Few things are as enticing to renewables developers as the prospect of deep-pocketed institutional investors clamouring to buy their projects.
While it normally takes many years for emerging sectors to attract such investments, the UK’s large-scale PV segment — only a year or two old — is already there, and reaping the benefits.
Last year, while Britain’s politicians and media were arguing over the merits of nuclear energy, offshore wind and fracking, large-scale PV quietly and methodically boomed.
The UK added about 1.45GW of PV capacity in 2013, most of it from ground-mounted arrays, according to market researcher NPD Solarbuzz. That means that when the final numbers are in, PV is likely to have topped onshore wind on annual installations for the first time in this wet and cloudy country — a major milestone for the sector.
And with another 1GW expected to go live during the first quarter of 2014 alone — as solar developers race to beat a subsidy cut planned for 1 April — the UK will soon find itself with more grid-connected PV than offshore wind, a scenario almost unimaginable a few years ago.
“It’s been a very important 12 months for the UK solar industry,” says James Armstrong, managing partner at the London-based Bluefield Solar Income Fund (BSIF), a PV investment vehicle that has spawned a number of imitators since raising £130m ($216m) on the London Stock Exchange last summer. The industry will play a far more central role in the country’s future energy mix than many people realise, Armstrong explains.
For both practical and symbolic reasons, buy-in from institutional investors is often seen as a sort of Holy Grail for renewable-energy segments.
The immense war chests such investors command can change the fortunes of a sector overnight, and, given their conservative natures, their stamp of approval speaks volumes about the perceived maturity and market prospects for a technology.
Onshore wind — with more than two decades of experience in the UK — has made the most progress with institutional investors to date. Offshore wind, despite notable successes with Danish and Canadian pension funds, still appears a considerable way from the tipping point.
In comparison, the speed with which large PV has caught on with institutional investors in the UK is dazzling.
In the past, in the UK and across Europe, PV plants were often seen as niche investments — “a sort of private-equity-type asset class”, Armstrong says.
But the “boring” reality of large PV — no moving parts; relatively consistent output relative to wind; guaranteed multi-decade project lifespans — is rapidly sinking in with pension funds, insurance companies and their ilk.
PV has several advantages in the UK in that regard. For starters, the cost of modules has fallen dramatically since previous booms in places such as Spain and the Czech Republic, moving solar energy significantly closer to the mainstream.
Also helpful are the UK’s strong credit rating, its stable governments, and the ability of policymakers to learn from regulatory blunders made in former solar hot spots.
“For pension funds, boring is good,” Armstrong says. “Solar is a fantastic infrastructure-type asset class which should attract pension funds and other long-term money. And that’s starting to happen [in the UK].”
BSIF is both taking advantage of and driving that trend. Since its initial public offering eight months ago, it has acquired more than 90MW of PV capacity, and — with a huge pipeline of attractive projects coming on line across the country — it intends to return to the markets and as much as triple its capital base over the next year or two.
BSIF shares trade at around £1, and it has promised its “mostly institutional” investors a dividend of at least £0.07 in its second year, set to rise with inflation beyond that.
“If you look at other listed infrastructure funds, that’s right there as a sensible return,” Armstrong says.
BSIF’s model is rapidly catching on. In January alone, two more investment groups — the NextEnergy Solar Fund and Ingenious Media Holdings — announced plans to list funds in London that will compete with BSIF in buying up UK solar assets.
The proliferation of such buyers is immensely beneficial to developers.
Most of the projects that BSIF has acquired to date — with an average sticker price of £10m — have come from just two developers, the UK’s Solarcentury and Belgium-based Ikaros Solar.
Having a partner ready to buy their projects means such developers can quickly turn a profit and recycle their capital into new arrays, driving speed and efficiency across the industry.
For all its momentum, however, there are still sizeable obstacles confronting large-scale PV in the UK, Armstrong notes.
Perhaps the most glaring is the lack of grid connections in the country’s sunniest corners, such as the southwest counties of Cornwall and Devon.
“The reality is that Cornwall would have a lot more solar farms, and indeed wind turbines, if there was any [grid] capacity,” Armstrong says. “Grid is the natural handbrake.”
The result is that development will naturally move northward; BSIF’s most northerly project at present is in England’s East Midlands, but developers are already at work in Scotland and Northern Ireland.
Still, as the solar resource declines, so too do project economics. Unlike some countries, the UK’s solar support schemes do not differentiate between sunnier and less sunny regions.
Another growing challenge for large-scale PV in Britain — the opposition to solar farms within some communities — may ultimately prove advantageous as the national energy debate intensifies.
Climate Change Minister Greg Barker — probably the strongest advocate for solar energy within the current government — has spoken stridently about the need for PV developers to site their projects “sensitively”. Armstrong agrees. “We’ve turned down opportunities that would have been good investments because the [modules] would have been on south-facing slopes and hills in beautiful countryside.”
He adds that projects are “never going to be completely invisible”, but the UK needs and has committed to vastly more renewables capacity over the coming decade.
“Solar has the advantage of being more discreet than wind turbines and less intrusive than a biomass plant with lots of lorries going back and forth.”
One major question mark for large-scale PV in the UK is how economic the sector will look after 2017, when the two current support schemes — the Renewables Obligation (RO) for large projects, and a feed-in tariff for those below 5MW — are replaced by the Contracts for Difference (CfD) regime.
From later this year, the three schemes will effectively run alongside one another, before the CfD takes over entirely in 2017.
In December, the government announced it would reduce the CfD strike price for large PV by £10/MWh in 2018 in order to offer more cash to the struggling offshore wind sector — a back-handed vote of confidence. Then, in January, it confirmed that PV will probably have to compete directly with onshore wind and other “mature” low-carbon technologies upon the formal launch of the Electricity Market Reform package later this year.
As it currently stands, the CfD “might work and it might not” for large PV, Armstrong claims. “Our focus at the moment is working with the RO and the FIT [until 2017].”
Yet while conceding that the strike price for large PV came in “a bit lower than the industry had been hoping for”, Armstrong says that BSIF is “very interested in looking at how the CfD beds in”.
One source of help may come in the form of the EU’s current price floor on Chinese modules, which is due to expire in 2015, well before the RO concludes.
The industry is also likely to help itself by cutting costs.
“The one thing this industry delivers on consistently, year on year, is cost reduction,” says Armstrong.
“It’s a tight-margin industry if you’re a UK contractor at the moment, but that’s as it should be.”
The government has formally opened its arms to the possibility of 20GW of PV in the UK by 2020, up from less than 4GW today. But many factors will influence the amount of PV the country builds in the coming years, not least the ability of offshore wind sector to meet its challenging cost-reduction targets.
In all the areas that count, Armstrong believes that PV holds a winning set of cards.
“Solar has always done everything you wanted it to do — it was simple, non-intrusive. The only problem is it was just very expensive,” he says. “But that’s changed. It’s gone past offshore wind and it’s going towards onshore wind very rapidly.
“There’s a reason Bluefield chose solar as its single strategy within renewables — we think it’s a very, very sensible solution [for the UK].”