Developing a Medium Term Strategy for Solar PV Development in Local Government
The solar PV industry is used to turbulence and there have been numerous times in the past five years when this has been apparent, such as in 2012 when FIT rates were slashed overnight.
History is now repeating itself, with the removal of the Renewables Obligation for all solar farms both over and under 5 MW in capacity and the slashing even further of FIT rates for ground mounted installations.
All this points to the inescapable conclusion that financial incentives from the Government for solar schemes are likely to come to an end completely fairly soon.
So where does this leave the numerous schemes going on around the country that are promoted by local authorities, seeking to develop their own land and assets for the public good? Here, there may be a silver lining to this dark cloud – for local authorities are looking at the potential very soon to develop solar PV without any subsidy and this will give them infinitely more flexibility and enable them to better target such installations to their wider corporate plans. This approach is known as the medium term strategy, indicating that it does not involve development in the immediate future.
But to take advantage of these longer term opportunities local authorities have to position themselves now and undertake the necessary work. It is essential therefore, that they do not become disillusioned by the proposed changes and effectively give up on their proposed projects, or they will miss out on the benefits that are just a couple of years down the road and which can be lined up now.
Local Authority Projects
Every local authority that approaches a project is undertaking it for both financial and non-financial reasons. The financial drivers may be very strong at present, due to the problems caused by the public sector austerity package, but they are supported by a variety of non-financial benefits, such as community leadership, carbon benefits, energy security, economic growth, jobs and skills.
When it comes to financial investment, local authorities can take a different perspective to the private sector and can also accept lower gains in financial returns. Effectively, local government can take a long-term view of the situation and balance its needs and plans accordingly. Private developers find anything other than the short-term view difficult, meaning that development will reduce considerably next year.
Those authorities that have taken time already to give consideration to solar PV deployment, whether on land as part of a solar farm or on housing or other civic buildings, will know its strengths. Despite the superficial view that such projects are dependent on the financial incentives, in fact they may not be. This means that all work done to date will be valid when considering moving instead to the medium term strategy and new opportunities will also arise.
Current Policy and Its Impact on Business Cases
When a local authority considers a solar PV project it will prepare a business case within the context of a wider proposal. Whilst the wider proposal may cover the non-financial elements, it is normally the business case that persuades the members to authorise the development.
In the past, the business case would have income lines that covered the financial incentives provided by the Government. Now that these have effectively gone, the business case will have to be made to work on a different basis.
Current Local Authority Projects
At the start of this year, there are projects on going across the country. As the public sector was slower than the private sector to react to the potential for solar projects, few have yet been completed, whether solar farms or civic buildings or housing.
APSE Energy has been involved in the establishment of a collaboration between different local authorities that currently has around 20 authorities intending to build solar farms of up to 5 MW as soon as they can.
Those authorities have not been put off by the changes to Government policy; they have merely adjusted the time frames over which the projects will be completed.
The Medium Term Strategy
The starting point for the medium term strategy is to say that it is not whether solar farms will be developed, but merely when. The reason that this conclusion has been reached is that ‘grid parity’ is not far away. Grid parity is driven by two factors, the world price of solar and the UK price of energy. Despite Government policy in the UK, the world price of solar continues to move sharply downwards, with energy prices moving in the opposite direction.
The key issue in the business cases, therefore, is the price of solar panels. There are many papers on this, such as the one written by KPMG for the Renewable Energy Association, which chart the fall of prices (http://www.r-e-a.net/upload/uk-solar-beyond-subsidy-the-transition.pdf). There is likely to be a fillip when the Minimum Import Pricing provisions applied by the EU to stop cheap Chinese imports come to an end, even though this has now been delayed.
Prices are considered further below but suffice to say for these purposes that prices will need to drop by around 30% from current levels before the return on undertaking a solar PV project will be the same as it would have been with FIT or ROC support.
So to undertake a solar PV project for a local authority, there are five crucial ingredients or boxes that need to be ticked. These are:
• Having a site for development;
• Having planning consent;
• Having an affordable grid connection;
• Having completed a procurement exercise;
• Having a viable business case.
Local authorities own a lot of land and this needs to be reviewed. Sites can usually be found in such a portfolio and once this has been done, provided the authority does not dispose of the assets, then they are available to be developed indefinitely.
For solar farms, this is a big issue. The cost of having planning applications prepared externally is at least £25,000 per site and involves considerable preparatory work. Planning can easily take 6 – 12 months to complete.
But once a planning consent has been granted, it can last for 5 years. Provided the authority starts the development within that period it can proceed.
Grid connections are a difficult area. Distribution Network Operators are not easy to deal with and the technical side of electricity connection is complex. Grid connection costs can make or break a proposal and take substantial time to sort out. However, whilst large deposits are often demanded from the private sector, many local authorities have developed good relationships with DNOs and agreed lower deposits to secure grid offers.
Once a grid connection offer has been made and accepted, the authority has 5 years to undertake the development. So the advantage of the medium term strategy is that it guarantees that connection capacity has been secured and can be accessed when convenient by the local authority. This is vitally important as many areas in the UK have a limited connection capacity, which could be secured by either a residential developer or other solar PV farm investors re entering the market, which is likely in the next 12-18 months.
Finally, there is an important timing issue here. Under the medium term strategy, the position is that the capacity is secured now, but nothing is done with it for a couple of years. The position of the DNOs is that they are coming under greater pressure to only accept offers where the developer is going ahead to build out the scheme covered by the quote almost immediately. This is because there are so many developers sitting on secured connections for solar farms and doing nothing with them. There is therefore a warning that the ability to secure the connection now and do nothing until later may not be an option that will be available in due course, if Ofgem decide to take action on this point.
Procurement is also the bane of some officers’ lives and can sometimes be difficult. However, a collaboration of local authorities for solar farms, led by Northumberland County Council, has undertaken a procurement exercise that can be relied upon by any other UK local authority at low cost.
The solar farm framework will last for 4 years.
Once the four boxes above have been ticked, the Council concerned would have a site for development, a planning consent, a grid connection offer and route to contract with a company to design, build and operate a site. These will all last for a minimum of three years, giving flexibility in the development schedule.
The missing link then is the business case. It is still not likely that an authority will wish to build solar facilities if their financial returns are inadequate.
In my work with local authorities, they have been provided with a solar PV financial model to calculate income and expenditure as part of the financial planning process.
If the line in the model for FITs or ROCs is deleted, then the returns look very different on 2015 prices. However, if the other boxes above have all been ticked – then all an authority needs to do is to keep inserting the new price of solar (as prices drop) and wait until the model gives the right answer as to the rate of return required.
There are other ways of improving the financial model too, such as by identifying a potential user of the electricity on an adjoining site, by private wire, or by the authority sleeving the power to itself or even by establishing a fully licenced Energy Services Company. These will be considered in other articles.
The strength of the medium term strategy is that it puts local authorities in the prime position to proceed when grid parity arrives or solar prices drop to the right level. In short, when the next gold rush takes place, local authorities will be at the front of the queue, rather than at the end, which is inevitably where they normally find themselves.
So despite the doom mongers suggesting that solar PV is dead and best abandoned, in fact the contrary is true. Now is the time to press forwards. Local authorities have a golden opportunity to react, when private sector companies are contracting, and put in place the building blocks to a large scale programme of solar deployment, free from the bonds of financial incentives.
Stephen Cirell is an independent consultant specialising in local authority renewable energy projects. He is author of ‘A Guide to Solar PV Projects in Local Government'