Is the UK solar market set for a cool down?

Comment from Francis Wright, managing director at Turquoise International.

With PV prices falling, efficiencies increasing and global installations doubling in volume every year, the solar market continues to go from strength to strength. However, as the UK closes its Renewables Obligation (RO) for >5MW solar and instead transitions towards working under the Electricity Market Reform (EMR), there is widespread uncertainty about the market’s continued growth. Here, Francis Wright, managing director of Turquoise International, discusses the impact dissolution of the RO will have on the UK’s solar sector and where future opportunities lie – for both investors and developers alike.

Disruptive solar – has the race already been won?
Over the past decade, the global impact of solar technology has increased dramatically. Although previously considered a minority solution due to its perceived high costs and intermittent production capabilities, ongoing research and development has seemingly turned such preconceptions upside-down.
Recent research from German think tank Agora EnergieWende, for example, has found that solar energy will become the cheapest source of electricity in many parts of the world within the next 10 years. This, combined with a reported 80% fall in the cost of domestic PV installations since 2008, has seen uptake rates soar.
But it’s not just consumers who are seeing the light. Initiatives by a high percentage of global top 50 companies to implement solar technologies as part of wider environmental programmes, alongside another record number of commercial arrays installed throughout 2014, demonstrates the true impact solar is making worldwide.
The facts are simple. Solar is far quicker to build than any other energy technology and considerably cheaper and cleaner than most alternatives. In sunny countries, solar is under half the cost of power from diesel generator sets. Surely then, the market will continue to race ahead – overtaking traditional resources and changing the face of the energy market worldwide. Unfortunately, however, despite positive public perception, this may not be the case in the UK.

In sunnier climes, the power from solar is half as expensive as that from diesel generator sets, prompting an expectation that it will continue to pull ahead in the energy market.

Closing the Renewables Obligation (RO)
The UK solar sector has come a long way since the first feed-in tariff (FiT) was introduced in 2010. The attractive returns offered by ground-mounted installations under the RO subsidy regime saw investment flood into the sector. In fact, since its introduction, the initiative has made a huge national impact; more than tripling the level of eligible renewable electricity generated (from 1.8% of total UK supply to 7.0% in 2010) and gaining widespread support from owners, developers and investors alike.
However, in July 2014, the Department of Energy and Climate Change (DECC) made the controversial decision to close the RO for >5MW solar – resulting in a huge development rush to beat cut-off points and seeing 1GW of capacity added in Q1 2015 alone. Introduced as part of wider initiatives to transform the UK electricity sector to one where low-carbon generation can compete with conventional, fossil-fuel generation, a new strategy – the Electricity Market Reform (EMR) – was proposed, effectively replacing the existing RO process.
The aim of the EMR is to bring forward investment in low-carbon generation, through the use of long-term Contracts for Difference (CfDs). Allocated to eligible generators via an application process involving an auction, bidders now compete on the basis of the strike prices offered for specific projects.
Although a comprehensive strategy on the surface, the process for funding solar projects is much more complex than before and favours large companies over small developers. One critical point in comparison to the previous RO initiative, is that certain renewable technologies have been grouped together – effectively making them bid directly against each other for shares of the subsidy budget.
Solar is in the same budget as onshore wind and at current cost levels it is very challenging to win a CfD for a solar project. In the first auction round, CfD’s for 72MW of solar were awarded compared to 748MW of onshore wind. Ironically, despite having strike prices approximately 50% higher than solar, offshore wind, which is funded out of a separate budget, was awarded CfDs for 1,162MW. On this basis, supply of solar projects in 2016 is expected to be considerably lower than the approximately 1,600MW installed in 2014.

An attractive investment?
Although some believe CfDs will put the UK one step ahead in the global race to deploy clean technologies, due to the ‘first come, first served’ nature of the regime, complication of direct bidding with other technologies and lack of budget, there is a serious risk that the industry will decline significantly over the next two years.
UK developers are already starting to look internationally for new markets. While some other countries have very attractive solar resource, few are as investor friendly as the UK. However, there may still be another investment opportunity in the UK solar market – the continued quandary of energy storage.

Where does the solar sector go from here?
One of the key issues restricting building of solar plants is the national grid. There needs to be enough local grid export capacity to take electricity produced on a sunny day, but over a full year, only about 12% of the export capacity is utilised. The grid connection with its transformer and switchgear, has already been paid for, so there are opportunities to generate power from other sources when the sun is not shining.
One potential option is to install electricity storage to allow an extension of the solar farm to be built with any generation exceeding the grid export capacity stored and then released back into the grid in the evening. The electricity price arbitrage between midday and evening is not high, however storage may become viable within a few years assuming a large reduction in its cost and continuing falls in the price of solar modules.
The first commercial electricity storage market in the UK is likely to be to for householdsand businesses with rooftop solar. The price arbitrage between retail prices and the solar export tariff can be as high as £0.10/kWh. Solid state battery systems for domestic applications are currently available from companies such as Moixa and BYD. Investment payback is not yet sufficiently attractive for mass market adoption, but this is likely to change over the coming years.

How does solar fit the future?
Going forward ten years, solar is likely to be at grid parity in the UK, competing directly with coal and gas generation without subsidy. New commercial buildings will have rooftop solar as a matter of course and solar farms will have become a familiar sight.
Intermittency will bring challenges to the national grid and we may start to see grid scale energy storage if it can compete on price with combined cycle gas turbines which currently provide much of the flexible capacity in the system.
Going forwards, there is widespread uncertainty as to how the market will develop. For now, the CfD regime is unattractive, however as a fast-paced industry, there is opportunity to change this in the future. This, combined with opportunities elsewhere in the sector, will see solar continue to go from strength to strength.