IN DEPTH: Solar Frontier on the march

Japanese module maker Solar Frontier is seeking approval for more than 10 solar plants this month, backed by financing from its new investment vehicle with the Development Bank of Japan (DBJ).

The co-operation with DBJ, unveiled last month, is targeting development of around 100MW of projects annually for the next three years, focusing particularly on small solar plants that cannot get traditional project finance from commercial banks.

The move will see Solar Frontier, a manufacturer owned by oil major Showa Shell, become an increasingly active power producer in the rapidly growing Japanese market.

“This kind of model is common in the Europe and the US, where a module maker does downstream IPP (independent power producer) business and then divests the projects,” says Tamio Kani, general manager for development and finance at Solar Frontier.

Japan introduced one of the world’s most generous feed-in tariffs for solar power on 1 July last year, triggering strong demand from investors and landowners. It could install up to 4GW on new solar power capacity in the year to end of March 2013, compared to 1.3GW in the previous year.

Investors interested in Solar Frontier’s new financing package include both private equity and hedge funds looking for high returns, and more cautious institutional investors.

Individual landowners are also approaching the company as well as corporations who want to earn revenues on underutilised land but do not want to become an IPP.

Project finance in Japan is expensive, incurring fixed costs of around 50m yen ($67m), too much for projects less than 15MW in size, says Kani.

This has created a need for new IPPs to support growth of the utility-scale market, he says.

Solar Frontier is putting up 60% of the equity – estimated at a total 300m yen – for its joint venture investment company with DBJ. Kani says the equity comes from the group’s balance sheet.

However significant challenges remain for companies working in the market.

“We have lots of project proposals, even hundreds, but many are covered with trees or rocks or on undulating land. There aren’t such a big number of suitable assets.”

EPC (engineering, procurement and construction) companies are inexperienced and “don’t know how to make cheaper racking or save on labour costs for installation”. This drives up system costs to about $3.5 per watt in Japan, compared with less than $2 per watt in European markets.

Utilities are also reluctant to absorb intermittent renewable energy, says Kani.

“I’m not sure how co-operative the utilities are in accepting feed-in tariff power purchase agreement applications, and how, in engineering terms, they can absorb 2-3GW of solar power into a weak grid,” he says.

Developers are currently rushing to enter into PPAs with grid operators before 31 March to guarantee that they will receive this year’s FIT of 42 yen per kwH. The FIT is expected to be reduced by around 10% on 1 April.

Solar Frontier has “already negotiated one PPA and will do more than 10 more this month”, says Kani.

The projects range from small megawatts to double-digit figures, he says.

Solar Frontier claims its experience working in Europe and the US gives it an advantage in building projects at home. It works with German firm Belectric in Japan.

But it is difficult to predict how much Japan will install this year because of the immaturity of the market.

“The capabilities of banks, of IPPs, and EPCs, mean it’s very tough to forecast how much capacity will be installed. If there are no problems, it could be 4GW,” says Kani.

Solar Frontier opened a 900MW production facility in 2011, making it the world’s largest producer of CIGS thin film solar panels.

It will reach 1GW of cumulative shipments “sometime this year”, says a spokesman.

Note: Amends final line of original story regarding Solar Frontier shipments.