UK Solar Breakfast Briefing
EU
RenewablesMarket UpdateIt is a testament to the pace of solar PV deployment in the UK that the technology has been subject to no fewer than three regulatory changes in the space of four years. With the latest reforms coming into force earlier this year, investors and financiers are now on the lookout for new sub-sectors of the market to put their money to work
While recent subsidy changes in the UK solar sector may limit the rollout of large-scale greenfield projects in the future, the industry is simply turning its attention to other parts of the market for opportunities.
Panellists at inspiratia's UK Solar Breakfast Briefing – which took place at Osborne Clarke's London offices on Wednesday [15 July] – remained resolute in the face of the past year's regulatory upheaval.
The most recent knockback came last week, with the government announcing plans to remove the climate change levy (CCL) exemption for renewables generators from 1 August [News Story].
Alan John, a partner in Osborne Clarke's projects practice and head of the law firm's environment and energy group, noted that the move was "slightly unexpected" but pointed out that the CCL is a tax, rather than a subsidy.
Predictions on the long-term impact of the removal vary wildly, though the impact is likely to be less hard on the solar market due to the weight that revenue from the levy exemption certificates (LECs) have in the overall revenue of a solar park, the panel agreed.
Karim Schramm, senior director at BayernLB, said the bank was "quite used" to regulatory changes because of its long history lending to the Spanish and Italian renewables markets. She added, however, "[The removal of the CCL exemption is] not a retroactive change so it doesn't make me too nervous."
Shift in focus
After last week's bump in the road – the latest in a long list of regulatory changes in the solar sector over the past four years – inspiratia expects continued interest from all corners of the industry.
The bulk of activity, the panel said, will simply shift towards smaller projects, with an uptick also expected in the secondary trading of solar assets.
"We are seeing more and more developers hinting that they are developing a considerable pipeline of sub-5MW assets," said Ricardo Piñeiro, head of UK solar at the Foresight Group, whose listed solar yieldco owns 233MW of operational capacity [see Figure 1].
Figure 1: UK listed yieldcos – solar assets under management
These asset owners are looking at the optimal long-term capital solutions for their projects. One option is simply to sell out, to an investor like Foresight, with a number of EIS and VCT funds understood to be seeking to shortly exit their assets after holding them for three to five years.
"Before this year, there were a very limited number of transactions that could give equity investors a better feeling on where the secondary market was standing in terms of target returns. But after this year, we suspect there'll be a lot more visibility on the sector and you'll be able to see an increased number of secondary transactions" – Ricardo Piñeiro, Foresight Group
Alternatively, those planning to hold on to assets can try and secure long-term debt financing, with the institutional market now competing with traditional project finance banks to lend to projects – a trend inspiratia forecasts will only increase.
Incentive environment
Sub-5MW solar farms continue to be eligible for the renewables obligation (RO) regime, which closed for 5MW-plus schemes in March this year. Some of the larger assets that are not yet grid connected will qualify for a 12-month grace period at a lower tariff, but the majority will have to go through the contract for difference (CfD), competing against other renewable technologies for 15-year contracts.
The inaugural CfD auction, which concluded in February this year [2015], saw a total of five solar farms awarded contracts. However, two of these were soon scrapped because of their uneconomic £50/MWh strike prices [see Figure 2].
Figure 2: CfD draft strike prices vs. strike prices
"Everyone's got a better idea what will happen next time," said Paul McCartie, structured finance director at Lightsource Renewable Energy, whose 14.67MW Charity Farm project is one of the three CfD-backed solar farms actually going ahead.
While many of the teething problems of the first auction are likely to be ironed out by the time the second one comes around, there remain uncertainties for the solar sector in terms of the budget allocation. "Given the rhetoric coming out of the government, it's hard to know whether there'll be any material CfD budget in the first place," McCartie said.
"We are developing CfD projects for the auction this year... If wind is in, given what's happened on ROCs, I would expect heavy compression into the CfD price that was won last year" – Paul McCartie, Lightsource
Despite this uncertainty, Schramm of BayernLB noted that from a project finance perspective, the CfD is preferable to the RO, given it offers a fixed income stream with a state-backed guarantee.
The CfDs are awarded for a 15-year period, and while there is appetite for longer tenors from the lending market, very few are willing to take a merchant tail on the project. This "limits the banks to go longer", Schramm added.
Institutional appetite
Tom van Rijsewijk, associate director at Macquarie Infrastructure Debt Investment Solutions (MIDIS), said that MIDIS would "happily" go to a 30-year tenor if the subsidy allowed.
The lender has completed several deals in the solar sector to date – some taking construction risk and others structured as refinancings of operational projects.
McCartie of Lightsource noted that debt margins were at their lowest level since the crisis – below 200bp for mid-term deals, he said – and with the lack of PFI deals in the market, lenders are being directed towards renewables.
However, on RO-backed solar projects, he said, "I don't think institutions will fundamentally take a long-term view on commodity price power risk. Ultimately the banks are more aggressive in that space and I think will remain so for the foreseeable future."
Sector developments
For a sector that virtually didn't exist in 2011, at least 6.5GW of solar was connected in the UK by the end of March this year [2015] – according to Department of Energy and Climate Change (DECC) estimates [see Figure 3].
Figure 3: Cumulative UK solar PV deployment (quarterly)
The shift towards smaller projects and brownfield opportunities is likely to curtail this growth somewhat, but sub-sectors like the rooftop market are also of interest to many in the financing market.
"If you look for long-term, index-linked debt... that has a lower exposure to the volatility of power prices, you can gear a lot higher than ROCs, which makes [rooftop] a big game for a sponsor" – Tom van Rijsewijk, MIDIS
Meanwhile, a related sector that could help transform the reliability of solar is energy storage, which Osborne Clarke partner John said was being driven by technological advancements. In reality, though, the regulation and commercial agreements are not necessarily catching up fast enough.
McCartie said Lightsource, which has a "multi-megawatt" battery storage facility, was working on how to monetise the project.
John added, "Fundamentally, where's the money, who's going to pay and how are the funders going to get comfortable with a guaranteed income stream from these new sources of finance from potentially these new players over an extended period? If that rather brutal question is put, we are still a fair way away from the kind of guaranteed flow from a CfD or a FiT generation tariff."
Finally, one of the biggest questions that continues to divide the market is around solar's ability to reach grid parity.
McCartie said this is "not a million miles away", adding a caveat that this meant grid parity on price rather than being viable without subsidy. The issue with the latter is that asset owners would be betting on the fact that merchant price of power will still be the same in 25 years' time, he said.
Panelists:
- Karin Schramm, Senior Director, Project Finance EMEA, BayernLB
- Paul McCartie, Structured Finance Director, Lightsource Renewable Energy
- Ricardo Piñeiro, Director, Head of UK Solar, Foresight Group
- Alan John, Partner, Osborne Clarke
- Tom van Rijsewijk, Associate Director, Macquarie Infrastructure Debt Investment Solutions
Partner: Osborne Clarke
Date: 15 July 2015
