How to get solar PV projects on track
The medium term strategy for solar PV projects whereby prices of solar PV fall sufficiently for solar PV projects to be undertaken at the same IRR as previously, but without Government subsidy is set to be realised by the end of 2017.
However, there are ways in which this time frame can be accelerated. This article will examine the major ways that this can be done, in which case solar PV projects can continue to be undertaken even on today’s prices.
Use of electricity on site
It has been apparent for some time that the best way to install solar is in a circumstance where the electricity can be used on site. The obvious example of this is a solar PV installation on a building, where the electricity is used in the normal operation of the building. A civic building would be a good example.
If this is to be contemplated, then a full profile of the current electricity use needs to be prepared, to see what the best fit is in terms of capacity of solar PV to fit to the roof. As most local authorities are paying at least 10 pence per kwh for their electricity, the business case for such an installation works, even on current prices and without any Government subsidy. Of course a small FIT rate might still be applicable and will be a bonus.
Of course, the solar does not need to be fitted to the buildings themselves. Many buildings are unsuitable for one reason or another, but might have a large car park or the building might be situated in ample grounds, perhaps like a County Hall. Both will be suitable to site the panels.
But what about solar farms? The comments above relate to buildings and many authorities want land based solar installations now. Here it is a little more tricky, as land based schemes tend to be a bit more rural.
However, don’t be hung up on not having a user nearby. Thinking out of the box, the question should be – can we create a new use on the land or nearby? An example might be a series of rural fields that a Council owns that are suitable for solar PV. The solar farm is planned and then a new market gardening opportunity is created on the remainder of the land, with the electricity providing the power to heat the poly tunnels. The Council could contract out the operation of the market garden to a specialist operator, with the promise of renewable power at a guaranteed subsidised rate. Doing so will create some jobs and help the local economy at the same time as providing a customer for its power. As long as the power can be sold for the right rate, this will make the solar farm viable now, even without ROCs and on current PV prices.
Private wire arrangements
The previous section looked at accelerated options for solar PV, i.e. ways in which solar panels can be fitted now without Government subsidy and still deliver a strong business case for the local authority.
Use on site is always the base option if it is available. But what if use on site cannot be possible – usually the case with solar farms in rural locations. Here the solar panels might have been fitted in a field with nothing around the site. In circumstances like this, the art is to get the electricity generated to a user based somewhere else.
Later, I will look at use of the grid system to do this, but a better way – if it is available – is to use a private wire. For this, the Council needs to identify a user, within a reasonable distance that will be interested in buying power. There are numerous practical hurdles to be surmounted, but these only come into play anyway if a potential user can be identified.
I have several good examples of this situation. One authority in Northern England has a former spoil tip site, which is suitable for a solar farm. Next door to this site is a large glass factory with a 24 hour furnace. This will be a huge user of electricity on an annual basis. Another Scottish authority has land which is adjoined by a cement factory, again a huge user of power.
On a practical level, the sites are adjacent, with the factory near to its own boundary. This means that the private wire will be short – and therefore less expensive – and untroubled by ransom strips or interfering ownerships.
Having identified a potential user, the deal on offer and how it is presented will be key. It may well be that the user will take some persuading that the Council is 1) serious and 2) able to deliver on this promise.
Having met those tests, the deal should share the benefits of the connection, by offering the user a payment mechanism that is unhinged from normal energy price inflation, whilst continuing to increase the amount paid to the Council as prices rise. This will be highly attractive to any business.
There are a number of reasons why such an arrangement is also beneficial to the authority. Firstly, private wire arrangements are not regulated, and so a deal can simply be negotiated. Secondly, there is no use of the grid and so no ‘use of network’ charges are applicable. Thirdly, such a deal can underpin the business case for the lifetime of the solar park and finally, deals can agreed and contracts signed up before the park is even built. This means that the Council will have no risk whatsoever in the construction of the asset.
It is for this reason that any authority that has land that can be used as a solar farm, and where there is a user within a reasonable distance that could be connected by private wire, should proceed now, without any regard for the removal of ROCs or FITs. Business cases in such circumstances will offer returns of at least 8% on current solar prices.
This form of solution is referred to as a ‘behind the meter’ arrangement. The next section will look at ‘in front of the meter’ solutions, such as sleeving, where the network is used to transport the power to the user.
There has been much publicity over the removal of ROCs for solar farms and drastic cuts in FIT payments, most of it negative. But this series of blogs is looking at accelerated options for such developments, where local authorities can proceed now to develop solar farms, without any Government subsidy. This only works if a good business case exists ie the Council is going to make some valuable income from the venture.
The last section looked at a private wire arrangement, whereby the Council lays a cable between it and the user. Such ‘behind the meter’ solutions are attractive, but will not be available in all circumstances. If there is no user within a reasonable distance but a grid connection is available, another option arises whereby the Council can use the power it has generated itself.
This goes by different names but is colloquially referred to as ‘sleeving’. This means that the electricity is fed into the grid at the point of generation but then removed from the grid by the Council at a point where it wants to use the power to deliver its own services.
As the Council will be paying a minimum of 10 pence per kwh for its power, this is attractive - as a saving is the same in value terms as a Government subsidy.
The Council owns the electricity – because it has been generated from its own solar farm; the Council owns the buildings (such as a Town Hall) in which the electricity is being used. But there is a third party in between, namely the power company that supplies the means to get it from point A to point B.
So a sleeving arrangement involves the local authority compensating the third party for the use of its systems. These are called ‘use of network charges’ and there are different types of these. The power company cannot simply charge what it wants for this as such charges are regulated, but they have to fall within an acceptable band to make the business case viable – or more accurately to stop those charges simply sinking what was an otherwise viable business case.
To do such a deal, the solar farm has to be operational, the buildings to be supplied identified and their electricity use profiled and the negotiations conducted with the Council’s electricity supplier. Of course, if a deal cannot be done with the current supplier, the Council could switch suppliers.
The main problem with sleeving is that the electricity supply companies – particularly the big six – have no incentive to enter such arrangements. They do not benefit from them and do not like them. Think of it as a restaurant where you can bring a packed lunch from home, but the restaurant is forced by the Government to let you do this, on the basis you pay a small cover charge for the seat or might buy a coffee whilst you are there eating your sandwiches.
This analogy is not as simple as it sounds. Think of the knock on effect. As more packed lunch eaters frequent the restaurant, more will be encouraged to come and the less customers will be buying the more expensive traditional option from the restaurant. Bearing this in mind, it is not hard to understand why a local authority will get very little co operation from an electricity supplier when sleeving is mentioned.
But it remains an important option and a way in which solar farms can continue to be built and operated now, without Government subsidy and at current solar prices. As such it is worth the effort to pursue.
So far, I have looked at accelerated options for such solar farm developments, where local authorities can proceed now to develop solar farms, without any Government subsidy. It is necessary to think along these lines because the Government has all but removed subsidies for land based solar installations. Despite the social and other benefits that accompany a solar farm development, local authorities still want to see a good business case in support of the venture in order to proceed.
Earlier, I looked at use on site and private wire options. These both work on current solar PV prices, as if the Council is saving 10 pence per kwh on each unit of electricity coming from its solar farm that is used in its own operations, the financial case is strong. Notwithstanding this, it may be possible to improve the financial case by adding in battery storage.
As mentioned before, use on site and private wire are called ‘behind the meter’ options. Where sleeving is concerned, or there is the potential for supply of power at premium times for peak rates, such as in the Capacity Market, these are ‘in front of the meter’ options. These too can be improved by the addition of battery storage.
So battery storage is an important wild card, and one that can improve the business case for a solar farm, whatever the current plans for the sale of the electricity generated.
In simple terms, the benefits for use on site or private wire are in relation to users that are half hourly metered. If this is so, the user is paying differential rates for its electricity, with much higher rates applying at peak times. So a leisure centre buying power at 5 pm on a weekday night in the winter, might be paying 26 pence per kwh of electricity purchased.
So if the power can be generated in the day, then stored and discharged later, it can be used to defray costs at premium times which will have a big benefit.
The issue is whether the cost of the battery makes this worthwhile. In a report for the REA published recently by KPMG, it quantified the costs of battery storage using lithium ion batteries as about £1,000 per kw installed. This is a high price, but will fall steeply over the next few years. For now, this would mean a whopping £5m for a 5 MW battery to accompany a commercial sized solar farm. Clearly this does not work, as the cost of the battery cannot be recovered easily.
But both solar panels and lithium ion batteries will fall in coast over the next two years and then the business case will stack up. So it is simply necessary to work the figures on each site and see what options present themselves. The strength of battery storage is that it can work with so many other options and generally will improve them all to some degree.
Establishing an energy services company
We have so far looked at accelerated options for solar farm developments, as some local authorities are anxious to proceed with schemes, notwithstanding the effective removal of Government subsidy. Whilst there are definite social and other benefits in building, owning and operating a solar farm, local authorities still want to see a good business case in support of the venture in order to proceed.
In looking at the prices that electricity generated will command, there is no doubt that the ‘holy grail’ is sale to the public on a retail basis. This is because prices for such sales are in the region of 12 pence per kwh, whereas 5 pence is more indicative of a wholesale price under a Power Purchase Agreement. If the position of a 5 MW solar farm that generates 5 million units per annum for 30 years is considered, there is a big difference between the two. Of course, it all comes back to the bottom line.
But to sell electricity on a retail basis requires a full supply licence under the Electricity Act 1989. Getting one of those sorted out is a very big ask for a local authority. Apart from costing millions, there is a considerable level of risk associated with any such venture. So is the work worth it?
Generally, there is no doubt that the ESCO model is the finest option in the set. This is because – leaving aside the considerably better financial returns – the full social benefits of electricity generation can only really be captured if the supply of the power is controlled.
The supplier dictates the costs of the supply – or tariff – and can provide local tariffs, discounted tariffs and arrangements that do far more than pay lip service to fuel poverty in an area. Most local authorities would want in concept to be in this position.
The problem is the level of difficulty and the cost of achieving this. Nottingham City Council is one of two local authorities that have recently taken this step. It is rumoured to have cost in the region of £2.5 m to achieve and required particular commitment on the part of the authority. Bristol City Council has recently followed this lead. It is very unlikely that there will be any flood of others following suit.
But what the development of two prominent civic ESCO’s has done is to add another option to the menu for those other authorities. This is because if they do not want to establish a separate ESCO themselves, they can seek some form of Joint Venture with one of the existing civic ESCOs that have been established. An obvious example would be a ‘white label’ deal, whereby the supply licence of the established ESCO backs up the front end supply arrangements of the authority to its own inhabitants.
If this is so, it might just be that another accelerated option can be added to the list, which will enable local authorities to keep on building their solar farms, despite the national downturn in activity in the private sector.
Stephen Cirell is an independent consultant and is author of ‘A Guide to Solar PV Projects in Local Government and the Public Sector’, which is now in its second edition.