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New direction in UK 'solar race' as developers eye unsubsidized plants

SNL Image

A solar farm on the Isle of Wight, off the southern coast of England. For such projects to be viable without government support, some additional boxes will have to be ticked.
Source: Lightsource BP

Solar developers in the U.K. are assembling pipelines of unsubsidized projects after the country's government phased out its supportive subsidy schemes. But the business case for the next wave of plants will include some caveats.

The rainy islands boast Europe's third-largest installed solar capacity at around 13 GW — behind only Germany, with 45.9 GW, and Italy, with 19.9 GW — thanks to generous government support throughout much of the 2010s. The U.K.'s total is more than double that of Spain, where conditions for solar generation are significantly better.

"Solar came from nowhere in the U.K.," said Ian McCarlie, partner at law firm Pinsent Masons LLP, who has advised on renewables projects in the U.K. since the early days of the sector. The country's subsidy schemes attracted investment from far and wide and "because the cost of infrastructure came down with the influx of supply from South East Asia, all of a sudden we had this absolute solar race," he added.

Solar deployment mushroomed, sparking a flurry of secondary market M&A deals. Institutional investors began snapping up solar farm portfolios — seen as low-risk assets with stable cash flows — and the increased competition sent asset valuations climbing.

But then the government started whittling down subsidies. It ended support for utility-scale projects above 5 MW in 2015, and by 2019, subsidies for projects of all sizes had been closed down. "That created shocks in the market," McCarlie said.

SNL Image

Questions over viability

After this market disruption, the U.K. solar industry is now on the comeback trail. McCarlie and Gareth Phillips, another partner at Pinsent Masons, are bullish on the prospects for unsubsidized solar development in the country, and see the business case boosted by significant cost reductions and improvements in technology.

"We've now got solar projects being set up in the darkest parts of Scotland, because of the more efficient panels," Phillips said. "That is making subsidy-free projects viable."

But while technology costs are declining, Paul Saugier, senior research analyst at think tank Aurora Energy Research Ltd., said that without subsidies, "solar on a standalone basis is not viable yet," adding that projects co-located with battery storage can make economic sense, as those sites are more cost-effective. Land can be used more efficiently, he argued, and the batteries can help boost returns at times of over- or undersupply of solar by either storing or dispatching the power.

For co-located projects, timing is important. Foresight Group, one of the U.K.'s largest renewables investors, is not yet invested in standalone subsidy-free solar projects in the U.K., and initially expects projects to be designed in a way that allows a battery connection in the future. "The battery would come later, since prices need to fall to make the case economical," said Ricardo Piñeiro, partner at Foresight Group LLP, in an email.

The size of the project matters, too. While scale offers benefits and efficiencies in unsubsidized solar ventures, 50 MW would be a feasible size, Piñeiro said. Larger projects require more complex planning processes that can take up to three years, since they are assessed by the national government rather than local authority.

Foresight is reviewing investment opportunities in the U.K. for unsubsidized solar and such projects will become a reality eventually, Piñeiro said. They are "just not economically viable yet," he added.

Raised risk profile

Without government subsidies, having exposure to wholesale power prices raises the risk profile of unsubsidized projects, although Phillips said developers are confident about the direction of power prices, and in parts of the equity community there is appetite for merchant risk.

Zosia Riesner, head of corporate power purchase agreements, or PPAs, at solar developer Lightsource BP Renewable Energy Investments Ltd., sees PPAs as a key aspect of project financing, although the company also looks for some merchant exposure in its projects. "Having an element of price certainty is important for many lenders still," she said. "I think it's a balance."

The exposure to market price risk is usually hedged by having a portfolio of subsidized assets sitting alongside unsubsidized projects, especially where investors deploy funds specifically for solar power. Hedging can be thought of laterally as well, said Saugier, by diversifying across different renewables technologies or even by including gas assets.

Still, scoring a deal with a corporate offtaker who signs a PPA for a number of years and guarantees a certain price for the power is seen as a big win for subsidy-free ventures. "If you've got a corporate with a strong balance sheet behind your project, that's a good story to tell your bank," McCarlie said.

"PPAs are a very good option," Saugier said. "A floor price [PPA] protects from price cannibalization risk," he said, which arises when a large amount of power is dispatched onto the grid at once, weighing on the power price.

While she still sees significant demand from corporate offtakers, Riesner said that until the market matures and more big buyers enter the fray, "you have to be innovative about how you sell the power," for example by selling it indirectly to smaller offtakers through utilities. "It's not straightforward," she said.

Grid investment is needed

Across the U.K., there are at least eight sites penciled in for large-scale unsubsidized solar projects, according to Phillips. A good plot of land for a large solar project boasts high irradiation, grid connection availability, as well as single ownership, for example by a large farming estate, he added.

"We still have a bit of land," Saugier said. "The question is more about the grid, the connection costs are getting more and more expensive." Spare capacity is limited on the U.K.'s distribution networks, and millions of pounds of investments in the grid infrastructure will be required to accommodate large projects.