the statute books as soon as possible. Charlotte Morton, chief executive of the Anaerobic Digestion and Biogas Association adds that the UK needs stronger coordination between relevant government departments that can provide harmonized policies that can support the nation’s carbon and energy targets.

Source: Greenwise Business, Power Engineering International (1), (2), Solar Power Portal

Guest Article: Will Solar Shine in South Korea?

Rise to Prosperity

South Korea’s gone through vast changes in recent history. From the meteoric rise of Samsung to the ubiquitous exposure of pop star Psy, the country is experiencing unprecedented growth and global recognition. With Japan’s 35 year occupation at the beginning of the 20th century, and the ongoing struggles with North Korea, it may be surprising for some to see the nation enjoying the success it has today. With a tireless work ethic and a longstanding cultural foundation in science and mathematics, it’s actually not so surprising to find South Korea securely settled on the list of developed economies. The growth has predictably increased its energy demand. But with few natural resources, South Korea heavily relies upon imported coal and oil. To curb their dependence on expensive foreign energy sources, the country must look for ways to produce its own energy.

There have been serious efforts to supplement its energy needs with nuclear and hydro power. In recent weeks, however, these two sectors have been rocked by scandal. Crony capitalism runs rampant on the peninsula. Companies like Samsung, Hybundai, and others of these so called “chaebol,”have a great deal of influence within the government. It has been a part of the system for far too long to go away overnight. Fortunately, the Park regime has begun a full investigation into the nuclear scandal, causing both domestic energy problems and concerns for Korean exports of nuclear facilities.

Roger Willhite

Roger Willhite

Energy Challenges

Due to the closing of nuclear facilities, energy shortages are expected. Public sectors have been issued a mandate to conserve energy. There is no short term cure to this impending crisis, but the country must look beyond the current energy issues.

An obvious solution to its lack of local resources and its mishandling of dangerous nuclear power plants is to fulfill its energy demand with clean and safe renewable resources. Solar energy is a promising answer, but this solution does not come without challenges.

There are certain components of South Korea that are worth evaluating in order to assess its solar readiness: logistics, environment, and culture. But first, let’s take a brief look at where Korea stands today with solar in its energy mix.

Korean Solar Projects

Making recent headlines with a host of solar publications, the Hyundai Motors decision to install 10 megawatts with 40,000 solar panels on its Asan plant was looked upon favorably by environmentalists. Hyundai manufactures hybrids at this plant, further boosting its green cred. This will be the biggest commercial rooftop solar project in South Korea. Working backwards, in 2008 Germany based Conergy completed construction of a 24MW solar farm in Sinan, near Seoul.

South Korea produces far more solar for other nations that itself. By 2016 CX Solar will have installed 50MW in Balochistan, Pakistan. Building projects aren’t the only way Korean companies are involved in solar. Solar cell manufacturing has been explored by several of the large corporations.

Hanwha SolarOne (HSOL), Korean owned but based in China, also has manufacturing facilities in other parts of the world to help avoid EU and US imposed tariffs. Samsung, Hyundai, and other large chaebol have moved out of this space in recent months, but Hanwha remains committed.

It’s worth noting that Korea exports more solar, products and services, than it uses domestically. To understand this phenomenon, let’s now return to the three components listed previously: logistics, environment, and culture.

Logistics

South Korea is about the same size as Indiana or Iceland. But with around 50 million people, it ranks 11th in the world overall in population density. If we exclude developing countries, countries with less than a million people, and island city-nations such as Hong Kong and Singapore from the list, South Korea ranks second only to Taiwan. Not to further belabor the point, but South Korea’s GDP is double that of Taiwan. All this correlates to a higher energy demand per kilometer than any nation in the world, save the outliers mentioned above. The provincial area surrounding Seoul seems like a dry run for the fictional city-planet, Coruscant, seen in the Star Wars prequels.

It is possible to add solar panels to the roof of Korea apartments.

It is possible to add solar panels to the roof of Korea apartments.

This population density can be a blessing and a curse for energy consumption. One the one hand, the electrical grid is much easier to manage and maintain than in large, spread out countries such as the United States. On the other hand, distributed solar energy is much harder to implement due to the housing situation. The overwhelming majority of Koreans live in thin high rise apartments. This makes it impossible to get effective use from solar panels. If the roof of my building were covered in solar panels, at 5KW per unit, it would be a small miracle to supply 10 of the 160 units. This situation is familiar in any urban environment throughout the world, but it is exaggerated in South Korea. Having said that, I still think adding solar panels to every apartment roof would not be exorbitant. Even if the rooftop solar only powers the external lights, elevators, and security cameras, while the remainder is fed back to the grid, the energy savings and carbon reductions would be noticeable.

Environment

Koreans love to get outdoors. Hiking seems like a national sport here. Join them sometime. And when you think you are on a good pace and deserve a much needed rest, don’t be surprised to find a “halmoni” (grandmother) shuffling past you on the trails.

From the DMZ down to Busan, the country is covered with mountains. The flat spaces that do exist are needed for the crowded cities, industry, and farming. The country has rules protecting the mountains from development. Great for outdoor loving Koreans, and for the environment, but the rules are also an obstacle for energy projects, however.

Cultural

One of the most visible aspects of Korean culture is their love of technology. Lightning fast internet connections, smart gadgets, and a thriving gaming community demonstrate the near obsession with modern technology in Korea. Obviously, this is a relatively new addition to Korea, or any part of the world, but it’s a very real part of the cultural mix. This appreciation of technology is rooted in Korea’s longstanding appreciation for science, math, and invention.

Among other facets of Korean culture, such as Confucian filial piety, Koreans have a deeply rooted sense of community. This, along with geographical constrictions and convenience, has given rise to an unmoving preference for a city lifestyle. The congestion, traffic, pollution, and noise that come with living in crowded spaces are overcome by the status of living in a Gangnam highrise, for example. This lifestyle preference doesn’t bode well for distributed energy production.

The Koreans may have found a way to work within this framework. Business and government leaders have worked together to use environmental, cultural, and logistical factors to work for them in creating a sustainable solution.

Songdo, Korea is an eco-friendly city and the host city of UNFCC

Songdo, Korea is an eco-friendly city and the host city of UNFCC

The Songdo Experiment

I mentioned previously that South Koreans have a penchant for planned communities. My first impressions of these planned cities were a bit negative. It seemed artificial to build a city overnight. Unnatural. The problems of climate change and fossil fuel consumption have led me to reevaluate my opinion. If shifting to renewable energy means sacrificing a bit of authenticity, so be it. Especially if you plan an eco-friendly city based on efficiency and sustainability. In South Korea, that city is Songdo.

Make no mistake. Songdo, was built for business. The city boasts sleek office buildings and a short drive from Incheon International Airport. There’s a Central Park clone and even a golf course designed by Jack Nicklaus. But realizing the need for sustainable solutions, Songdo was designed to be as eco-friendly as possible. So much so that the UN decided to base its Green Climate Fund in the new city. Accessible bike routes, canoes and water taxis on canals, and efficient public transportation make getting around Songdo a breeze. Songdo joins a small number of what are described as Ubiquitous Cities.

The technology that gets the city working in unison is impressive. The city boasts a network that maximizes efficiency to bring energy savings. Sunlight, aka, passive solar is utilized well in the building designs. And yes, solar energy is a part of the mix.

The Green Diary points out some of the solar projects in Songdo:

The buildings in Songdo are designed in a manner such that the usage of fossil fuels is reduced by quite a large extent. Quite a lot of buildings in Songdo have adopted to green energy systems like solar paneled roofs which facilitate reduced usage of fossil fuels. Nine buildings in Songdo have won the ‘Leadership in Energy & Environmental Design’ certificate issued by the U.S. Green Building Council. Besides these nine buildings, 75 other buildings have been designated as ‘Eco-Friendly Structures’ by the central government. Most of the buildings in Songdo have rooftop gardens with trees & flowers to provide a green rest area to its employees. The Building Council that has awarded certificates to the nine buildings in Songdo has its headquarters based out of Washington D.C. The organization has rated the buildings on parameters like its design, construction and operation. A housing complex by the name Prau II has installed a thermal energy system to save energy and this helps the residents of the complex to save nearly 40% of the maintenance expenses annually. The underground parking lots in the city use solar energy.

Planned smart cities like Songdo are being experimented with in a number of places around the world. However, the fact is most people live in old cities that are centuries in age. There’s no feasible way to dismantle and rebuild the infrastructure of these cities. The 10 million residents of Seoul, for example, will have to look for other solutions. But the example of Songdo is inspiration. With Songdo, Korea has shown a desire to put sustainable needs on equal footing with business interests. It has combined the two with a courageous investment. South Korea has come a long way. The country is not well suited for distributed solar, the method favored by a majority of Western renewable energy enthusiasts. Instead, they are demonstrating a creative effort to solve their energy problems with a mix of technology, planning, and clean energy.

Roger Willhite is a guest blogger and solar enthusiast from Second Silicon.

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