Big changes have been announced by the UK government regarding changes to the support machanism for large scale PV, with the government moving from Renewable Energy Certificates (ROC’s) to CfD’s (Contracts for Difference). Below are 5 key aspects and considerations that should be in the mind of any PV professional operating in the UK.
1. CfD’s will be replacing ROC’s 2 years earlier for Large scale PV
Contacts for Difference (CfD’s) are replacing the Renewable Obligation Certificates (ROC’s) for all solar installations over 5MW from April 2015. The government seeks to reduce its direct support for large scale Solar PV, as it believes the budget is being overrun due to higher than expected levels of large scale deployment over the past 6 months. The government seeks to encourage renewable technologies to compete with each other for CfD contracts in order to drive down prices. But many, especially within the industry, see the targeting of PV as a political move, with the Conservatives looking to win favour with the UKIP leaning, anti-renewables vote.
2. CfD’s are based on an established “Strike Price”
Investments into new PV projects will be secured by a strike price that will be awarded by the government after a competitive tender process; producers will be able to lock in a price for periods of 15 years. The price paid by the off taker will be determined by the market, if the wholesale price drops below the strike price then revenue is topped up to the amount of the agreed strike price. If prices rise above the Strike Price, then the producer will be required to pay back the excess. Setting a strike price that will be low enough to win the CfD contracts whilst giving a decent return on investment for producers will be the main challenge here.
Facilitation of these transfers will likely come through a single counterparty body owned by Government. Under the current proposal, all difference payments would flow through the newly formed counterparty body, with liabilities passed through to suppliers. The price range for the contracts is still to be set, but there is likely to be extensive lobbying by industry for a price that will give investors high enough returns to put their money into PV and to keep the market buoyant.
3. Large scale solar can compete with other energy sources on price.
There was outcry in the PV industry after the signing of the Hinkley Point Nuclear plant CfD, which gave a strike price of £92.50 per MWh for 35 years from completed construction. This was twice the current wholesale price, with leading figures in the solar industry claiming that, given time, PV would be able to beat this price, even accounting for inflation and the rise of wholesale electricity prices. This dispute has given colour to the current debate about how technologies are valued for the future, and whether solar PV can really reach some level of grid parity.
Although not in the same banding as nuclear, Solar PV is being considered by the government as a mature technology. Other technologies included in this band are onshore wind greater than 5 MW; energy from waste with combined heat and power (CHP); hydro between 5 MW and 50 MW and landfill and sewage gas. Although large scale solar is price competitive with offshore wind, it still lags behind some of these other technologies by 2-3 years.
Although the medium term outlook for large scale UK PV looks challenging, the long-term competitive outlook is still generally positive, even into the CfD era. Large scale PV will likely benefit from the continued reduction in module prices, driven by the demand side growth into the US and Asian markets, and the further consolidation of UK project developers to 3 or 4 major players. This reduction in price will allow large scale solar to compete with onshore wind etc as a key componenet of the UK’s future energy mix.
4. CfD’s may remove some of the volatility for investors and lenders in the longer term.
The UK PV industry has, over the past 5 years, been defined by volatility, as successive reviews and policy shifts from government have made the investment environment less than certain. The cycle of ups and down will not change over the next 18 months as the rush to get projects through prior to the April 2015 deadline will leave many a PV professional sweating.
Voilatility is compounded by the RO’s being exposed to the wholesale market price over the long term, as it works by paying a premium on top of a variable market price, this again is not an ideal situation for long term investors. In the case of CfD’s the variability in payments is less of an issue as prices are contractually fixed, with variations between the agreed strike prices being minimal. This may improve investor confidence as reliance on goverment policy whims eases and large scale solar is eased into the wider energy market.
This being said, investors looking to establish long-term supply chains in the UK maybe concerned at the potential for the running out of the CfD scheme, as there is a defined pot of money to be spent. If the ‘pipeline’ of support payments was to dry up as wholesale prices come down and transfers out of the scheme rise, many projects could find themselves caught short.
5. CfDs are more complicated: The devil is definitely in the detail.
Even a quick glance over the government’s white paper shows how the CfD’s will act as a major complicating factor for developers. Properly predicting the viability and competiveness of projects into the long term will remain challenging until all the details are on the table and basic forecasts can be made on the energy market as a whole.
Many firms will likely not make it into the CfD era. Only those with significant internal capacity, who are able to navigate and negotiate the complex market and highly competitive bidding environment are likely to attract investor confidence and succeed.