The Medium Term Strategy for Solar PV Development
In this paper for APSE Energy, Stephen Cirell considers a way for local authorities to avoid the cuts to financial incentives and to build solar farms without Government subsidy.
The policy world of solar PV development has been turbulent across a number of milestones in its history. The last memorable time was in 2012, when Feed in Tariff (FIT) rates were slashed from 44p to 22p within a very short period of time. It seems that history is repeating itself now, as since the new Government was elected there has been nothing but bad news.
The latest consultation papers are referred to below, but include removal of the Renewables Obligation for solar PV schemes under 5 MW, together with the slashing of FIT rates again and other measures, such as the end of pre accreditation and grandfathering.
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. We have termed this approach as the medium term strategy for solar PV. This is to differentiate it from the ‘fast track’ projects that are working hard to be completed by next March.
But to take advantage of these 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 nicely lined up now.
2. 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. This will result in a dramatic drop in PV installations from next year.
Over the longer term, authorities have plans to rationalise their assets, support their communities and jump start their economies after a difficult period. But Rome was not built in a day.
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.
3. 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 income line of the business case, there will be two elements: the income from the financial incentive provided by the Government and the income from the sale of the power.
The financial incentives are the Renewables Obligation (RO) and the Feed in Tariff (FIT) regime. It is not the place of this paper to explain these fully but the work ‘A Guide to Solar PV Projects in Local Government’, available from APSE Energy, does have a full explanation of how the financial incentives work.
Until the latest announcements, ROC payments for solar farms (based on 1.3 ROCs per MWh until 31 March 2016) were about 5.5 pence per kwh and FIT rates were about 6 pence per kwh. Both offered healthy returns.
However, the new Government has announced proposals that affect both FITs and ROCs. For ROCs, the availability of such payments for schemes over 5 MW was ended from April this year. It now proposes to end payments for schemes under 5 MW from April 2016.
This proposal would not have impacted on those authorities who are involved in a joint procurement exercise being led by Northumberland County Council and supported through APSE Energy, as all planned to complete their projects by the end of March 2016 in any event.
However, the Government has also proposed that if certain matters were not in place when the consultation was launched on 22 July, the RO rates for projects completing before next April could not be guaranteed. It is not necessary to go into full detail here, but this is potentially a far more serious setback for the fast track projects.
On the FIT side, the rates have already degressed to around 4 pence per kwh and will degress further in January. But the Government issued a separate consultation paper on 27 August 2015 proposing new and much lower rates. Under these proposals the rate for ground based solar would fall to just over 1 penny per kwh. Moreover, there are moves to end pre accreditation (which protects a FIT rate for 6 months) from October.
The solar PV industry has reacted furiously to these proposals, but there is no doubt that DECC fully intends to follow through on them. The reason is that there is a danger that the budget will be overspent and the Government is very sensitive to such an outcome during its efforts to balance the books. Others in the solar PV industry have despaired, and there is talk of the market collapsing. APSE Energy has itself responded to the Consultation Papers, urging the Government not to make the changes for local authorities or community schemes.
4. Current Local Authority Projects
There are projects ongoing 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.
The APSE procurement collaboration currently has around 16 authorities intending to build solar farms of up to 5 MW by next April. Other authorities are also doing the same, such as West Sussex County Council and Monmouthshire Council in Wales.
The first reaction to the proposals was panic and a view that the wheels had well and truly come off the waggon. But this is not the case.
We refer to the projects trying to complete before April next year as the ‘fast track’ and there is no doubt that some authorities were struggling to undertake the necessary work under a very challenging timeframe. Planning consent and grid connection agreements have been particular issues for solar farms. But there are more mundane matters, such as tenancy disputes, historical legal issues to resolve involving sites and intentions to involve the community in some way. On buildings, it was issues of surveys, orientation, wiring checks, and grid capacity. Such matters are rarely sorted quickly.
It is undoubtedly the case, therefore, that not all of the authorities that had expressed an intention to develop solar PV on the fast track were actually going to achieve that goal.
5. The Medium Term Strategy
Fortunately for those authorities, all will not be lost if the deadline is missed. In fact many authorities are now looking to a longer term to bring these projects to fruition. The issue, though, is whether this is viable or not and on what timeframe?
The starting point for the medium term strategy is to say that it is not whether solar PV will be developed, but merely when. Even if it does not deliver in the next six months, it will still be delivered to the benefit of the local authority and the community.
The reason that this conclusion has been reached is that ‘grid parity’ – when solar PV costs no more than fossil fuel generated electricity from the grid – is not far away. Grid parity is driven by two factors:
• The world price of solar;
• And the UK price of energy;
This means that even if the Government stopped solar PV incentives completely in the UK, world prices will continue to fall, as more and more dynamic economies than the UK adopt a low carbon approach and recognise the value of solar power.
Electricity prices in the UK are likely to rise over coming years. The estimates cover a wide range but a significant increase by 2020 is likely. This will aid the move towards grid parity.
The key issue, 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). Generally, 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 in December of this year (although that might now be delayed). Industry estimates are that prices will drop by 15% to 20% overnight, as the Chinese are already supplying solar panels more cheaply to areas not covered by those provisions, such as to the United States.
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 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.
Determining a site sometimes takes longer than might be thought. For solar farms, this is 25 – 30 acres of land that has the right characteristics. For housing, it is the right age and calibre of houses, with the right orientation. For civic buildings, it might be the usage profile or strength of the roof.
To undertake this work properly takes time and problems need to be ironed out. But once it 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. If time related reports are required, such as breeding birds reports, it can take even longer.
This is less of an issue for housing and other buildings but there are still provisions to be complied with.
But once a planning consent has been granted, it lasts for a minimum of 3 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. Often large deposits or down payments are demanded.
APSE Energy has managed to negotiate some special provisions for local authorities, such as a one off deposit of £10,000 to secure a grid connection offer in one area and an agreement that a payment equal to the design fee (typically about £3,000) will be sufficient as the initial payment in another. The deposit would also be refundable if the development does not go ahead, subject to any costs already incurred by the DNO.
However, 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 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 2-3 years. The position of the Distribution Network Operators 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. It was for this reason that APSE Energy proposed a collaboration of local authorities for solar farms, whereby a single procurement exercise could be relied upon by other authorities and the costs shared.
This has been very successful and the framework, which will only apply to solar farms and car park canopies, is close to being completed.
Once finished, the framework will be available for use by any authority in the UK and will offer an EU compliant route for the swift conclusion of a contract to design and build solar farms.
APSE Energy is in the process of seeking agreement to a second collaboration on housing and other civic buildings.
If a new procurement exercise is undertaken by an authority directly this takes about a year to complete.
For these purposes, though, 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.
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.
However, those authorities that have had assistance from the APSE Energy team have been provided with a solar PV financial model to calculate income and expenditure. Currently, that financial model includes a line for FITs or ROCs income.
If that line were to be removed, the returns projected would look very different. But if that line were deleted – and 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. There are several good examples of this amongst the APSE Energy projects, including some where there is a sizeable factory right next door to the solar farm site. Here, where a PPA agreement for 8p per kwh or better can be achieved, it will further enhance the business case and the price of solar does not need to drop as far to make the right returns.
The other way to improve that case is for the Council to be in a position where it can use the power itself. Obviously this is the case with a roof based system, but power from a solar farm has to go into the grid first. This means that a sleeving arrangement, if one can be organised, could also improve the financial case, having the same effect.
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 find themselves.
Two years for such a strategy is not a long period and will then unlock a series of valuable projects for local councils to implement, giving both financial and other benefits. For some, it just gives them time to get the issues sorted at a more realistic pace.
It is also the case that a longer term strategy such as this, gives the opportunity for the Council to tie in its solar PV strategy more tightly to the wider corporate goals. A simple example of this is the search for sites with the greatest economic impact, via private wire arrangements or local grids. In one authority, they are looking at where sites can be linked to local light industrial parks to help make local commerce more competitive.
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 the short-termist 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.
Even if the local authority was not going to proceed with a development itself, following this strategy will increase land values and enable a Council to sell a site to a developer, with the benefit of a planning consent and a grid connection for an enhanced value, whilst a decision is taken on whether to directly invest.
Local authorities should do this now as they are long term players in the economy and are capable of planning well in advance. This relatively modest investment will pay back handsomely over time and will also be an important step towards the re municipalisation of energy and wider plans to intervene in local energy markets.
11 September 2015