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European power outlook: Falling costs to drive more unsubsidized solar activity

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A solar farm in Spain, which installed more new solar capacity than anywhere else in the EU in 2019.
Source: AP Photo

Solar capacity is on the rise across Europe. As costs fall and subsidies become scarce, utility-scale projects are increasingly being realized on a merchant basis or through private power purchase agreements, or PPAs — a trend set to continue into 2020, investors say. And the EU's renewable energy targets will bring a further boost in capacity growth, according to industry group SolarPower Europe, which predicts that Europe could have as much as 165 GW of solar installed by the end of 2020, with Spain in the spotlight as the bloc's fastest-growing market.

S&P Global Market Intelligence asked four renewable energy investment managers for their view on where the solar sector is heading in 2020 and beyond.

This is part of a series of European power outlooks compiled by S&P Global Market Intelligence. Click here for onshore wind, here for battery storage, and here for a legislative and regulatory outlook for Europe's five biggest markets.

Michael Bonte-Friedheim, founder and CEO at NextEnergy Capital Ltd.


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Michael Bonte-Friedheim
Source: NextEnergy

I expect the deployment of new solar plants to accelerate over the course of 2020. This acceleration will be driven by the attractive economics of solar, with the decarbonization benefits of new solar plants being a secondary benefit but not the driver. Looking into next year, NextEnergy Capital will be focused on North America (USA and Mexico), southern Europe and India, as those markets continue to grow exponentially. Other markets such as China and the Middle East will also deploy significant new solar capacity, but are of less interest to us.

In 2019, [NextEnergy] passed significant milestones, with over 1,000 MW in operating solar plants owned as well as over 200 individual utility-scale solar plants acquired. The key development I see happening in the market is the expansion of subsidy-free solar plants, like our 50MWp Staughton plant in the UK, without the need for PPAs in place being developed and built. This will require a particular expertise, but will allow market participants to avoid sourcing long-term debt financing and avoid entering into long-term offtake agreements at prices well below the market.

Peter Dickson, technical partner at Glennmont Partners

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Peter Dickson
Source: Glennmont Partners

The dramatic fall in the global price of solar power is a key trend that we envisage continuing in the coming years. This has enabled investors to grow their solar portfolios particularly in geographies such as Spain and Italy, where we have seen the deployment of solar generation on a utility scale.

This is coupled with the fact that the growth of clean energy technologies is being driven by increasing energy demand due to, among other things, the electrification of road transport and governments setting ambitious decarbonization targets. On this basis, we anticipate the appetite from institutional investors for opportunities to invest in solar to sustain strong levels of growth in 2020 and beyond.

In terms of other European markets, we expect the likes of Portugal to become increasingly attractive for investment in solar deployment. We could also see Greece become part of this segment of the market, where there are some interesting opportunities for the right investor.

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Federico Giannandrea, partner and head of business development at Foresight Group LLP

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Federico Giannandrea
Source: Foresight Group

The solar market in Europe continues to see divergence of investor activity and appetite between subsidy-linked markets (UK, France, Germany, Spain and Greece) and the rapidly expanding unsubsidized markets of southern Europe.

The secondary market in solar in subsidy-linked markets is already experiencing significant yield compression, and that is expected to continue throughout 2020. With so much capital chasing a fixed number of assets, competition is rife which invariably leads to some mispricing in the market which itself could lead to problems down the track.

The current focus on refinancing activity will continue throughout 2020 and we are already seeing some assets which have been changing hands with refinancing priced in on the assumption that it will be in place. This problem is not exclusive to the solar sector, and we are experiencing it across all renewables generation technologies.

Alex Brierley, co-head of Octopus Renewables, part of Octopus Investments Ltd.

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Alex Brierley
Source: Octopus Investments

The solar industry has come a long way in the last decade. Due to reduced technology costs, in many markets, solar power plants are now able to compete with conventional generation assets without the need for government subsidies. This fact, coupled with an increased societal demand for global leaders — politicians, investors and corporates — to address the climate emergency, has created the perfect evolutionary environment for a new wave of investment into unsubsidized solar power plants.

Octopus Renewables [was] among the first investors at scale into unsubsidized solar. Competition for these assets is increasing as experienced managers educate investors on the risk adjusted returns offered by these assets, and the management of the merchant power price exposure. We recently spoke to 100 global institutional investors — it emerged that grid-scale solar power plants are the most popular renewable energy class to invest in, due to the low operational risk and the long-term, predictable cashflows the assets offer.

But as distributed wind and solar assets increasingly penetrate power markets, new specific market risks emerge for investors that we need to manage. Strong market expertise is crucial in navigating these risks. Octopus recently invested in an experienced solar development business based in Spain, and we believe this is a key market to watch given the acceleration in solar development and strong investor interest.

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