Energy and Climate ChangeWritten evidence submitted by the Sola Trade Association
The Solar Trade Association is the leading voice for the solar industry in the UK, and the only trade body representing both solar thermal and PV. With our diverse membership we reflect the whole solar supply chain with manufacturers, developers, distributers and installers through to consultancy firms and training bodies. Established in 1978 as a not-for-profit organisation, the STA’s primary objective is to ensure the sustainable growth of the share of solar energy in the UK energy mix.
The STA has recently set up a Large Scale PV Group (LSPVG) which represents the greater majority of the 400–600MW of large scale solar PV that has been deployed under 2 ROC’s over the last year. Virtually all this deployment is by independent generators, many of whom own their own electricity production assets and therefore we are able to give an accurate commentary on this call for evidence.
Executive Summary:
1. PV is by far the largest growing technology in the UK with approximately 2.5GW deployed at the end of March 2013. Approximately 600MW of this is from projects sized between 1MW up to 40MW, with the typical size being 5MW or 25 acres. Although much of this is for solar farms where electricity is fed in to the local high voltage electricity distribution network, at the smaller scale (up to 2.5MW say) there is an increasing amount of ‘own usage’ deployment for direct use in local farms and on commercial and industrial roof tops.
2. Solar farms, or solar parks, are the large scale application of PV to generate electricity. Approximately 25 acres of land is required for every 5MW peak generation capacity of installation, enough to power 1,515 homes1 for a year and save 2,150 tonnes of CO2 in the southern part of the UK.
3. They represent time-limited, reversible land use and provide an increased, diversified and stable source of income for landowners as part of their farming mix. They have dual purpose usage with sheep or other animals grazing between rows, and can help to support biodiversity by allowing small animals access to otherwise fenced-off land, with bird and insect fodder plants and wildflowers sown around the modules.
4. Solar farms have lower visual and environmental impacts than other forms of power generation. If 10GW of solar was installed on the ground, it would only use 0.1% of UK land area, while producing electricity equivalent to 1000 large wind turbines or 5 medium-sized gas-fired power stations.
5. The current system of Feed-in Tariffs (FiTs) initially worked well at supporting larger scale Solar PV and Renewables Obligation (RO) have provided a bankable method of support since Q1 2012, yet we have concern that under the Electricity Market Reform (EMR) these projects will not be sufficiently supported and will result in a “squeezed middle”.
6. Recent concerns surrounding the EC anti-dumping investigations on Chinese solar panels are already risking decimating the UK solar market, with the loss of 80–90% of solar farm projects (depending on size of duties). This would completely derail Government’s ambition to deploy up to 20GW of solar power by 2020 and could jeopardise the 15% EU renewable energy targets.
Questions:
1. What contribution could medium-sized energy projects (5–50MW) make to the UK’s climate change, energy security and energy affordability objectives?
1.1 From a solar perspective, this contribution could be very significant. Projects within this 5–50MW range are nearly all ground mounted systems otherwise known as solar farms or solar parks. Within the last nine months alone, the STA estimates that between 400 and 600MW was installed. Considering the appalling weather conditions this winter, this is an incredible achievement.
1.2 Solar is the fastest growing global energy technology in the World. Notwithstanding the current issues around anti-dumping duties, solar installation prices have halved in the last 18 months. Solar farms are now cheaper to install at 1.6ROCs than offshore wind at 2ROCs. Global PV deployment to the end of March was approximately 110GW, of which the UK was 2.5GW.
1.3 Considering the ability for solar to be rapidly deployed, plus the lower pricing, we believe that medium-sized energy projects, which include projects at commercial, industrial and community scales, as well as independent generators, have a significant role to play in meeting our renewable energy targets, mitigating climate change, ensuring we have energy security and fulfilling energy security objectives. Our concern however is that under the EMR, these projects will not be sufficiently supported and these projects will be “squeezed” out.
2. What different models of ownership exist for medium-sized energy projects and how prevalent are they in the UK?
2.1 Debt financing is the method often used by medium scale Solar PV developers. Banks providing debt and investors providing equity do not invest unless the generators have signed a viable long-term power purchase agreement (PPA) with a large BBB+ credit rated company. UK FITs are characterised by three monthly reviews (typically a medium scale solar project takes 12 to 24 months to deliver) plus with inherent political risk and are no longer an easily ‘bankable’ support mechanism for medium scale projects.
2.2 Solar projects outside of FIT’s are eligible to receive EIS and VCT funding.
2.3 Community solar projects currently represent only a small proportion, one notable site being Westmill Solar Farm (5MWp) using cooperative community funding. The community funding model is based on selling shares to local and other interested investors, providing full or partial equity to a group of investors. This may be leveraged by bank or other debt to create a larger pot of funds. The projects are typically run on a ‘one member one vote’ basis meaning that all shareholders have an equal say in how the project is managed.
2.4 There are a number of options available to local authorities who wish to finance low carbon projects, for example through generalist funds or low carbon funds.
3. What types of financing model are most suitable for small- and medium- scale projects? Do these differ from the financing models used for larger-scale projects?
3.1 Typically internal funding, or balance sheet financing, is used for smaller industrial and commercial scale projects where renewable energy is not the core business. Many smaller solar farms are self-financed and the ownership is kept in-house after the projects are completed.
3.2 There is a commonly used model for financing community projects in the UK, being to raise funds in the form of a cooperative share sale. For example, a project with a cost of £100,000 would aim to sell shares at £1 per share (usually with a minimum number of shares which must be bought (5 to 250) and a maximum of 20,000). There is currently a de facto limit on these share sales of approximately £4 million, as raising funds above this level requires an almost prohibitive extra amount of due diligence and regulatory clearance. The shares pay a ‘dividend’ to investors based on the project’s income and every shareholder automatically becomes a member and is eligible to vote in AGMs. Financing in this model might be supplemented by debt funds, usually from a bank. In the past this funding has been difficult to come by and the current state of the PPA market (see below) has exacerbated this.
4. Why are community-owned energy projects more prevalent in countries like Germany and Denmark than they are in the UK?
4.1 The main point to explain the greater uptake of community renewable energy projects in continental Europe, especially Germany is the ‘municipal’ power generation tier, which is not present in the UK. In Germany, many towns and cities have their own municipal power plants (“Stadtwerke”) and local distribution grids, with power mainly being generated and consumed in the local area, and are less reliant on transmitting power long distances on a national grid infrastructure. Because of this “municipal” tier, there are many small local utilities who naturally have strong ownership by and responsibility to community stakeholders. This may be in a number of forms, eg employment, energy security, and providing lower-cost and higher renewable content local power. In Germany, renewable energy project developers often work with these local utilities and community groups to deliver solar PV, wind and biomass generation schemes, sometimes combining several technologies.
4.2 There is also the issue of public perception and energy politics. Especially in Germany, Denmark, and Holland, the general public is sensitive to and interested in the topic of renewables, nuclear etc, and more willing to participate actively in this energy debate. In the UK, the focus has mainly been on the cost that renewables is perceived to add to already high domestic electricity bills, and renewables are seen as an expensive necessity. In continental Europe, there are a number of ways that members of the general public can get involved in the energy debate and there is a high degree of social acceptability for this involvement. The ultimate expression of active support is to invest in a local renewable energy scheme and claim part-ownership of the solution to the energy problem facing us.
4.3 Planning has also played a major part, for example wind projects in Denmark received favourable planning treatment, and the requirement that any turbine application had to offer local people the opportunity to invest in the project to qualify for planning permission.
4.4 In Germany the KFW (German government backed funding) provides very low cost financing—around 2%—for up to 100% of investment costs for community-owned projects. The UK has now comparable scheme. Indeed the Governments green deal financing is approximately 7.5% and that is considered subsidised.
5. Is there any evidence that medium-scale energy projects are more likely to be accepted by local communities?
5.1 The Cooperative Bank found that 49% of the 2027 adults interviewed would support a wind turbine being erected two miles of their home, with 22% against. However if the project were 100% community-owned and controlled by the community with all the profits benefiting the community, support rose to 68% and opposition plummeted to 7%. We would expect a similar reaction with solar farms, but as yet there is no evidence.
6. What appetite is there for community-owned medium-scale energy projects in the UK?
6.1 Community owned projects tend to be smaller scale in nature. But some of the “largest” community-owned projects developed in the UK in the past few years include a Cooperative wind farm in the North West of England, Westmill Solar (5MW), Wind (12.5MW) Cooperatives in the south-east and Lochcarnan wind farm in South Uist (7MW).
6.2 The sector is becoming more ambitious and aiming for larger schemes which would be eligible under the more complex RO, CfDs and the new EMR arrangements. Although FIT’s might be more straightforward, most developers use the RO for a number of reasons. The lower size limit of 5MW used to differentiate between FIT’s and CfD’s would dampen appetite for solar projects if forced to use one OR the other. A choice is imperative to allow entrepreneurial development of all types of locally owned projects. Such issues are further complicated by the uncertainty surrounding the eligibility arrangements for EIS and VCT funding.
6.3 Companies such as Good Energy have launched their local tariff for electricity consumers located near to wind farms. However a generator by itself is unable to sell electricity to consumers as it is not a licensed supplier. The STA feels the key to unlocking community ownership and the wholesale acceptance of renewable energy would be to allow generators to sell direct to the community. Give people the choice!
6.4 We would recommend you look at the helpful website www.energy4all.co.uk
7. What appetite is there among private sector organisations in the UK to invest in their own medium-scale energy projects?
7.1 Significant. We have a number of owner/developers who self finance their own projects and who do NOT re-sell the projects in the secondary markets. Key is stability of funding & legislative regime. For medium scale solar projects, UK FITs have lost their low risk “bankability”, hence ROCs are preferred. It will be essential that CfDs are characterised by longer term political & legislative stability to permit medium scale project investment.
7.2 Through EIS and VCT funding many individuals are able to invest in solar projects so long as the EIS/VCT tax advantages remain in place and stable (even if slim) returns are available.
7.3 Being exposed to the price of electricity is an “investable” asset—there are several good examples of industrial customers in the UK who have taken the step of installing their own renewable power generation equipment or allowing others to install it on their premises in order to better fix their OPEX costs and shield themselves from future energy price rises.
7.4 Prior to developing medium scale solar farms, one of our members was Head of Energy of the UK’s largest retailer. He was charged with both reducing energy consumption/sq ft of retail space whilst also investing over £100M annually in self generation (either as a backup or as renewable replacement of brown electricity). Many of the UK’s largest retailers have similar programmes.
8. What appetite is there among UK local authorities to invest in their own medium-scale energy projects?
8.1 Similar to private companies, there is widespread evidence that the local authorities are keen to invest in and promote renewable energy when the right conditions are met, as shown by the over 300 English authorities that have signed the Nottingham Declaration.
8.2 A recent report by the CCC states that “there is a crucial role for local authorities in reducing emissions to meet national carbon budgets”. Whilst noting the benefits of local authorities investing in their own projects, it is also reported that there is “currently a significant risk that local authorities will not develop and implement sufficiently ambitious low-carbon plans, following the removal of the national indicator framework and given the highly constrained fiscal situation”.
9. What are the barriers to medium-scale energy projects in the UK?
9.1 The key barriers to medium-scale solar projects in the UK are financial incentives, route to market, grid generation capacity constraints (in that the grid is centrally designed to distribute electricity from central power stations to end users whilst generators placed within the distribution network face constraints of inadequate thermal capacity of switchgear, transformers, cabling etc), planning requirements, changing policy landscape, public perception and external events such as the EC anti-dumping investigation.
9.2 For financial barriers please see Q10.
9.3 Another key barrier is the rapidity with which the ROCs banding changes for Solar PV projects (annually) versus the typical development timeline of 12 to 24 months. Given the upcoming 1.4ROCs/MWh support level, only the sunniest locations in the UK can at this point (April 2013) be taken on for development.
9.4 A lack of liquidity and competition in the Power Purchase Agreement (PPA) market has also unnerved the market. As recent DECC research has confirmed, there are a very limited number of suppliers willing to offer contracts and they must be BBB+ credit rated to be acceptable to a bank providing debt funding. In practice this means that an independent project fully or partially dependent on bank funding must attract a PPA offer from a supplier acceptable to the bank.
9.5 Grid connection is an increasing constraint. The usual DNO’s connection delivery quotation for a medium scale project connecting at 33kV is 12 to 24 months connection timeline. Given that construction finance (to fund the grid connection construction) is not available until planning is awarded and financial due diligence completed, this frequently leaves just six months to construct and energise the connection, a timeline DNOs are very uncomfortable with. Grid capacity to accept generation within the distribution network (11kV, 33kV, 66kV and some 132kV), particularly in the South West of England has already reached maximum capacity extensive distribution network upgrades are be required to realise the stated distributed generation ambitions. However, DNOs are not permitted to fundamentally upgrade their distribution network speculatively (increasing their distribution charges as a result) to accept more generation. Solar PV developers cannot economically afford to upgrade anything other than just their own local connection; hence there is a fundamental disjoint in expansion of grid capacity to suit DG.
9.6 The financial risk of not meeting planning consent requirements often including extremely demanding visual impact requirements (solar farms have to effectively be invisible to receive planning in many counties) and statutory consultations from bodies adverse to development of renewables remain one of the greatest barriers for solar. For example, community energy projects need to fund pre-planning and planning development work, without any guarantee of success and without any upfront capital support. Larger companies and utilities allocate part of their profits to make high risk money available for the planning, legal & grid application phase, whereas smaller or community groups may find it ruinous to not be awarded positive planning on their project.
10. How effective are current Government policies in encouraging local and medium-sized energy projects? Could they be improved in any way?
10.1 Although FIT’s in general is a good incentive mechanism for the domestic and small scale commercial market, there is virtually no deployment between the 250kW and 5MW sector. This so called “squeezed” middle with projects that require 6–18 months of development lead time, require higher tariffs than are currently offered, need certainty of price for an investor (vs. UK FiT degression every three months), can’t use VCT’s or EIS funding, and are generally regarded as high risk & unprofitable by developers. This is a missed opportunity for DECC as there are many smaller brownfield sites or large industrial roof tops with up to 80% self-consumption of electricity generated which are more economic to install under the RO.
10.2 The RO is a well understood incentive for large scale developers with a ready market to sell ROCs into. Projects larger than 50kW are eligible to use the RO, but in reality, large scale roof tops from about 1MW tend to be the smallest projects, with 5MW being the average size. The STA has concerns over this 5MW threshold limit as once the market transitions to CfDs, projects less than 5MW will ONLY be eligible for FIT’s. This will likely leave many viable projects without an appropriate financial incentive. It would recommend that FITs is restricted to projects below 1MWp with ROCs/CFDs above that level.
10.3 With reference to the PPA market, solar farms are nearly all independent generators who are dwarfed by the size of the “Big 6”. Route-to-market for these independent generators is of paramount importance. Current proposals within the Energy Bill do not go far enough to ensure financial security of electricity export, and we support the proposals of the Green Power Auction Market (GPAM) as an amendment within the bill to allow a better route to market.
10.4 Measures are needed to allow carbon saved from on-site renewable electricity to reduce CRC (carbon reduction commitment) tax. Currently the credit can only be obtained by giving up the FiT or ROC, unlike in the case of the RHI. Therefore the STA supports the suggestion of the REA to treat renewable electricity in the same way as renewable heat, ie not adjusting back to the grid mix for the purposes of CRC calculations as it currently is. A further solution would be that where a business seeks to have the full carbon saving reflected in its CRC calculation, it would not pass on the Renewable Energy Guarantee of Origin (REGO) certificate to the electricity supplier under the FiT or ROC power purchase agreement. This would avoid double counting and help incentivise on-site renewable electricity.
April 2013