Can solar stack up?

Subsidies are no more, so what’s the state of the solar market in Scotland?

It would be fair to say that Scotland has never quite enjoyed its fair share of the solar cake, with only about 350MW (1, 2) of the UK’s 13GW total to date (about 2.7%).

So our starting point is low – but, taking an optimistic view, there’s plenty of room for growth.

The Committee on Climate Change calculates 54GW of solar PV must be deployed across the UK by 2035 to achieve net-zero carbon emissions targets.

Scotland should have its fair share of that, too; at least 10%, or approximately 6GW.

So there are huge opportunities for growth in Scotland and across the UK; but how do we achieve that?

Ahead of our Solar Conference in Edinburgh on September 26, Andrew Lyle, MD of Scottish Renewables member Locogen and our Vice Chair, looks at how the domestic, industrial and commercial (I&C), and utility-scale markets have fared, where we are now, what business models might spark the growth required to meet our net-zero goals and how the market needs to change in order for us to get there.

Domestic installations

Domestic solar installations declined sharply in 2015 due to falling Feed-in Tariff (FiT) rates, and with no FiT since March this year it’s only going to get harder for a typical household to make the numbers stack up.

Storage can shift the generation/consumption mismatch of a working household (empty during the day and busy boiling kettles at night) but the finances are still marginal at very best.

It’s clear, therefore, that the financial case for domestic solar is going to be challenging, at least in the short term. The Smart Export Guarantee (SEG) is not much of a guarantee at all when pitched at ‘more than 0p/kWh’ although Octopus Energy’s ‘Outgoing Octopus’ deal of 5.5p/kWh suggest there may be more mileage in this. There is also the possibility of aggregation in the market, where a broker brings together thousands of homes to attract better export tariffs.

The SEG, however, is dependent upon the installation of smart meters and the recent announcement of a four-year delay in their roll-out will impact the programme.

Where policy does help is in the case of new social housing and the new-build sector, where modest solar installations are the simplest and most cost-effective way to meet energy efficiency targets.

More ambitious energy efficiency targets from the Scottish Government are required for the private rented and owner/occupier sectors to encourage uptake in the retrofit market at a domestic level.

There is also an opportunity in the future that second-hand solar PV panels could flood the market once the early solar farms start to repower. These could reduce capex significantly and encourage uptake in the domestic retrofit market.

 

Agriculture, industrial & commercial rooftop

The agricultural market has always been good for solar, with entrepreneurial farmers comfortable with long-term investments in what is often a family business, and equally comfortable with adopting new technologies around the farm.

We are now seeing a renewed upturn in this market and there is a strong business case where the majority of the power is consumed onsite. Being exempt from business rates has always helped, too.

The industrial/commercial market (I&C) has typically been a tougher sale, particularly at the SME scale, as it requires a business which owns its own building, will consume the majority of the power onsite and has the senior management bandwidth to consider the returns of a non-core business investment – the holy grail of SME I&C prospects, and a fairly small slice of the market.

Although it is a challenging market to encourage, the business case is strong where the power is used onsite. It just needs some further encouragement to help growth.

At the larger end of the I&C market, we are seeing corporations with multiple sites generating power where planning and available space permit and trading exported energy to their other sites where onsite generation is not viable via “sleeved” PPA arrangements with their energy supplier. This gives some guarantee of future energy costs, while burnishing those green credentials in a marketplace where that is becoming an ever more important factor.

One area of the I&C market where there has been little progress is on privately-leased non-domestic buildings – an areas where policy from the Scottish Government is required to drive growth.

Hundreds of thousands of hectares of south-facing industrial roof space – which could accommodate GWs of solar – mean the potential here is large. However, building owners are very unlikely to invest where they don’t benefit from the use of the power, and when PPAs are an added complexity and headache to their business. The Energy Efficient Scotland Route Map and Climate Change Bill 2019 are not ambitious enough, to my mind, to help realise this potential.

There are a number of actions the Scottish Government could take to help support the uptake of solar in the I&C sector.

• Reform planning regulations in Scotland to at least match the situation in England, where up to 1MW of rooftop solar is ‘permitted development’, would be a good start (as opposed to just <50kW in Scotland). But why not go further? I would suggest there should be permitted development for all rooftop solar, regardless of size, instead of an arbitrary limit.
• Remove or substantially reduce business rates for subsidy-free solar on non-domestic buildings. At present the guidance for business rates for solar does not consider a subsidy free installation – it only provides guidance for ROC and FiT installations.
• Introducing EPC requirements, similar to those in place for domestic buildings, for new build and non-domestic building lets would encourage landlords to make some use of all that unused roof space.
• Changing building regulations to favour solar-friendly designs (southerly aspect, good pitch, no air-conditioning outlets, easy and safe access to the roof, etc), would help reduce costs to retrofit solar in the future if it is not installed during construction.
• Helping industry with access to unsecured, low-interest funding is key. Not a subsidy, but loans on a commercial basis. The current Resource Efficient Scotland loan for SMEs is capped at £100,000, with a term of eight years and an interest rate of 5%. A substantial increase to this cap, a longer (15 year) term and a more reasonable interest rate (3.5%?) could be transformative in removing barriers and allowing almost any business to install solar, where sensible.

 

Utility-scale solar farms

Scotland was late to the party for utility-scale solar, with earlier developers favouring the greater solar resource in the south of England, and the market only got moving just as the subsidies started to drop around 2015, so fewer projects were built out.

That said, some developers have remained active and there is now a noticeable uptick in activity. In an under-resourced market, there is definitely an opportunity down the east coast of Scotland, with good grid connection and excellent insolation levels.

While there has been a significant reduction in the CapEx and OpEx of utility-scale solar projects, the economics of solar farms are still challenging.

The initial true subsidy-free solar farms are likely to happen in the south of England, and further reductions in CapEx and OpEx are required to enable ground-mounted solar farms to offer viable returns in Scotland.

Previously the emphasis was on speed of construction to hit FiT and ROC grace period deadlines. Now, though, the emphasis must be on commercial structures which reduce cost.

But these economic challenges are not stopping activity.

There are many developers actively pursuing sites and consents ahead of future cost reductions and/or new policy to support development.

New business models include the provision of corporate PPAs, where long-term contracts can improve the bankability of a project and reduce the cost of debt. But these longer-term deals do tend to attract lower purchase prices, so there is a balance to be struck between longer-term deals with lower income but cheap debt, and shorter-term deals with higher income but more expensive debt.

Co-locating batteries at utility scale gives access to a potentially enticing revenue stack of grid services, but those revenues are not secure and everything needs to be tendered or traded on a regular basis. Also, these markets remain in a state of flux, and future opportunities are far from certain.

Banks now have experience of subsidy-free projects in the wind and gas peaking sectors so there is debt available, but this debt is more expensive due to the uncertainty in the long-term value of the energy. There are developers building a portfolio of installations with PPAs to onsite businesses. However, they will need to diversify their portfolio across business types to build in some market resilience, where a small percentage of such businesses may fail but still leave a viable portfolio.

 

Sector-wide risks and opportunities

While we have covered many risks specific to certain sectors, there remain a number of challenges which cut across markets and scales.

One risk to behind-the-meter projects is in the reformation of the approach to recovering network, social and environmental costs through energy bills. Currently these are charged on a p/kWh basis. Through Ofgem’s Targeted Charging Review there is a risk that a portion (or all) of these costs could be removed from the unit price of energy and moved to a standing charge to ensure a fairer spread of the cost among consumers. This could significantly reduce the unit cost of retail electricity, which will impact the business case for subsidy-free solar behind the meter. 

Another risk is the impact Brexit may have on the value of the pound, and on interest rates. Brexit could place further strain on any projects requiring debt, with potential interest rate rises increasing the cost of that debt and marginalising single-digit-return projects.

That said, debt in the EU will likely still be cheap and the value of the pound may be lower, so we may see inward investment in larger UK projects from EU investors, too.

 

Sector-wide opportunities

Reducing energy storage costs and the introduction of Time of Use tariffs could greatly improve the economics of battery storage from domestic to I&C scale, where colocation of solar and storage is common.

The Scottish Energy Strategy also identifies six key priorities, one being:

“Innovative local energy systems – we will empower our communities by supporting the development of innovative and integrated local energy systems and networks.”

This is important because the decarbonisation of the heat and transport sectors is going to place a hugely-increased demand on the grid.

Enabling local energy markets will minimise the immense grid upgrade costs that this would otherwise entail – but there is currently no incentive to match local generation to local consumption.

Local energy markets would square this circle, and would also enable local generators to maximise returns by trading their output locally.

 

Sunrise or sunset?

The end of the FiT could remove the route to market for solar and spell the end for the industry on any meaningful scale.

But it needn’t be so.

We currently have a sector that was set up for subsidy, with no subsidies, and that has to change.

A sensible approach to regulation and taxation could light up an industry which can deliver our net-zero carbon targets quickly, with no subsidies and little disruption. And this can be deployed across the full range of scales and in urban and rural locations.

With a little sensible government intervention, is the future brighter than we think?

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