Embed Size (px)
Citation preview
European Union
EU-WIDE SOLAR PVBUSINESS MODELSGUIDELINES FOR IMPLEMENTATIONA guide for investors and developers on how to put into place and finance the top business models for solar PV across the EU.
PV FINANCING project | November 2016Deliverable 4.4 – Public – EU Implementation Guidelines
Sonia Dunlop - Alexandre Roesch
This project has received funding from the EuropeanUnion’s Horizon 2020 research and innovationprogramme under grant agreement No 646554
2
Cover image: © Flo Hagena
Many thanks to all those that assisted in the review of this report, including those from Frankfurt School, BSW-Solar, AmbienteItalia, Creara, RESCoop, Housing Europe,Eclareon Berlin, Allianz Climate Solutions Gmbh,Photovoltaic Austria, Gunder and Observ’ER.
This report has been prepared by SolarPowerEurope. It is being furnished to the recipients for general information purposes only. Nothingin it should be interpreted as an offer orrecommendation of any services or financialproducts. This presentation does not constituteinvestment, legal, tax or any other advice.Recipients should consult with their ownfinancial, legal, tax or other advisors as needed.
This report is based on sources believed to beaccurate. However, SolarPower Europe doesnot warrant the accuracy or completeness ofany information contained in this report.SolarPower Europe assumes no obligation to update any information contained herein.
SolarPower Europe will not be held liable for any direct or indirect damage incurred bythe use of the information provided.
This report reflects the views of its authors only and the Innovation and NetworksExecutive Agency (INEA) will not be heldresponsible for any use of the informationcontained in this report.
AuthorsSonia Dunlop - Alexandre RoeschSolarPower [email protected]@solarpowereurope.org +32 2 709 5520
Cover image: © Flo Hagena
3
© REC Solar
1. INTRODUCTION 8
1.1. BACKGROUND TO EU SOLAR PV MARKET 8
1.2. APPLICATION SEGMENTS FOR PV 14
2. PROFITABILITY DRIVERS & BARRIERS ACROSS THE EU 22
2.1. PROFITABILITY DRIVERS FOR FINANCING, INVESTMENT AND DEPLOYMENT 22
2.2. BARRIERS TO FINANCING, INVESTMENT AND DEPLOYMENT 25
3. FINANCING SCHEMES ACROSS THE EU 28
3.1. SELF-FUNDING 31
3.2. DEBT 31
3.3. EQUITY 33
3.4. MEZZANINE FINANCING 34
3.5. LEASING 34
3.6. CROWDFUNDING 35
3.7. FINANCING SOLAR IN COMBINATION WITH OTHER TECHNOLOGIES 37
BUSINESS MODELS IN EUROPE4. SELF-CONSUMPTION BUSINESS MODEL 39
4.1. REGULATORY FRAMEWORKS FOR SELF-CONSUMPTION 41
4.2. VARIANTS OF SELF-CONSUMPTION 42
4.3. BROAD STEPS FOR SELF-CONSUMPTION PROJECT IMPLEMENTATION 43
4.4. EU-WIDE SELF-CONSUMPTION SENSITIVITY ANALYSES 44
TABLE OF CONTENTS
4
© REC Solar
4.5. CASE STUDIES 50
4.6. OUTLOOK 51
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL 52
5.1. REGULATORY FRAMEWORKS FOR PPAS 54
5.2. VARIANTS OF PPAS 54
5.3. BROAD STEPS FOR PPA PROJECT IMPLEMENTATION 60
5.4. EU-WIDE PPA SENSITIVITY ANALYSES 61
5.5. CASE STUDIES 64
5.6. OUTLOOK 65
6. COOPERATIVE SCHEMES 66
6.1. REGULATORY FRAMEWORKS FOR COOPERATIVES 66
6.2. BROAD STEPS FOR COOPERATIVE PROJECT IMPLEMENTATION 67
6.3. EU-WIDE COOPERATIVE SENSITIVITY ANALYSES 68
6.4. CASE STUDIES 68
6.5. OUTLOOK 69
7. VIRTUAL POWER PLANTS 70
7.1. REGULATORY FRAMEWORKS FOR VIRTUAL POWER PLANTS 71
7.2. BROAD STEPS FOR VPP PROJECT IMPLEMENTATION 71
7.3. EU-WIDE VPP SENSITIVITY SCENARIOS 71
TABLE OF CONTENTS CONTINUED
5
7.4. CASE STUDIES 72
7.5. OUTLOOK 72
8. BUILDING A PROJECT: COMBINING APPLICATIONSEGMENTS, FINANCING SCHEMES & BUSINESS MODELS 73
9. CONCLUSIONS 75
LIST OF ABBREVIATIONS 77
ANNEXES 78
ANNEX I: NATIONAL TEMPLATE CONTRACTS FOR SOLAR BUSINESS MODELS 78
ANNEX II: CASH FLOW MODEL 79
ANNEX III: GERMANY – THE “MIETERSTROM” NEIGHBOUR SOLAR SUPPLY MODEL 80
ANNEX IV: FRANCE – THE COLLECTIVE SELF-CONSUMPTION MODEL 82
ANNEX V: TURKEY – REGULATORY FRAMEWORK OVERVIEW 83
ANNEX VI: AUSTRIA – POTENTIAL “GEMEINSCHAFTLICHE ERZEUGUNGSANLAGE” SHARED GENERATION FACILITY MODEL 84
ANNEX VII: SPAIN – REGULATORY FRAMEWORK OVERVIEW 85
ANNEX VIII: ITALY – SUPPLY CONTRACT PPAS OR “SISTEMI EFFICIENTI DI UTENZA” 88
ANNEX IX: UNITED KINGDOM – POWER PURCHASE AGREEMENT REVENUES 90
6
© Olivier Morin
1. Evolution of European annual solar PV installed capacity 2000-15
for selected countries (SolarPower Europe) 9
2. European annual solar PV market scenarios 2016-2020 (SolarPower Europe) 10
3. Weighted Average Cost of Capital across the EU for onshore wind (DiaCore) 11
4. Price comparison map (2014) (JRC) 12
5. Venn diagram of three primary variables in a solar PV project 13
6. The different options for each of the three variables of a PV project 13
7. Electricity and gas post tax price trends for household and industrial customers in Europe,
Eurocents/kWh (ACER) 20
8. Proportion of EU cumulative solar PV installed capacity by segment (SolarPower Europe) 21
9. Key profitability drivers for solar PV projects across Europe 23
10. Possible steps to overcome offtaker risks e.g. bankrupty or re-location 26
11. Stages of utility-scale ground mount solar PV and corresponding sources of financing 29
12. Technical risk profile of a typical solar PV installation (Solar Bankability) 30
13. Types of debt commonly used in solar PV sector across Europe 31
14. Types of crowdfunding for solar PV 36
15. Typical self-consumption business model 40
16. Sensitivity analysis for self-consumption based on yield 45
17. Sensitivity analysis of self-consumption based on debt interest rate 46
18. Sensitivity analysis of self-consumption based on self-consumption rate 47
19. Sensitivity analysis for self-consumption based on levies and fees
on self-consumed electricity 48
20. Sensitivity analysis of self-consumption based on Feed-in Tariff level 49
21. Wittelsheim GAEC dairy farm (Web-agri.) 50
22. Domus Energethica building, Tradate, Italy (F.lli Bertani S.p.A.) 50
LIST OF FIGURES
7
23. Typical onsite private wire PPA business model structure 53
24. The wholesale PPA model (Solar Trade Association/Bird&Bird) 55
25. Onsite private wire PPA model (Solar Trade Association/Bird&Bird) 56
26. Sleeved PPA model (Solar Trade Association/Bird&Bird) 57
27. Synthetic PPA model (Solar Trade Association/Bird&Bird) 58
28. Mini-utility PPA model (Solar Trade Association/Bird&Bird) 59
29. Sensitivity analysis of PPA project based on yield 61
30. Sensitivity analysis of PPA model based on PPA price escalation 62
31. Sensitivity analysis of PPA model based on debt 63
32. L’Oreal building, Torino, Italy (Qualenergia) 64
33. Ketton solar farm, Ketton, UK (Lark Energy) 64
34. Neue Heimat buildings, Heidelberg, Germany (Heidelberger Energiegenossenschaft) 68
35. Single family new build homes, UK (Oakapple Renewable Energy) 69
36. Screenshot of self-consumption cash flow model used as base case 79
37. Diagram of the neighbor solar supply model (BSW) 80
38. Comparison of business models for on-site, local or regional electricity (BSW-Solar) 81
39. Main characteristics of different self-consumption schemes in Spain 87
Figures have been created by authors unless otherwise stated.
8
© Tenesol.com
The European Union is the world leader in solarin terms of total installed capacity having in2016 just crossed the historic milestone of100GW of solar PV, up from just 3GW ten yearsearlier in 2006.
However Europe is currently only just ahead of theAsia-Pacific region which is hot on its heels at justover 96GW, and is growing much faster. China isthe main driving force in the growth of this Asiansolar powerhouse.
Looking back, the European solar market really tookoff in 2008, growing rapidly until 2011 in what was aboom period of high support schemes and decliningcosts. After 2011, due to damaging retroactivechanges to support schemes, stop-start subsidiesand other factors, the EU solar market went intodecline and volumes of new solar installationsreached a five year low in 2014 at 7.1GW. This isdemonstrated in more detail in Figure 1.
In 2015 the European PV market started growingagain with a 15% year on year increase to 8.2GW,of which 7.7GW was in the European Union. Muchof this was in fact due however to a boom in the UKdriven by the sudden closure of a number of supportschemes. Without this activity in the UK, the EUmarket would in effect have remained stagnant.
1.1. BACKGROUND TO EU SOLAR PV MARKET
1. INTRODUCTION
© Flo Hagena
9
1. INTRODUCTION
Looking ahead it is estimated that the European PVmarket could grow by as much as 145% by 2020,1
as shown in Figure 2. This shows there is realpotential for EU solar deployment over the comingfive years.
France and Germany are set to be the biggest solarPV markets in the EU between now and 2020, bothbroadly forecast to be over 1GW per year out to2020. In the best case scenario France is set toreach 2GW in some years and Germany 3GW. Italy,the Netherlands and the UK will also be sizeablemarkets. And although smaller in absolute size,Ireland is expected to have the highest growth rateof all with 160% growth between 2016 and 2020.
Figure 1. Evolution of European annual solar PV installed capacity 2000-15 for selected countries (SolarPower Europe)
1 SolarPower Europe analysis assuming High Scenario. More details inFigure 2 above and in SolarPower Europe “Global Market Outlook forsolar power 2016-2020”, June 2016. Full report available here:http://www.solarpowereurope.org/insights/global-market-outllook/
0
5
10
15
20
25
GW
20042003200220012000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
8.2
Austria Belgium Bulgaria Czech Rep. Denmark France Germany
Greece Italy Netherlands Romania Spain UK Rest of Europe
10
EU-WIDE IMPLEMENTATION GUIDELINE
It is clear that over the last ten years Europeansolar markets have been largely policy driven –they were determined not by the solar irradiationresource but by the regulatory frameworks andsupport schemes available. The national supportschemes available combined with the perception ofpolitical risk in turn determined the cost of capitalin that country. Equally in the larger markets theleading business model was also dictated by thesupport scheme, with the revenues beingguaranteed by the state and therefore generallyconsidered low risk.
Figure 3 shows the variation in cost of capital foronshore wind, demonstrating that cost of capitalvaries hugely across the EU. South East Europe inparticular has very high cost of capital in onshorewind. Solar can be said to have a similar spreadacross the continent.
Like many other renewables solar PV is verycapital intensive, with low operating costs. The highup-front cost is one of the barriers to investing insolar. In addition to this the benefits or revenuesare spread out over 20 years or more. This islonger than many businesses or even people canconfidently forecast their own existence, let alonewhether they are still going to be in the samebuilding. There is a fundamental timing mismatchbetween costs and revenues.
Another barrier to investing in solar is simply the factthat electricity sold on the wholesale market has solittle value that projects are uneconomic and do notproduce a return on investment. This is a challengenot just for the solar PV industry but also othertechnologies such as CCGT in parts of Europe.
Figure 2. European annual solar PV market scenarios 2016-2020 (SolarPower Europe)
0
5
10
15
20
25
GW
Historical data Low Scenario High Scenario Medium Scenario
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
10.2
20.1
5.6
-11%
16%
20%
17%
24%
8.08.2
11
1. INTRODUCTION
Deploying new and innovative financingmechanisms and business models is what canovercome the high up-front costs. The combinationof financing mechanisms and business models arewhat will allow investors to feel more comfortableinvesting in low-subsidy solar PV. There will alwaysbe some households and businesses with enoughspare cash to be able to self-fund solar PV projects,and this will be looked at in more detail in Section 3.But finance is what will allow solar to be accessibleto a maximum number of power consumers andapplication segments if sufficiently attractivebusiness models and projects can be put forward.
The cost of capital or financing is usually the singlebiggest cost component in the Levelised Cost ofElectricity (LCOE) of PV. This is particularly thecase with projects that have long-term tenors orloans. Solar’s LCOE is typically made up of 29%capital costs, 19% module costs and 16%operations and maintenance (O&M) costs, withother cost components making up smaller shares.3
2 DiaCore project “Assessing Renewables Policy in the EU”, p. 18.Available here: http://www.diacore.eu/images/files2/DIA-CORE_Final_Brochure.pdf.
3 BSW-Solar, “PV Investor Guide: New business models forphotovoltaics in international markets”, August 2014, p 22.
Figure 3. Weighted Average Cost of Capital across the EU for onshore wind (DiaCore2)
Below 6.0
GEND
6.0 - 6.9
7.0 - 7.9
8.0 - 8.9
9.0 - 9.9
10.0 - 10.9
Above 11.0 7.4-9%
6-7%
6.4-13%
9.3%
8-9%
8.7-10%
8%
6.5%
7-9%
5.7%
3.5-4.5%
5-6.5%
5-6%
6-6.7%
6.5%
9%
10%7.5-8.5%
8.1%
11.3%11%
12%11.1%
10%
12%
8-12%
Below 6.0
LEGEND
6.0 - 6.9
7.0 - 7.9
8.0 - 8.9
9.0 - 9.9
10.0 - 10.9
Above 11.0
12
EU-WIDE IMPLEMENTATION GUIDELINE In many western European markets solar LCOEs
are already lower than the retail electricity price(see Figure 4). It is estimated that 79% of EUcitizens live in locations where in theory solar PVhas a lower LCOE than the residential retail priceof electricity.5 This is a good sign, and shows thatthe fundamentals of the solar business model arein place. These crude calculations however shouldbe taken with caution and do not necessarily meanthat solar can be deployed without subsidy in thoseareas. Section 2.2 will outline the remainingbarriers to PV deployment that are preventingprojects from coming forward. For example, thesystem of grid charges and taxes on retail
electricity can radically alter the economics of abusiness model. If the charging system for gridcosts changes, a project or business model can gointo unprofitability.
Finally, as the level of support schemes are beingreduced and solar moves into a low or no subsidyenvironment, the revenue stream6 for solar projectsbecomes more exposed to market forces, withwholesale electricity price fluctuations foremostamong them. This makes revenues moreunpredictable, and requires a more complexbusiness model to maintain adequate rates of return.
Figure 4. Price comparison map (2014) (JRC4)
6 Note that in addition to traditional revenues from a solar installation, a possible additional way of generating revenue for PV is throughSolarcoin. Solarcoin is an alternative digital or virtual currency whichrewards every MWh of solar energy with one SolarCoin (SLR).SolarCoin’s objectives are a value of 20 USD per SLR and a millionparticipants by 2018. A few crowdfunding platforms are already usingSolarcoins to further generate revenue from their electricity.Solarcoins can be exchanged for Bitcoins, another widely acceptedonline virtual currency.
4 European Commission Joint Research Centre, “Cost Maps forUnsubsidised Photovoltaic Electricity”, 2014.https://setis.ec.europa.eu/sites/default/files/reports/Cost-Maps-for-Unsubsidised-Photovoltaic-Electricity.pdf.
5 European Commission Joint Research Centre “Cost Maps forUnsubsidised PV Electricity”, 2014. Available here:https://setis.ec.europa.eu/sites/default/files/reports/Cost-Maps-for-Unsubsidised-Photovoltaic-Electricity.pdf
13
1. INTRODUCTION1.1.1. General remarks regarding
this guide
This document is intended as a broad guide forboth professional and non-professional investorsand developers to the main solar PV applicationsegments, financing schemes and businessmodels in use across Europe.
In principle every PV project can be categorised asbelonging to one of the application segmentsdescribed in this document, is financed using oneor a combination of the financing schemes and thedifferent parties involved relate using one or acombination of the business models. This is ofcourse a simplification for many real-world projects,however every project can be classified as perthese three variables and described using a venndiagram like that in Figure 5. Of course new andinnovative business models and financing schemesmay be added to the list of options in Figure 6 asthe industry develops. Note that off-grid applicationsof solar PV are not covered in this guide.
• Single family residential
• Multi family residential
• Commercial buildings,shopping centres and office buildings
• Public and educationalbuildings
• Industrial buildings
• Solar farms
• Self-consumption
• Power Purchase Agreements
• Cooperatives
• Virtual Power Plants
• Self-funding
• Debt
• Equity
• Mezzanine financing
• Leasing
• Crowdfunding
• Combo financing
Figure 6. The different options for each of the three variables of a PV project
Figure 5. Venn diagram of three primaryvariables in a solar PV project
APPLICATION SEGMENT BUSINESS MODELS FINANCING SCHEMES
APPLICATIONSEGMENT
FINANCING SCHEME
BUSINESS MODEL
14
EU-WIDE IMPLEMENTATION GUIDELINE The guide will look mainly at the self-consumption,
Power Purchase Agreement, cooperative andVirtual Power Plant business models. And thesebusiness models can be combined in different ways– they are not mutually exclusive. Neither is this listexhaustive, these are simply the most promisingbusiness models in use or being considered in theEU today. For each business model a step-by-stepguide to how to put it in place is provided.
However a note of caution is required beforeproceeding. Costs, specifics of business models andabove all regulatory frameworks differ enormouslyacross the EU. It is vital that any investor looks intothe national circumstances in the target market indetail before proceeding. This guide attempts tobring together common traits from across Europeand highlight differences. Specific examples of
barriers and case studies will be given from differentcountries. This is useful for policy makers andbusinesses across the EU and beyond to learn fromtheir counterparts and adopt best practice. Forpractical assistance with regards the seven PVFINANCING countries (Austria, Germany, Spain,France, Italy, UK and Turkey), please consult thenational implementation guides available for eachmarket.7 Note that the national implementationguidelines are available in the national languageonly. An English translation of key sections of thenational guidelines is provided in Annex III to AnnexIX. For further information please contact the authorof the national guidelines. For the remaining EUcountries, please contact SolarPower Europe or thenational solar PV association8 in that member statewhich can assist you further.
7 The PV FINANCING national implementation guidelines, which each focuson business models that are particularly promising in that country, areavailable on the website here: http://www.pv-financing.eu/project-results/
8 A list of the national solar PV associations for each EU country can beviewed on the SolarPower Europe website by selecting ‘National PVAssociations’ under category:http://www.solarpowereurope.org/membership/list-of-members/
Solar PV is a very modular technology. It comesin all shapes and sizes, from the smallestcaravan roof to a 300MW ground-mounted solarfarm covering over 250 hectares, from a solarpowered calculator to huge reservoirs coveredin floating solar panels. Outside Europe,ground-mounted solar plants can even reach1GW in size. It is important therefore todistinguish between the different applicationsegments for this technology.
For each application segment a brief descriptionwill be given, followed by advantages,disadvantages and the outlook going forward.These application segments can also be dividedsimply into building mounted vs. ground mountedsegments, single-occupancy vs. multi-occupancyand owner-occupied vs. rented buildings.
1.2.1 Single family residential house(owned or rented)
This is the application segment that best representssolar PV’s nature as a force for the democratisationof energy. Solar allows energy consumers to becomeprosumers (also known as renewable self-consumers or active consumers), generating andusing their own energy. This application segment canbe split into two types: owner-occupied homes andrented homes. (Note that social housing is a specialcase and is dealt with in Section 1.2.2.1 below.)
The advantage of the single family owner-occupiedresidential home application segment is that thepower consumer is also the owner of the building,and legal issues around access to the roof aretherefore straightforward. The main driver in thissegment is the financial return that the householderwill make on his/her investment in PV, from savingson electricity bills and selling excess power back tothe grid. Solar is also a hedge against rising electricity
1.2. APPLICATION SEGMENTS FOR PV
15
1. INTRODUCTIONprices. Support schemes for years provided a very
stable investment environment and high returns,which only increased the financial or economicincentive for installing solar. However additionaldrivers are energy independence, environmentalmotivations, a desire for cutting edge technology, andespecially if the solar installation has been done in anaesthetic way, the increase in the value of a home.9
A disadvantage in both owner-occupied and rentedhomes is that on the whole residential electricityconsumption is lower during daylight hours whilepeople are out at work and peaks in the evening. Thisleads to a timing mismatch of demand and solargeneration and can lead to low solar self-consumptionrates, often between 20-30%. Ways to overcome thisare discussed in Section 4. The most promisingsolutions are demand response and battery storage.
Rented homes have the disadvantage of complexlegal rights issues, as the permission of both thetenant and the landlord is required. Thelandlord/tenant dilemma10 commonly found inenergy efficiency projects also applies to solar. Thelandlord has no incentive to invest in PV if thebenefit goes to the tenant.
Two options for overcoming this are:
• Leasing financing schemes where a third partypays for the installation of the system and the tenant pays a monthly fee in return for thesolar electricity generated. (See Section 3.4 formore details.)
• Regulations which oblige landlords to meetspecific standards, often known as energyperformance of building regulations. Anexample is the obligation on private sectorlandlords in the UK to meet EnergyPerformance Certificate band E by 1 April 2018.Solar is a very cost-effective way of improvingthe Energy Performance Certificate of a home.
In the owner-occupied single-family homesegment, the self-consumption business model(which implies self-ownership) is the most commonbusiness model in the EU today.
Finally, due to homeowners’ nature as non-professional investors and their lack of technicalunderstanding of PV technology and electricity, itis important to ensure high consumer standards inthis application segment to prevent misleadingsales tactics. Irresponsible or illegal behaviour candamage the reputation of a technology and industryand inhibit its growth potential further down the line.Clear, easy to understand information should beprovided to consumers as part of an independentnational outreach strategy.
1.2.2 Multi-family residential buildings(owned or rented)
Approximately 40% of the population of theEuropean Union lives in multi-family residentialbuildings.11 Latvia, Estonia and Spain in particularhave the highest rates of people living in apartments.
An advantage of multi-family housing is that thereis less roof space (and therefore PV capacity) perhousehold, which leads to higher rates of self-consumption, sometimes up to 80-90%.
Furthermore if the electricity demand fromcommunal areas of the building is high enoughthen solar can be installed as a self-consumptionsystem owned and operated by the building owneror management company. Communal areas can insome cases have significant electricity demand.Lifts, lighting, air conditioning and CCTV canconsume a considerable amount of power. In someNordic countries it is common for apartment blocksto have a communal sauna, which consumes a lotof power. However in general communal powerdemand is not enough to justify a solar PV system.
However there are also many disadvantages tosolar on multi-family apartment blocks. Despite thesmall advantages above this is a much morechallenging application segment for solar PV whencompared to owner-occupied single family homes.
Multi-family solar business models often involve along-term contract with the tenant or occupierwhich can lead to major issues when thathousehold moves home. The contract shouldideally be passed on to the next occupier and be
9 For more information on the aesthetics of solar PV systems pleasesee Campaign to Protect Rural England and BRE National SolarCentre, “Solar Design Tips: your 10-point guide” and “Ensuring place-responsive design for solar PV on buildings”, October 2016. Bothavailable here: http://www.cpre.org.uk/resources/energy-and-waste/climate-change-and-energy/item/4384-ensuring-place-responsive-design-for-solar-photovoltaics-on-buildings
10 The landlord/tenant dilemma is where the interests of the landlord andtenant of a building are not aligned. Often it is because the landlordhas to pay for the solar PV system but the tenant pays the electricitybills and gets the benefit of the power. This is commonly recognisedwith energy efficiency investments, and stops projects that are cost-effective and would save energy from going ahead.
11 Eurostat housing statistics, available here:http://ec.europa.eu/eurostat/statistics-explained/index.php/Housing_statistics#Type_of_dwelling
16
EU-WIDE IMPLEMENTATION GUIDELINE made part of the property. In practice new
occupiers will usually have an incentive to take onthe long term contract as usually the cost is lessthan the savings so there is a net benefit for theoccupier. However continuation of the contract cannevertheless be difficult to guarantee.
For rented multi-family residential housing thelandlord/tenant dilemma described above alsoapplies, which is another disadvantage.
In many countries there are regulatory andtechnical barriers to the sharing out of the cost ofthe investment and resulting electricity. Examplesfrom across the EU are:
• In Austria the law does not currently allow asingle PV system to supply more than onepower consumer. As in many countries, thecommunal cables and wires within an apartmentbuilding are considered to be part of the publicelectricity distribution grid and it is very difficultfor third parties to use them to distribute solarpower. Residents of an apartment block are alsonot allowed to combine their metering points inany way. An amendment to the legislation inorder to allow for the use of PV within residentialand non-residential shared multi-storeybuildings is expected by the end of 2016. Formore information on this future amendment,please see Annex VI.
• In Italy the onsite direct wire model (SistemiEfficienti di Utenza in Italian) can only apply tosystems with one power consumer. This is abarrier not just to solar on multi-family residentialbuildings but also shopping centres, multioccupancy office buildings and business parks.For more information on Italy see Annex VIII.
• Up until recently in France building owners werenot allowed to sell electricity from a solar systemdirectly on to the residents of a building becausethe connection to each apartment was ownedby the Distribution System Operator. This is inthe process of changing with the new regulatoryframework in the country which will allow forcollective self-consumption along a low voltagebranch of the grid. For more information onFrance see Annex IV.
• The 2009 EU Electricity Market Directive12
dictates that every consumer must have thefreedom to select a utility of his or her choice.For certain solar multi-family residential
business models this can be an issue as itmeans the common PV system can only beinstalled if all homeowners agree on a singleelectricity supplier. Future owners and tenantswould be bound by this agreement, which couldbe in breach of the 2009 directive.
There are a number of potential business modelsand financing schemes that could be successfullyapplied in this segment to overcome the barriersand disadvantages listed above:
• Neighbour solar supply “Mieterstrom”model (or on-site direct wire mini PPAs) – Aprovider offers to supply the residents of abuilding with solar PV electricity from thebuilding’s roof. If there is adequate take-up, theprovider installs the solar PV system. From alegal perspective the solar electricity is notconsidered to have been supplied via the publicgrid even if technically speaking it is using thecables and wires in the building. The residentsreceive cheaper electricity than if they paid theretail electricity price and the provider receivesa return on his/her investment in the solar PVsystem. Providers of this business modelinclude public utilities, green energy suppliers,energy and housing cooperatives, homeowners’associations, building management companiesand commercial building developers. For someof these providers, and the local energycompanies in particular, adding solar to theirportfolio or offer can be a way of increasingcustomer loyalty. It is also a way of easingaccess to finance as the large number of powerofftakers reduces the offtaker risk for theinvestor. The provider must also invest in smartmeters in every participating apartment and anIT system to operate the metering and billingsystem. This business model is starting to beused in Germany in the multi-family housingsegment. Some regions in Germany13 plan tosubsidise the cost of the smart meters andnetwork technology. The German federalgovernment is currently considering an incentiveprogram to promote this model by exempting itfrom taxes and charges. This is a variant of anonsite direct wire PPA, which will be described
12 Directive 2009/72/EC of the European Parliament and of the Councilof 13 July 2009 concerning common rules for the internal market inelectricity. Available here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0055:0093:en:PDF.
13 Bundesländer in German, the federal states within Germany.
17
1. INTRODUCTIONmore in section 5.2.2. More detail on this model
is provided in Annex III. A similar scheme maysoon be possible in Austria, see Annex VI,although here power consumers will almostdefinitely have to own at least a symbolic shareof the PV system.
• Collective self-consumption – this is aspecific scheme allowed in the regulatoryframework in France where the generating andconsumer entities have to be part of a singlelegal entity and within a single branch of the low-voltage grid. At the time of writing the Frenchgovernment has yet to finalise the details of thisscheme. For more information see Annex IV.
• Leasing – The building owner or a third partyinvests in one or more PV systems and leases/rents it to one or more tenants or occupiers. Thisfinancing scheme is described in more detail inSection 3.4.
• Crowdfunding – The solar system is fundednot by a third party but by the residents comingtogether and crowdfunding a system on theirown building. As in the neighbour solar supplymodel above, smart meters are generallyrequired in every apartment to accuratelymeasure and bill for the solar electricity.
• Multiple technically separate solar PVsystems – Each participating apartment gets aseparate installation on the roof of the building.This works best with new build residentialbuildings as it can then be incorporated into thedesign of the building. Every apartment has thefreedom to choose their own utility for theresidual power supply and export of excesssolar electricity. The disadvantage here is thatthis increases the investment costs per kWpsignificantly, and can require the installation ofa new direct wire. This model has been used inAustria in a small number of cases as it is theonly way of getting around the restrictive currentregulatory framework on multi-family buildings.
• District power – The whole building is a unifiedgroup of consumers and has one commonsupply contract, similar to district heatingsystems. In Turkey residents of a multi-familybuilding have the option to ‘unite theirconsumption’ and appoint a person with full
power of attorney to act as legal representativewhen negotiating the installation of a PV systemand supply contract. In the UK this is commonin new build multi-family residential buildings. Inbuildings that have district heating as well as‘district power’ excess solar electricity can ifnecessary be used to heat hot water which canbring self-consumption to almost 100%.
• Estimated billing – The investment cost is splitbetween the apartments and the existing‘traditional’ electricity meters are used to estimaterather than measure solar consumption in eachflat. Some providers take an even simpler attitudeand allocate the value of self-consumedelectricity proportionally to the number of peoplein each household. The disadvantage of thissystem is that this can lead to a grossly unfairallocation of costs and benefits.
Overall this is a challenging segment but the adventof new business models such as on-site direct wiremini PPAs could transform this market segment.The key barriers are regulatory in nature, many ofthem unintentional as they are a legacy of how thedistribution grid and metering system was originallyset up. 1.2.2.1 Social housing
Social housing,14 which includes both single-familyand multi-family homes, should be consideredseparately to other residential segments.
The big advantage for social housing providerswhen it comes to solar is that they have low costsof capital by virtue of receiving public support andtheir long time horizons. In France and Germanysocial housing receives direct subsidies andsubsidised loans. In the Netherlands the segmentreceives dedicated guarantees for renovationprojects and mortgage-based loans.
Social housing units also tend to undergo majorrenovation, which can reduce solar installationcosts (cost of scaffolding and roof access alreadycovered). Social housing providers can alsoachieve economies of scale by renovating (andinstalling PV on) hundreds of units in one go.
There are two main drivers for the use of photovoltaicpanels within the social housing sector. The first isthe economic driver – the return on investment forthe housing association. This can be from the sale ofthe power to the grid or the sale of the power to thetenants at a price lower than the retail price.
14 Although there is no official definition across the EU social housing isunderstood as rental residential housing provided at sub-market pricesand allocated according to specific rules rather than via the open market.
18
EU-WIDE IMPLEMENTATION GUIDELINE The second driver of solar on social housing is
energy performance of building requirements. Article9 of the 2010 Energy Performance of BuildingsDirective15 states that new buildings owned oroccupied by public authorities have to meet thenearly zero-energy building standard two yearsearlier than the rest of the new build stock i.e. in2018 rather than 2020. In most cases this will involvehigh levels of insulation and on-site renewables likesolar PV, solar thermal, heat pumps, biomass,combined heat and power and storage.
The disadvantage in the social housing applicationsegment, which is always rented accommodation,are the same as in rented single family homes orrented multi-family homes. These are discussed inSections 1.2.1 and 1.2.2 above.
Finally, research has shown that it is important toraise awareness of the PV system among thesocial housing tenants, as often the tenants areunaware of the solar PV system. This allows thetenants to change their behaviour and try and shiftas much electricity consumption as possible todaylight hours and the middle of the day.16 Thisthen translates into cost savings for the family orfor the housing provider, which then directly orindirectly passes the savings on to the tenants.
An example of the economies of scale that can beachieved in social housing is the energy jump orEnergiesprong programme in the Netherlands. Thisinitiative is undertaking the wholesale renovation ofthousands of social housing properties, including asolar roof, electrification of cooking equipment andspace heating and a highly efficient wall envelope. Inreturn the tenant pays a fixed monthly payment ofapproximately 160 EUR for energy services or a pre-specified comfort level, completely replacing theprevious utility bills, and saving tenants a lot of money.
1.2.2.2 New build segment
Integrating solar PV into a building as it is beingbuilt is in some ways a separate PV segment toretrofitting the technology on existing buildings. Thestakeholder here is the developer and constructioncompanies rather than the occupiers or owners ofthe buildings. This applies both to the residentialand non-residential building mounted segments.Generally speaking the driver for PV in thissegment is building regulations. It is important tonote also that when solar is sold as an add-on toan apartment in a new build development providers
have seen a higher take-up rate than when a solarsystem is offered to residents of an existingbuilding.17 This is an argument for regulation andincentives for solar on new build housing.
1.2.3 Shopping centres, office buildingsand other commercial buildings
This application segment can also be divided intobuildings that have one single occupier and thosethat have multiple occupiers.
The advantage of solar projects on shoppingcentres is that this segment has high electricitydemand and can achieve high solar self-consumption rates of up to 90%.
In some EU member states shopping centres aresubject to specific building regulations. In Spain, asof 2009 all new build shopping centres andentertainment centres bigger than 5,000m2 aremandated by law to meet a certain minimum oftheir power consumption with on-site solar PV. Theminimum capacity of the system is calculated by aformula which takes into account the total buildingfloor space and area to be air conditioned.
Office buildings similarly have the advantage thatpeak demand is generally during office hours andtherefore times of peak solar generation. Otherexamples of commercial buildings that are ideal forsolar are supermarkets, warehouses, cool stores,hotels and data centres. Almost all of these havehigh air conditioning or refrigeration loads. The loadcurve of cooling is an excellent match for PV’sgeneration profile. Solar car park canopies are alsoan ideal option for big shopping centres,supermarkets and office buildings (although couldin theory be used in any building mountedapplication segment).
15 Directive 2010/31/EU of the European Parliament and of the Councilof 19 May 2010 on the energy performance of buildings (recast).Available here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:153:0013:0035:EN:PDF.
16 Research by Changeworks in social housing in the UK, moreinformation available here: http://www.changeworks.org.uk/case-studies/researching-the-effectiveness-of-solar-photovoltaic-panels-in-social-housing
17 See national PV Financing Implementation Guidelines. Available here:http://www.pv-financing.eu/implementation-guidelines/.
19
1. INTRODUCTIONThe disadvantage of solar projects on shopping
centres or multi-occupancy office buildings is,again, the large number of sub-tenants. Howeverthis can be overcome in shopping centres thanksto the high levels of power demand from communalareas, meaning that the solar system can pay foritself based on the communal power demandalone. Multi-tenant office buildings often providetenancy contracts that include energy serviceswhich overcome the landlord/tenant dilemma.
The outlook for solar on shopping centres, officebuildings and other commercial buildings ispositive, with Power Purchase Agreements beingthe most promising business model.
In France 62% of big food retailers are keen to investin a solar self-consumption solution.18 It is importantto note that this market will be primarily a retrofitmarket, as new build large retail units are rare.
1.2.4 Public and educational buildings
The advantage of solar PV installations on publicand educational buildings is that like the socialhousing sector, public authorities have long timehorizons and very low costs of capital.
As with social housing, public authorities aresubject to more stringent energy performancestandards than in the private sector, creating anadditional driver for solar PV.
Hospitals are public buildings in many memberstates and are a key target market for solar, due tohigh round-the-clock power consumption. Theyalso have a large component of demand thatrequires “uninterruptible power supply” i.e. life-support systems or ongoing surgery that needelectricity to continue even during a power cut.Solar systems can be designed to interact withexisting back-up diesel generators and batterystorage units to contribute to this.
However there are also disadvantages. Schoolsand other educational buildings have low demandduring weekends and holidays which leads tolow(er) overall self-consumption rates - in Germany
this is estimated at 75%. A fair price for excessexported electricity is therefore critical in thisapplication segment.
Crowdfunding can be a good financing mechanismfor public and educational buildings due to the rolethese buildings play in the community.
1.2.5 Industrial buildings, businessparks and ground-mounted solar farms
1.2.5.1 Business parks and industrial buildings
Industrial buildings often have high power demanddue to industrial processes. This makes them idealcustomers for solar electricity supply.
An important factor in the industrial solar segmentis property ownership. Countries where small andmedium sized industrial buildings are generallyowner-occupied, such as the Mittelstand inGermany, have higher incentives to install PV.These businesses are often family owned, have along-term focus and strong social responsibility.
On the other hand countries where small andmedium sized businesses tend to rent theirbuildings, as is the case in the UK and France,need more innovative financial solutions toovercome the landlord/tenant dilemma.
In most Member States the industrial sector hasaccess to low electricity prices which acts as adisincentive to investing in solar. In 11 memberstates industrial users benefit from regulated end-user prices.19 In Germany and Austria solarstruggles to compete with the retail prices alreadyon offer in the industrial sector. The stark differencebetween residential and industrial prices can beseen in Figure 7.
18 Membership survey of the French large-scale retailers association orl’Association technique de la grande distribution (PERIFEM).
19 Agency for the Cooperation of European Energy Regulators “ACERMarket Monitoring Report 2015”, November 2015, p. 10. Available here:http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER_Market_Monitoring_Report_2015.pdf
20
EU-WIDE IMPLEMENTATION GUIDELINE
The dominant business models in this segment areself-consumption and PPAs.
1.2.5.2 Ground-mounted solar farms or parks
The solar farm application segment represents onethird of total solar deployment so far across theEU21 (Figure 8).
The advantage of solar farms is that it is muchsimpler from a legal perspective than roof-mountedPV. Rights issues are often simpler andstandardised contracts can be applied in a one sizefits all way. The only thing that can be morecomplicated is getting planning permission from thelocal municipality.
20 Agency for the Cooperation of European Energy Regulators “ACERMarket Monitoring Report 2015”, November 2015, p. 10. Available here:http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER_Market_Monitoring_Report_2015.pdf
21 SolarPower Europe “Global Market Outlook for solar power 2016-2020”, June 2016. Full report available here:http://www.solarpowereurope.org/insights/global-market-outllook/
Figure 7. Electricity and gas post tax price trends for household and industrial customers in Europe, Eurocents/kWh (ACER)20
Ele
ctri
city
pri
ce (
euro
cen
t/kW
h) G
as price (eu
ro cen
t/kWh
)
16
22
12
14
18
20
10
5
8
3
4
6
7
22008 2009 2010 2011 2012 2013 2014
Electricity HH prices
Gas HH prices
Electricity IND prices
Gas IND prices
21
1. INTRODUCTION
Furthermore in some markets LCOEs for groundmount are lower than for roof-mounted solar.
Finally, and critically, solar farms are less risky forinvestors because they are built to inject into thegrid and therefore there will always be a route-to-market for the electricity the plant generates. (Thisis not necessarily the case for a rooftop system ona building that is vacant and doesn’t have a directgrid connection – see Section 2.2 for more.)
The disadvantage is that in some Member Statesthe regulatory framework and support schemediscourages ground-mounted solar for land-usereasons. France for example encouragesdevelopers to focus on brownfield land and rooftopprojects. Austria only subsidises rooftop solar.
These installations are almost exclusively designedfor export to the grid, even if the power is then re-sold through an intermediary to a corporate powerconsumer. Low wholesale prices and reducingsupport schemes however mean that in manycases the business model for ground-mount solarfarms could be challenging over the next few years.
Figure 8. Proportion of EU cumulative solar PVinstalled capacity by segment (SolarPower Europe)
Rooftop
LEGEND
Utility/Ground mounted
© AluPlusS
olar
The common profitability drivers across the EU arelisted in this section, and the key drivers aresummarised in Figure 9.
2.1. PROFITABILITY DRIVERS FOR FINANCING,INVESTMENT & DEPLOYMENT
22
© Sunvie
The seven national implementation guidelinescompiled as part of the PV FINANCING projecthave identified a number of common profitability
drivers and barriers to financing and deploymentacross the EU.
2. PROFITABILITY DRIVERS & BARRIERS ACROSS THE EU
© Urbasolar
23
2. POLICY DRIVERS AND BARRIERS ACROSS THE EU
• Electricity prices:High retail or wholesale pricesare the main driver when building a businesscase for solar PV. If the solar LCOE is lower thanthe retail or wholesale electricity price, then solarcan be competitive. The map in Figure 4 showsan estimation of where this is already the case inEurope. It is important to also have a reliableforecast of future prices over the 20 years of theproject, in addition to data on current prices.
A main driver for solar projects is how it caninsure or hedge against future price increases.More and more solar systems are being sold onthis basis – as a way of reducing the risk ofrising costs in the future. On the whole retailelectricity prices in the EU are on the high sidecompared to other OECD countries,22 althoughthere are big variations within the EU.23
Bulgaria, Hungary and Lithuania have very lowretail power prices, whereas Denmark andGermany have high prices.24 In the wholesaleelectricity market the last ten years has seenprices decline 35-45% on the major Europeanwholesale electricity benchmarks.25 Asdiscussed above, this undermines the businesscase for large-scale ground mount solar PV.
22 For USA 0.1129EUR/kWh fromhttps://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a. Tukey 0.12EUR/kWh from http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Electricity_prices_for_household_consumers,_in_2015_sem_2_(EUR_kWh).png. This also is shown in research doneby FactCheckEU among other sources:http://factcheckeu.org/factchecks/show/620/elzbieta-bienkowska
23 Agency for the Cooperation of European Energy Regulators “ACER MarketMonitoring Report 2015”, November 2015, Figure 4, p.11. Available here:http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER_Market_Monitoring_Report_2015.pdf
24 Eurostat energy statistics. Available here:http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Electricity_prices_for_household_consumers,_in_2015_sem_2_(EUR_kWh).png
25 European Commission, “Communication on energy prices and costs inEurope”, 2014. Available here:https://ec.europa.eu/energy/sites/ener/files/documents/20140122_communication_energy_prices.pdf
Figure 9. Key profitability drivers for solar PV projects across Europe
PROFITABILITYDRIVERS
Costof capital
Export price and support
schemes
Self-consumptionrate
Grid servicesrevenues
Electricityprices
Irradiation and system
costs
P
24
EU-WIDE IMPLEMENTATION GUIDELINE • Export price or price for excess electricity: This
is the amount paid, if at all, for electricity fed intothe grid. In some countries this is not remuneratedat all and therefore has a price of zero. In othercountries it is given a price similar to the wholesaleprice of electricity or higher, in the form of an exporttariff or Feed-in Tariff. In Austria there is asettlement centre for renewable energy which hasto by law purchase excess electricity at a pre-set(low) price. Other Austrian utilities can offer slightlyhigher prices for export electricity, as a way ofenticing the power consumer to buy their residualelectricity from them. In Spain if a solar array isself-owned the consumer does not receiveanything for the excess electricity injected into thegrid. For more information on Spain see Annex VII.
• Cost of capital: This varies enormously acrossthe EU depending on the country, applicationsegment and financing scheme. It is broadlyspeaking a measure of the risk involved in theproject – and often reflects the political risk offuture changes in the regulatory framework. Assaid in the introduction, capital costs account forbetween a quarter and third of solar LCOEs.The cost of financing is an absolutely criticaldriver to whether or not a project is economic.
• Solar irradiation: The solar irradiation, or levelof sunlight, makes a significant difference to theoutput and therefore rate of return of a solar PVsystem. Solar irradiation in the EU ranges from750kWh/kWp in northern Scandinavia andScotland to 1650kWh/kWp in southern Spain,Sicily and Cyprus.26
• Self-consumption rate: For self-consumptionbusiness models, the level and pattern of powerdemand of the power consumer and the extentto which that matches the pattern of solar PVpower generation is a key profitability driver. Thisis also affected by system sizing and can rangefrom 20% to 100% depending on the powerconsumer. East-west systems can also beconsidered to increase the self-consumption rate.
• Daily electricity price variation: For powerconsumers such as industrial businesses thatare subject to time of use tariffs or dynamicpricing, it is important to factor in at what time ofday peak prices generally occur. Hot climatessuch as in Spain see summertime peak pricesbetween 1pm and 7pm Monday to Friday, whenthe air conditioning load is at its highest. This isa good match with peak solar generation.
• Building standards: Many countries havemandatory regulations and standards for newand existing buildings that incentivise solar.Examples are:
• In Spain new build shopping centres musthave a minimum amount of solar PV (seeSection 1.2.3).
• In Vienna all new build commercial buildingsmust have have a ‘renewable energy roof’ inorder to gain a building permit.27
• In Italy energy intensive industries are requiredto perform an energy audit every four years orput in place an energy management scheme.
• Many other EU countries have buildingregulations that incentivise solar PV, drivenin part by the 2010 EU Energy Performanceof Buildings Directive.28
• System costs: This is the cost of the solar PVmodules, inverter, balance of systems andinstallation (capex) and operations andmaintenance (opex). The bigger the localmarket size and experience the greater theeconomies of scale that can be achieved on e.g.shipping costs which bring down the systemcosts of an installation.
• Support schemes: All EU member statescurrently have some form of a renewable supportscheme in place, in the form of feed-in tariffs, feed-in premiums, quotas, tradeable green certificates,net metering, tax incentives or investment grants.29
However as the cost of solar PV modules falls thelevel of these support schemes are being reduced.It is important that this reduction of feed-in tariffsis done in a gradual and proportionate way. Aswas said above this makes solar PV projectrevenues more exposed to market prices andvolatility, which can increase their risk profile.
26 European Commission Joint Research Centre, “Map of Photovoltaic SolarElectricity Potential in European Countries”, 2006.http://re.jrc.ec.europa.eu/pvgis/download/PVGIS-EuropeSolarPotential.pdf
27 There were similar proposals in France for all new build commercialbuildings, and supermarkets in particular, in specified zones to eitherhave a solar PV installation and/or a plant based green roof. Howeverthis proposal was not enacted in the end.
28 Directive 2010/31/EU of the European Parliament and of the Council of19 May 2010 on the energy performance of buildings. Available here:http://eur-lex.europa.eu/legal-content/EN/ALL/;ELX_SESSIONID=FZMjThLLzfxmmMCQGp2Y1s2d3TjwtD8QS3pqdkhXZbwqGwlgY9KN!2064651424?uri=CELEX:32010L0031
29 European Commission, Staff Working Document on guidance for thedesign of renewables support schemes, November 2013. Available here:https://ec.europa.eu/energy/sites/ener/files/com_2013_public_intervention_swd04_en.pdf
25
2. PROFITABILITY DRIVERS & BARRIERS ACROSS THE EU• Grid services revenues: This is the extent to
which solar can provide and be compensated forparticipating in the balancing market and ancillaryservices to the grid such as reactive power,frequency response and voltage control.Additionally solar can help consumers avoid peakand locational grid charges. More information onthe revenues from ancillary services available inthe UK are detailed in Annex IX.
• Green image: The addition of a solar array to abuilding can make it more attractive to the endcustomer. This is a significant motivationespecially in the domestic market, whereinvestment decisions are not as “rational” as inthe commercial market. An example is the newbuild Gran Plaza 2 shopping centre in Spain,where the large solar roof and green buildingimage in the design proposal was a decisivecriterion in winning the tender for the project.
More broadly, a real breakthrough in thedomestic solar market will occur when solar isno longer viewed as a financial investment butas a sought-after desirable aspirationalconsumer good that people want on anemotional level, in the same way that they investin a new kitchen or bathroom. The forthcomingTesla SolarCity solar roofing product, which willintegrate a Powerwall storage unit and a Teslaelectric vehicle charging device into oneoffering, is an example of this. The aesthetics ofdomestic solar will therefore become more andmore important, as will the marketing of theproduct. In multi-family residential buildings, weare already starting to see more of an emphasison solar being marketed as a high-quality locallysourced electricity “product” rather than justcheap(er) electricity.
The PV FINANCING national guidelines also identifieda number of common barriers across the EU.
• Risk of power consumer changing, re-locatingor going bankrupt: A major barrier to building-mounted commercial solar PPAs across the EUis the perceived risk that the power consumer inthe building could change or cease to exist. Thiscould occur if the business that currently owns orrents the building either re-locates or goesbankrupt. Alternatively, the power consumer couldchange its business practices which couldsignificantly reduce or change the pattern ofpower demand at the site. Ways to overcome thisbarrier are displayed in Figure 10 and include:
• Conducting thorough due diligence on allpotential power consumers – although thecost of this can be substantial.
• Prioritising sites and power consumers thatcould easily be replaced if the business was tomove or go bankrupt. For example, it isrelatively easy to find a new tenant for awarehouse, more difficult for a steel plant.
There are examples of the new owner oroccupier taking on a solar PPA liability togetherwith the purchase or rent of a building, but thisis not easy to guarantee and could lead to acomplex re-negotiation of the contract.
• Securing a direct grid connection and a back-up wholesale PPA so that if anything goeswrong with the power consumer there isalways a minimum level of back-up revenueavailable from the wholesale market.
• Ensuring that the PPA contract is watertightand that there are no loopholes the powerconsumer could use at a later date to changethe agreed price or stop paying altogether.
• Including a “take or pay” clause in a PPAcontract to force the power consumer to payfor power even if it does not use it. Thedisadvantage here is that this means thepower consumer has no incentive tointroduce energy efficiency improvementsand reduce energy demand.
2.2. BARRIERS TO FINANCING, INVESTMENTAND DEPLOYMENT
26
EU-WIDE IMPLEMENTATION GUIDELINE
• Ensuring that the “lift and shift” option (i.e.removing the PV system from the roof andtransferring it elsewhere) is a viable optionas a last resort, even if in practice it is only atheoretical option to reassure investors.
• Arranging for the government to provide asafety net mechanism by which the risk of astranded asset would be minimised.
• Political risk: This is where regulatory changealters or abolishes the revenue stream of aproject. The worst case scenario in this case isretroactive regulatory change, which hasoccurred in the past for solar in Spain, theCzech Republic, Bulgaria, Greece and Italy.30
This history of retroactive measures in thesecountries has greatly increased the cost ofcapital in these markets since then which haslargely cancelled out the cost reduction in PVmodules in recent years.
Ways to overcome this barrier include:
• Including a change in law clause in contractsso that if there is a change in law the contractcan be re-priced to ensure the investor is nobetter and no worse off.
• Securing EU-wide investor protection rightsand a guarantee from member states thatthey will not implement retroactive measuresin EU legislation. This is something that iscurrently being discussed at EU level.
• Quality risks: Investors have to be careful of low-quality modules that do not perform to standard.Poor quality products provide lower electricityoutput which leads to lower revenues. Equally, alack of confidence in installation businesses canbe a barrier in residential solar markets.
30 Keep on Track project “Policy paper on retrospective changes to RESlegislation and national moratoria”, May 2013. Available here:http://www.keepontrack.eu/contents/publicationsbiannualnationalpolicyupdatesversions/kot-policy-paper-on-retrospective-changes-to-res-support.pdf
Figure 10. Possible steps to overcome offtaker risks e.g. bankrupty or re-location
Due diligence
1. Replacable power consumers
2. Direct grid connection and wholesale PPA
3. Watertight contract with take or pay clause
4. Lift and shift option
5. Government safety net
6.
27
2. PROFITABILITY DRIVERS & BARRIERS ACROSS THE EU• Taxes and charges: Significant taxes and
charges on self-consumed or exported solarelectricity can act as a major barrier toinvestment. For example, in Austria if an entityconsumes more than 25,000 kWh/year thenself-consumed power is taxed at0.015EUR/kWh. In Spain under certain modelsthe export price is taxed at 7%. In Germany,systems above 10 kW are partially exposed tothe payment of the EEG surcharge. Taxes canalso be levied on the system as a whole insteadof the electricity produced, as is the case forlocal business property taxes or business ratesin the UK. There is currently a proposal toincrease the business rates on self-consumptionsystems eightfold as of 2017 in the UK.
• Minimum investment limits: Large-scale solarprojects can often benefit from project finance.However low cost of capital funding providerssuch as project finance banks, yieldcos, pensionfunds and insurance funds have minimuminvestment limits which even larger solarprojects cannot meet. This can range from25,000 EUR for some Austrian investors to25million EUR in the case of the EuropeanInvestment Bank and some major banks in theUK. A way to overcome this is for developers andEngineering, Procurement and Construction(EPC) firms to bundle multiple projects together,although this brings considerable legalchallenges. It is hoped that such bundling ofprojects will be eligible for funding within theEuropean Fund for Strategic Investments, a jointinitiative of the European Commission and theEuropean Investment Bank.
• Definition of public grid within a building: Inmany countries power cannot be transferred andsold from the roof of a building to e.g. apartmentswithin that building because from a legalperspective it is considered to have used thepublic grid and therefore (a) is not legallypermitted or (b) subject to grid charging. InGermany and soon Austria however this hasbeen re-defined and the power is not technicallyconsidered to have used the public grid and notsubject to grid charges. This best practice shouldbe spread elsewhere across Europe in order tofacilitate solar on multiple occupancy buildings.
• Legal rights issues: Roof-mounted projects inparticular can have complex legal rights issues andaccompanying legal fees that can make a projectuneconomic, especially in the case of smallerprojects. In some cases the building owner,occupier, tenants, sub-tenants and debt providersall require separate contract negotiations. Ways toovercome this barrier include:
• Introducing standard contracts that becomewidely accepted in that market. Possibleexamples are provided by the PVFINANCING project template contracts,listed in Annex I. The InternationalRenewable Energy Agency (IRENA) is alsoplanning on publishing such templatecontracts in the near future.
• Risk of curtailment: In markets where thereare high levels of grid congestion and a lack offlexibility, the risk of a solar generating assetbeing curtailed and what kind of compensationthe asset owner will receive if curtailment doestake place can have a major impact on thebankability of a project. Ways of overcoming thisbarrier include:
• Guaranteeing priority dispatch and access ofrenewables in legislation except when thereis a threat to security of supply. This iscurrently the case in the 2009 EU RenewableEnergy Directive.31
• a fair and transparent system for thecompensation of curtailment
• investments in system flexibility to allow forbetter integration of solar electricity.
31 Directive 2009/28/EC of the European Parliament and of the Councilof 23 April 2009 on the promotion of the use of energy from renewablesources. Available here: http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32009L0028
28
© evoenergy
There are a number of different financingschemes that can be used to raise money forsolar PV. The main categories are self-funding,debt, equity, mezzanine financing, leasing and crowdfunding.
These different financing schemes can ofcourse be combined in various ways, anddifferent financing schemes will be appropriateat different stages of a project, as shown inFigure 11. A project can be re-financed severaltimes during an installation’s lifetime.
3. FINANCING SCHEMESACROSS THE EU
© SBC Renew
ables
29
3. FINANCING SCHEMES ACROSS THE EU
For utility-scale projects, the different phases are:
• Project development: High-risk capital providerssuch as hedge funds and private equity willfinance this stage, as the risk of any single projectfailing at this stage is high. It is rare to see debtfinancing at this stage, as besides the high riskoften the project build time is shorter than thetime required by a bank to fully assess a project.Crowdfunding and in particular cooperativefinancing can often be used at this stage.
• Construction: The risk profile lessens during thisphase, and some banks that have higher riskappetites can consider lending to projects at thisstage. Bridging facility loans are also availableto help tide a project over from construction tooperation. Some project finance banks can bewilling to step in at this stage.
• Operational but with EPC O&M: In this phaserisk profile falls again. This is the period (e.g.first 2-5 years of system liftetime) during whichthe EPC is responsible for operations andmaintenance in order to correct any constructionor manufacturing faults.
• Operational: This is the very low-risk operationalperiod which provides very stable, steadyreturns. This would be an ideal time for green orclimate bonds, yieldcos, pension funds orinsurance funds to come in. Some forms ofcrowdfunding such as mini-bonds would comeit at this stage to refinance an installation.
Figure 11. Stages of utility-scale ground mount solar PV and corresponding sources of financing
• Hedge funds
• Private equity
• Crowdfunding
DEVELOPMENT
REDUCING RISK
• High-risk banks
• Bridging facilityloans
• Project finance
CONSTRUCTION
• Low-risk banks
• Project finance
OPERATION (EPC O&M)
• Yieldcos
• Pension funds
• Insurance funds
• Climate bonds andmini-bonds
OPERATION
30
EU-WIDE IMPLEMENTATION GUIDELINE
32 Solar Bankability project. More information available here:http://www.solarbankability.org/home.html.
33 This is also known as a Special Purpose Entity (SPE), Single PurposeVehicle (SPV) or Financial Vehicle Corporation (FVC).
Figure 12 shows the technical risk profile of solarPV and illustrates why it makes sense to re-financeafter two or five years when the risk profiledramatically reduces.
It is important also to note that in the PPA andcrowdfunding business models a project is usuallyits own legal entity i.e. a Special Purpose Vehicle(SPV),33 which makes it much easier to sell and re-finance a project. Many financing schemes requirethis as it ring-fences the project. The SPV usuallybears the name of the location of the site and canbe a limited partnership, trust, corporation, limitedliability corporation or other legal entity.
Most of the financing schemes below require theinvolvement of banks and other financial institutions.This requires banks to build up sufficient know-howabout solar and the various solar business models tobe able to assess projects. Although many banksacross the EU already have this knowledge, ingeneral banks are often unwilling to build up thisknow-how unless they are confident of a significantproject pipeline in that country. This can lead to achicken and egg problem – solar projects cannot goahead due to lack of financing and financial
institutions will not lend to solar projects due to a lackof solar projects. Big investors often just need to getover the hurdle of the first transaction in any particulartechnology. Once they are over that hurdle significantamounts of capital can quickly become available.
An example is the Soleil du Grand Ouest project inFrance, where only one bank in the whole of Francewas willing to lend to the project. However in theGerman and UK markets, Deutsche Bank, MaquarieGroup and National Australia Bank are examples ofbanks who have built up in-house teams ofengineers and technicians who will test and approveall the components that are to be used in the project.
Below each financing scheme is examined in detail,including variants of the main financing schemes.
Figure 12. Technical risk profile of a typical solar PV installation (Solar Bankability32)C
om
mis
sio
nin
g
Commissioning check
Year
INFANT PHASE MID-LIFE PHASE WEAR-OUT PHASE
Risk Occurance
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Gu
aran
tee
Lev
el 1
Gu
aran
tee
Lev
el 2
War
ran
ty
End of Warrenty check Mid-life advanced inspection
31
3. FINANCING SCHEMES ACROSS THE EU
34 This financing scheme is also referred to as self-funded equity.
35 If you assume that the word ‘financing’ refers to the provision of capitalto another entity, self-funding is not technically a form of financing.However it is a way of raising money for solar PV, so is included here.
Figure 13. Types of debt commonly used in solar PV sector across Europe
Self-funding is the simplest financing scheme,35
where the system owner, usually also the powerconsumer, uses his/her own cash to pay for thesystem outright. Over the last ten years of solar PVdevelopment in Europe, much of which has beendriven by support schemes, this has been the most
common financing scheme in the smaller scaleresidential and commercial application segments.
It is important to not rely entirely on this however asself-funding limits solar projects to sites and ownerswho have large amounts of cash readily available.
3.1. SELF-FUNDING34
Debt financing, which comes in many differentforms, is where the owner borrows part of themoney needed to pay for the solar PV system – the
different types of debt are shown in Figure 13 anddescribed in detail below. Most projects arefinanced by a combination of debt and equity.
3.2. DEBT
DEBT
On balance sheet
Project finance
Green bonds
Promotional loans
Loans
Revolving credit and
bridging loans
Institutional tradable notes
and listed bonds
32
EU-WIDE IMPLEMENTATION GUIDELINE 3.2.1 Loans
Personal loans are available for solar in the sameway that they are used to purchase a car or pay forbuilding renovation. Indeed most existing buildingrenovation loans can also be used for solar panelinstallations. Banks will look at the owner’s debt-to-income ratio when deciding how much to lend andat what interest rate. These loans can be securedon the owner’s home or other assets. Solar loanscan also be unsecured although this of courseattracts a higher interest rate.
The terms of the loan usually depend more on thecreditworthiness of the owner than the details of thesolar PV system (unlike in project finance belowwhere the terms are based on the project revenues).This means that often is it simpler and more effectiveif the owner applies to his/her usual bank for a loan,as that bank already knows and has a relationshipwith that customer, rather than shopping around andreceiving multiple quotes from different banks.
In Belgium it is estimated that 70% of theresidential systems are paid for with personal loansof this kind. AlphaCredit, a subsidiary of BNPParibas, are an example of a bank that offerspersonal solar loans in Belgium. Residentialinstallations in Turkey are sometimes funded byeco or green bank loans.
3.2.2 Project finance
Project finance is debt financing where the cashflow generated by the project, usually held within aSpecial Purpose Vehicle, is used to repay the loan.Project finance is generally used for large-scaleinfrastructure investments.
Project finance banks will base the financingamount on the available cash flows and the abilityof the project to service its debt. A certain equitycontribution is expected to cover the remainingamount. This means the project owner will have tocombine project finance with another form offinancing to allow the project to go ahead.
Project finance banks, together with the pensionfunds and yieldcos, require stable long-termrevenues with a low risk profile, and thereforeusually are only interested in re-financingoperational projects. These low-risk investors alsohave the most stringent due diligence requirements.
Project finance banks are always very careful aboutguarantees and covenants,36 as in the event of aproject failure they risk not getting their money back.The bank will also usually establish a referenceDebt Service Coverage Ratio (DSCR) that needs tobe broadly maintained. If the client has a low DSCRfor an extended period of time this can result in thecovenants of the contract being enforced.
3.2.3 On balance sheet
This is where a project developer, EPC orcorporate consumer funds a project by borrowingagainst the company’s balance sheet. The bank orfinancial institution lends funds based on thecreditworthiness and track record of the borrower.
3.2.4 Revolving credit facilities and bridging facilities
A revolving credit facility is where a bank or investorlends to a specific company on the basis of itsrelationship with that company to do a specifictechnology, and where the borrower can drawdown,repay and redraw funds as and when it wishes. Itlends to a company as a whole, not a project. Anexample is Octopus Investments which financesLightsource Renewable Energy in the UK and Ireland.
A bridging facility is a short-term loan designed tohelp a developer bridge the gap betweenconstruction and operation.
3.2.5 Institutional tradable notes and listed bonds
Tradable notes and listed bonds are debtinstruments which in many ways resemble projectfinance loans but can be bought and sold on asecondary market and can be split between severalproviders of finance. This is considerably morecomplex than more traditional financing schemessuch as project finance.
36 A covenant is a promise in any formal debt agreement that certainactivities will or will not be carried out.
33
3. FINANCING SCHEMES ACROSS THE EU3.2.6 Green bonds
This is where an investor lends a specified amountof money to a project or bundle of projects for a pre-defined amount of time at a pre-determined interestrate. The majority of green bonds are use ofproceeds bonds37 or asset-linked bonds.38 InGermany these are issued by Kreditanstalt fürWiederaufbau (KfW) via private banks, and theproceeds of these bonds finance their promotionalloans described in the section below.
3.2.7 Promotional loan
These are loans with good terms supplied by afinancial institution such as KfW, the publicinvestment bank in Germany, generally forpromoting particular public policy objectives suchas renewable energy.
37 Where the money is lent on the basis that it will be used for a specificpurpose.
38 Where the money is lent to a pot or portfolio that is then used to giveout loans to e.g. solar projects.
39 The definition of equity is where an investor has a share in a project,or ownership of the asset. Equity participants are less protected thandebt participants – i.e. the bank/lender would get its money first ifproject went bankrupt. That is part of why debt participants have lowercosts of capital.
A project can also be financed through equity39
where an investor gains part or whole ownership ofthe asset. Most projects are a combination of equityand debt. Equity shareholders can then receive aregular dividend or a share of the profits, but arealso more exposed if the project incurs losses. If aproject goes bad equity is used to cover losses.Only if all equity has been used does the projectdefault to debt financing.
Equity is riskier for an investor as compared to debtfinancing, and therefore requires a higher return oninvestment. Equity is a more expensive form offinancing than debt. Equity investors tend to preferhigh risk, high return investments, and will often getinvolved in projects during the development andconstruction phases.
Examples of equity participants in solar areinvestment funds, publically listed yieldcos, utilitiesand institutional investors. Some EPCs,manufacturers and corporate PPA off-takers alsouse their own balance sheets to fund projects.
Equity is often combined with debt, although theproportion depends on how the financial institutionjudges the creditworthiness of the project and thedebtor. In Germany the equity share required bybanks in order to lend has gone up from 20% to upto 40% depending on the size of the system, dueto the decreasing feed-in tariff revenues. The lowerthe proportion of equity to debt in a project thehigher the equity return.
3.3. EQUITY
34
EU-WIDE IMPLEMENTATION GUIDELINE
Mezzanine financing is a layer of financing betweendebt and equity in terms of seniority. It can also bethought of as a hybrid between the two. It can takethe form of unsecured debt or preferred shares. It ismore expensive than regular debt financing, butcheaper than equity so can be used to minimize theequity share and therefore the cost of capital overall.
Some forms of mezzanine financing give the lenderthe right to convert to an equity interest in thecompany in case of default, after other senior lendershave been paid. Mezzanine financing often requiresless due diligence than other types of financing.40
3.4. MEZZANINE FINANCING
Leasing is an innovative and very promisingfinancing scheme for solar PV. Here the solarleasing company designs, purchases and installs aPV system on a consumer’s roof and receives amonthly rent payment or leasing fee over a longperiod of time (10-20 years). In many countries thereis an option to buy the system at the end of thisperiod, making it akin to renting a house but with anoption to buy the house at the end of the contract.
In the leasing model the consumer or homeowneroperates the system and either self-consumes thefree electricity, or exports it back to the grid via anexport price or net metering mechanism.Importantly it is the consumer who is responsiblefor ensuring the system is properly maintained – ifsomething goes wrong it is his/her responsibility tofix it. If the solar PV installation stops working for amonth for example and no revenue is generated,the leasing fee will still be liable for that month.
Leasing always involves three contracts: a rooftopaccess contract, a leasing contract and amaintenance contract. The maintenance contractcan be between the lessee e.g. homeowner and athird party service provider.
There are three alternative ways of setting up aleasing business model:
1. A utility, solar installer or investor leases thesystem to the building owner.
2. A utility or similar leases the solar installation tothe tenant, but signs a contract with the landlordfor permission to use the roof space.
3. The building owner leases the system to thetenant.
In all cases the lessor finances the system througha combination of debt and equity.
Like other financing schemes the leasing modelavoids the up-front costs that are often a barrier todeployment for solar and spreads them over a longperiod of time. As long as the leasing fee is lessthan the savings and revenues, the consumerstarts saving money from day one of the project.Also, leasing schemes can often receive special taxtreatment which can be an advantage.
A disadvantage is that the situation can getcomplicated if the tenant or homeowner moveshome. Generally speaking the lease can betransferred to the new occupier. However thatdepends on (a) the new occupier agreeing to takeon the lease; (b) the new occupier being of a similarfinancial solvency or creditworthiness; and (c) thesolar leasing model being sufficiently wellunderstood that it does not put off potentialhomebuyers. In principle it should not be difficult toconvince the new occupier to take on the leasebecause it should lead to a net saving on electricitybills. Interestingly in Germany leasing often cannot
3.5. LEASING41
40 This and other definitions of financial concepts in this report havebeen adapted from Investopedia. For more details on mezzaninefinancing please see:http://www.investopedia.com/terms/m/mezzaninefinancing.asp.
41 Also referred to as ‘contracting’.
35
3. FINANCING SCHEMES ACROSS THE EUapply to a Building Integrated PV (BIPV) installation,
presumably as it would in theory be more expensiveto “lift and shift” i.e. move the installation elsewhere.
A potential barrier to the leasing financing schemeis that national property regulations need to allowfor a third party to own an asset that is fixed to theroof of a privately owned property. Mortgagelenders also have to be comfortable with the model.In the UK leasing can only be used in owner-occupied homes as opposed to rented homes. Asimilar model in the UK called the “rent a roof”scheme where a third party company installed solaron homeowners‘ roofs and in return provided thehomeowner with free solar electricity has in somecases caused problems with the re-sale of thehome at a later date.
Finally another issue is who is held responsible inthe case of the system causing damage or harm toa third party. In France there was a case when awind farm caused an accident and the lessor e.g.the bank was held ultimately responsible.
This model has become very popular in Germanyin applications where there is one single powerconsumer, partly because it is a way of not havingto pay surcharges such as the ErneuerbareEnergien Gesetz (EEG) within the currentregulatory framework. It is also used in the UnitedStates where SolarCity and SunRun are theleading providers. It is in theory possible undercertain self-consumption models in Spain but at thetime of writing is not thought to have been used yet.
3.4.1 Sale and lease back42
This is where an owner, often the developer, sellsthe project to an investor and then leases it backfrom that investor for small regular payments over along period of time. It is a way for companies to raisecapital from their existing assets to then re-invest inor finance other projects. Leaseback financingschemes can give the seller tax advantages.
42 This financing scheme is also known as ‘leaseback’ for short.
43 More information about crowdfunding for renewable energy isavailable from the ongoing CrowdFundRES project, available here:http://www.crowdfundres.eu/.
44 There are also quasi crowdfunding platforms such as Citizen Energythat simply redirect citizens to local projects, however these are notconsidered here.
Crowdfunding is a very promising solar financingscheme where a large number of people each putin small amounts of money into a scheme in orderto raise money for a PV project.43
Some forms of crowdfunding such as cooperativescan be both a business model and a financingscheme, and so cooperatives will also be coveredin detail in the business model section of this reportin Section 6 below.
Crowdfunding platforms provide financing in theform of loans, equity or grants, with equitycrowdfunding being the most common.44 Thedifferent types of crowdfunding are shown in Figure14. In equity crowdfunding the investors become
co-owners or shareholders in the project, alsoknown as shared ownership. This brings togethera large number of smaller private and non-professional investors that then have anexperienced investor – the crowdfunding platform– act as an intermediary for them.
Grant crowdfunding is very rare but has been usedon a small number of occasions where for exampleparents have helped finance solar PV on a school.
Crowdfunding is often combined with bank loans orequity and can help communicate a project to thelocal community, especially when local acceptanceis required. There are also often substantial taxbenefits to crowdfunded finance. It is alsosometimes used when a project might struggle toget other forms of financing, especially forinnovative and small-scale projects. Crowdfundingplatforms might have different due diligenceprocesses as compared to banks. It is therefore afinancing scheme that can provide finance to abroader range of projects and increase the number
3.6. CROWDFUNDING
36
EU-WIDE IMPLEMENTATION GUIDELINE
of projects that can go ahead. Crowdfunding oftenprovides more expensive capital than bank loansor equity funding.
Certain types of crowdfunding are generally abetter fit for bigger projects that have sufficientscale to bear the management costs as theplatform will often take a commission of 5-10% offunds raised.
Crowdfunding is popular in Germany, the UK andFrance. Examples of debt crowdfunding platformsare Abudance in the UK and Lumo in France.
3.6.1 Mini-bonds
Mini-bonds are a type of debt crowdfunding usuallyused to re-finance an existing installation. This is alow risk investment as the installation is alreadyoperational, and investors are asked to invest apre-determined amount of money and will receivea pre-determined interest rate in return. TheBig60million project in the UK is an example ofmini-bond refinancing.
3.6.2 Peer-to-peer lending
This is a form of debt crowdfunding, often done viainnovative online platforms. Like regularcrowdfunding peer-to-peer lending requires adetailed business plan, appraisals, financialstatements and details of the key people who aregoing to be leading the business. Examples are OpenEnergy and Mosaic in the United States. AbundanceInvestment offer a similar peer-to-peer investmentproduct in the UK with debentures and InnovativeFinance Individual Savings Accounts (ISAs).
Figure 14. Types of crowdfunding for solar PV
JOINT PURCHASING SCHEMES
DEBT EQUITY
MINIBONDS COOPERATIVES
PEER TO PEER LENDING
CROWD FUNDING
GRANTS
37
3. FINANCING SCHEMES ACROSS THE EU3.6.3 Cooperatives
Cooperatives are a form of equity crowdfunding,where the investor-members jointly own and run theproject and share out the proceeds of the project.They are profit-driven companies but allow membersto own shares in renewable projects, share the profitsof the projects through dividends and often get theirelectricity supply at a fair price from a local renewableenergy supplier instead of a big utility. Decisions aremade in a democratic manner within the members ofthe cooperative, with each member having an equalsay in the running of the organisation.
Cooperatives come in all sizes, and there areexamples of cooperatives with 60million EUR ofcapital and 100MW of generating capacity. Thereare approximately 6,500 renewable cooperativesacross the EU representing 650,000 EU citizens.Examples of energy coops are Ecopower inBelgium which has 50,000 members, Enercoop inFrance which has 40,000 members and the BristolEnergy Coop and Cooperative Energy in the UK.EWS in Germany also runs a local distribution grid.Som Energia is a leading cooperative in Spain.
The cooperative business model will be discussedin more detail in Section 6.
3.6.4 Joint purchasing schemes
Joint purchasing schemes are not exactly afinancing scheme but included here as they take asimilar approach to crowdfunding. In this case alarge number of consumers come together to jointlypurchase residential solar PV systems on theirhomes. The homeowners achieve a better priceper system due to their joint bargaining power andeconomies of scale for the installer. The scheme isusually run through a reversed auction. If thehouseholds participating in the joint purchasingscheme all live in the same neighbourhood, thisfurther reduces costs for the installer. Jointpurchasing schemes can also apply to residentialhouseholds securing electricity supply contracts,where a lower cost per kWh can be achieved. Anexample is the Essex Energy Switch or the MoneySaving Expert Cheap Energy Club in the UK, oriChooseR in the Netherlands, France and Belgium.
Solar could also be supplied and financed as partof a package of products and services. Solar canfor example be combined with:
• smart meters
• storage
• electric water heating devices
• devices to better manage electricityconsumption
• energy efficiency measures
• heat pumps
• electric vehicles
• Balance Responsible Party (BRP)45 services
• demand response aggregation services (i.e.ramping electricity demand up and down)
• purchase of excess electricity
• aggregator services to provide access to thewholesale and balancing markets
• a full energy service i.e. the provision of all typesof energy to the building with the aim ofachieving a certain comfort level instead ofcharging per kWh
3.7. FINANCING SOLAR IN COMBINATION WITHOTHER TECHNOLOGIES
45 BRPs are tasked with maintaining the balance between electricityinjected and withdrawn from the grid in a certain time frame e.g. 15minutes. BRPs can trade with other BRPs for e.g. the same orfollowing day. If there is an imbalance in their portfolio then animbalance tariff is applied.
38
EU-WIDE IMPLEMENTATION GUIDELINE Many industry commentators are predicting that the
pure-play solar sector is likely to transition more andmore into a solar+services provider. During the eraof high support schemes, the business model wasoften dictated by the support scheme and theinstaller merely supplied the labour andcomponents. Now that support schemes are beingreduced, developer-installers will likely have todeliver a whole energy solution within which solar isbut one part. In Italy, developers have found that itcan be easier to finance solar PV projects if they arecombined with energy efficiency projects. An
example of this is SolarCity in the United States,which is selling solar in combination with a NestLearning Thermostat to allow consumers to saveeven more electricity.48 Another is the Energiesprongsocial housing programme in the Netherlands,where the housing association invests in an in-depthrenovation of the property in the return for a fixedpayment for the provision of all energy servicesthereafter (see Section 1.2.2 for more details). TheDomus Energethica case study in Section 4.4.2 isanother example of an energy services solarbusiness model and financing scheme.
46 SolarCity in New Zealand is taking a different approach and offeringcustomers a free coffee machine with the purchase of a solar PV system.
© Groupem
ent photovoltaique du Luberon
39
© Transenergie
In this section we will look in detail at the self-consumption, Power Purchase Agreement,cooperative and virtual power plant businessmodels that are in use across Europe. Note thatthese business models should not be seen aseither/or options, but can be combined in
innovative ways. These can be combined withtraditional Feed-in Tariff based businessmodel. The neighbour solar supply or onsitedirect wire mini PPAs business model iscovered in section 1.2.2.2 on multi-familyresidential buildings.
BUSINESS MODELS IN EUROPE
The self-consumption business model, whichcould be given the fuller name of the self-consumption and self-ownership businessmodel, is defined as where the power consumer,investor and plant operator are the same entity.
This most often applies to a household,business or non-residential building. Ittherefore applies to all application segmentsdescribed in Section 1.2 apart from ground-mount solar farms, which are very rarelydesigned for self-consumption.
4. SELF-CONSUMPTIONBUSINESS MODEL
40
EU-WIDE IMPLEMENTATION GUIDELINE
The key point about self-consumption is that thepower consumer or building occupier aims toconsume as much solar power itself as possible asin so doing it displaces the electricity it would usuallyhave to buy in from the grid at high retail electricityprices. The model assumes that the retail price ofelectricity is higher than the export price for excesselectricity fed back into the grid, and that thereforethere is a financial incentive to self-consume. (Thereare some Member States where this does not apply– such as any country that has pure net metering andFrance and Turkey where the export price can behigher than the retail price. For more information onTurkey please see Annex V.) The self-consumptionmodel is usually defined as where there is only onepower consumer, and therefore that is the segmentwhere it is most used. However there are somevariants of self-consumption models with more thanone power consumer, see Section 4.2 below.
As can be seen in Figure 16, the Investor, Operatorand Power Consumer are the same entity in theself-consumption business model. The PowerConsumer contracts with an Engineering,Procurement and Construction (EPC) firm to buildthe system. If the system is self-funded there is noneed to contract with a finance provider but if thesystem is being financed by debt, equity or one ofthe other financing schemes described in Section3 then a contract needs to be signed and the capitalrepaid. Excess electricity is sold to the grid for aprice (often referred to as the feed-in tariff or exporttariff). The Power Consumer then gets its residualelectricity from an electricity provider and contractswith an Operations and Maintenance (O&M)provider for maintenance, if necessary.
All the financing schemes outlined in Section 3 abovecan be used to finance self-consumption, althoughthe most common are self-funding, debt and leasing.
Figure 15. Typical self-consumption business model
EPC
InvestmentCapex
EPCContract
Electricity Provider
Contract
Payouts
Finance (if any)Service Contract
Service Fee Opex
O & M Service
GridContract
Feed-inTariff
ExcessUtility/Grid Operator
PowerPrice
SupplyContract
INVESTOR
OPERATOR
POWER CONSUMER
Cashflow
Powerflow
Contracts
41
4. SELF-CONSUMPTION BUSINESS MODEL
47 Also known as advanced time-of-use tariffs.
There are major variations in the regulatoryframework for self-consumption across Europe,with some countries heavily incentivising it andothers doing the opposite. It is widely expected thatthe revised EU Renewable Energy Directive due tobe finalised in the coming years will contain a newchapter on self-consumption, self-generation andthe concept of ‘prosumers’ – electricity consumerswho both produce and consume electricity.
There are a number of key determining regulatoryfactors in a self-consumption business model.
The first key factor is which of the three componentsof the retail electricity bill can be saved by self-generating and self-consuming electricity: thewholesale electricity price, grid charges and taxes. Inmany countries all three components can be saved,however going forwards there is more uncertaintyaround the framework for self-consumption and howself-consumed electricity is viewed in terms of gridcharges and taxes. A shift from volumetric tariffs tocapacity-based tariffs as has happened in theNetherlands and is ongoing in Italy, or increasedtaxation on self-consumed electricity has a majorimpact on the business case for solar.
The second key factor is what price the excesselectricity can get for being exported to the grid, ifelectricity can be injected into the grid at all. This iswhere Feed-in Tariff schemes often come into play,offering a guaranteed price for excess electricity.Furthermore, whether or not a country decides to moveto dynamic pricing47 is an important factor within this,as the displaced retail price and the export price couldthen vary depending on the time of day and supply anddemand. Ways to mitigate these risks include aguarantee of a minimum price for exported electricityand the remuneration of ancillary services to the grid.
The experience in many European countries hasmade clear that taxing self-consumed electricity actsas a major barrier to the transition to a more flexible,smarter and more decentralised energy system, andshould therefore be avoided or kept to a minimum.
Furthermore, grid charges should be designed insuch a way to be friendly to prosumer customers, asdisproportionately high capacity-based grid chargescan disincentivise self-consumption. Energyconsumers should be incentivised to invest intechnology that will increase system flexibility such asstorage, aggregation, remotely controlled distributedassets and smart home energy management.
In Spain power consumers who self-consume solarelectricity have to pay both fixed and variablecharges on the self-consumed electricity, with a fewexceptions for small systems and islands. SeeAnnex VII for more details on Spain.
In Austria self-consumed electricity is taxed whena single entity consumes more than 25,000kWh/year.
France and Turkey are both examples of countrieswhere the export price is or was higher than theretail price. In Turkey the export price is0.133USD/kWh whereas the retail price is0.06USD/kWh. In France the export price forfeeding electricity into the grid from small buildingintegrated PV (BIPV) systems was set at 0.24EUR/kWh. The retail price of electricity was just0.15 EUR/kWh. This meant that households hadno economic incentive to self-consume at all, anddesigned systems to export everything to the grid.This is very much the exception across Europehowever – generally speaking grid congestion andcharging means that it is more efficient from awhole system perspective for consumers to use asmuch of the electricity they can on-site. The Frenchregulatory system is now changing and majorutilities such as EDF and Engie are now beginningto offer solar self-consumption packages. EDF isnow offering a package called “My sun and me” orMon soleil et moi. A specific pilot tender fortechnology neutral commercial self-consumptionprojects was also launched in August 2016.
4.1. REGULATORY FRAMEWORKS FOR SELF-CONSUMPTION
4.2.1 Multi power consumer self-consumption
Although the self-consumption business model isgenerally defined as where there is one powerconsumer and that power consumer is the ownerand operator of the installation, it is also possibleto have variants where there is more than onepower consumer. Two examples from across theEU are interesting in this regard.
The first is the potential new Austrian“Gemeinschaftliche Erzeugungsanlage” sharedgeneration facility model for multi-occupancy buildingswhere each occupier in the building, whether it beresidential or commercial, owns either a significant orsymbolic share of the SPV that operates the sharedsolar installation on the roof the building, and self-consumes a portion of that electricity. Moreinformation on this model can be found in Annex VI.
The second is the new collective self-consumptionmodel in France. However although this is calledself-consumption it is not strictly speaking self-consumption, as here one or more generators andone or more consumers can sell to each other aslong as they are part of the same legal entity e.g. acooperative and are located along the same branchof a low-voltage line. Here the cooperative (or otherlegal entity) will self-consume the power, but eachconsumer within the cooperative is buying powerfrom another party to that cooperative. Moreinformation on this model can be found in Annex IV.
4.2.2 Net metering
Net metering is not strictly speaking a businessmodel or a financing scheme. It is in effect asupport scheme or regulatory framework for solar(like a feed-in tariff, premium or green certificatessystem) that creates a different business model forself-consumption style systems.
In a net metering or net billing support schemeexcess solar electricity is remunerated via either (a)reverse metering or (b) financial credits. It in effectuses the grid as storage for excess electricity.
With a net metering scheme it is critical to checkwhat the billing period or compensation period is –the time frame over which the two are balanced out.The longer the period allowed for compensation e.g.one year, the more profitable the investment in solarPV. If the compensation period is relatively long thescheme incentivises consumers to maximise thesize of their system as there is no need to size thesystem to demand on-site. Generation throughoutthe time period simply has to be less than totalpower demand for that power consumer.
The advantage of a net metering scheme is that itincentivises high levels of PV deployment inapplication segments where the demand curve ofindividual consumers does not match solar’sgeneration profile, even though the whole system’sdemand curve does. Because net meteringschemes usually lead to larger system sizes ascompared to systems for self-consumption with alow export price, all available roof space ismaximised and this reduces the installed cost perkWp overall. This is also the best strategy if thegoal is to have the highest possible deployment ofPV in the electricity system – in some ways if youare sticking one solar module on a roof you mightas well use all the space available.
The disadvantage is that it places a significantamount of pressure on the often inflexible andcentralised grid, which is in effect used as a storagesystem for excess solar electricity. One of thebenefits of PV in general is that it allows electricityto be generated and consumed on site andtherefore minimises the need for the oftenexpensive transmission of power across largedistances. Net metering does not make the most ofthis benefit, and could over time lead to increasedgrid costs when compared to the alternatives. Italso does not take into account the variation inelectricity prices across the day, week or year.
The Netherlands, Belgium, Hungary, Romania,Greece and Turkey all have or had net meteringschemes in place. Italy had a net billing system,where the electricity fed into the grid was creditedon a consumer’s bill in monetary units rather thankWhs, but that is being phased out and replacedby a system that provides a lower export price.
4.2. VARIANTS OF SELF-CONSUMPTION
42
EU-WIDE IMPLEMENTATION GUIDELINE
43
4. SELF-CONSUMPTION BUSINESS MODEL
The broad steps for the implementation of a PVsystem with a self-consumption model in the EU arelisted here. For more details in specific countriesplease refer to the national implementationguidelines available on the PV FINANCINGwebsite. Note that in reality many of these steps(and those in the sections below) would beprogressed simultaneously. The broad steps forimplementing a self-consumption project are:
1. Assess the electricity demand pattern of thepower consumer, across the day and the year.The higher the daylight electricity demand thebetter. In the residential segment standarddemand profiles can be assumed, althoughsome adjustment can be useful based onwhether the householders are at home duringthe day. In the non-residential segment thebuilding’s demand should ideally be monitoredfor several typical days in order to build anaccurate picture of demand on-site. In manycases additional data on consumption patternsis available via an analysis of bills or uponrequest from the electricity supplier. In somecountries large businesses are metered forelectricity in 30 minute segments, which canbe used to build up a picture of demand.
2. Gather information on the retail electricitytariff paid by the power consumer, and if thereare any variations in the electricity price paidthroughout the day or year.
3. Confirm what price excess electricity soldback to the grid will get, and whether that willincrease over time. Note in some MemberStates this may be zero.
4. Commission one or more PV installers tosurvey the site, roof space and provide aquotation for installing a PV system. It isgenerally recommended to obtain minimumthree different quotes in order to be able to
compare the prices on offer. Obtain referencesfor the installers or EPCs, or select them froma list or database of quality-approvedinstallers. The orientation, slope, shading anddimension of the roof should be analysed. Aneast-west option should be considered as wellas the usual south facing system.
5. Forecast the operation and maintenancecosts and include also any corporate or localproperty taxes the power consumer may beliable for as a result of the PV installation.
6. Confirm if the self-consumed solar electricitywill be liable for any taxes or grid charges.These can have a transformative effect on abusiness model, and it is key to monitor anyregulatory changes in this field.
7. Conduct a full profitability analysis on theproject, and determine what size system wouldresult in the highest rate of return andmaximise the self-consumption rate. Using allavailable roof space for PV is often not theoptimal system size as far as return oninvestment is concerned.
8. Secure a grid connection and confirm thecost of and technical requirements for feedinginto the grid.
9. Obtain permission from the local municipality48
or a construction permit for the project, ifrequired. In the UK this is not required forresidential properties and subject to anaccelerated process for commercial rooftopsup to 1 MW in size. In France permission isrequired for residential properties. In Portugalthere is a simplified procedure for smallersystems. In France every commercial solarproject has to have a mandatory projectpresentation with the local fire brigade before itis granted a construction permit.
4.3. BROAD STEPS FOR SELF-CONSUMPTIONPROJECT IMPLEMENTATION
48 This is known as planning permission in the UK or permis d’urbanismein France. In many EU Member States urban and rural developmentplanning is done through a ‘zoning’ system.
10.Secure financing for the project, using one of thefinancing schemes mentioned above such as self-funding, debt, equity, leasing or crowdfunding.
11.Commission the installer or EPC to build thesolar installation. This takes anything from aday to several months, depending on the size ofthe system. Full health and safety requirementsmust be complied with when working at heighton roofs. In many cases the electricity to thebuilding needs to be temporarily switched offwhile the connection is made.
12.Complete any administrative processes. Inmany EU Member States the system has to beregistered or notified on a central self-
consumption register or with a nationalauthority or grid operator. It is usually at thisstage that the project is registered for thenational support scheme, if any. Somecountries require an electrical safety checkfrom an official body.
13.For larger systems, secure an operations andmaintenance service provider who canprovide continuous monitoring, thermography,regular visual inspections and cleaning. TheSolarPower Europe O&M guidelines49 canprovide further detail in this step.
14.Generator power for the system’s lifetime.
49 SolarPower Europe “Operation and Maintenance Best PracticesGuidelines”, June 2016.http://www.solarpowereurope.org/insights/operations-and-maintenance-om/
50 SolarPower Europe analysis has shown that a typical residential solarsystem in the EU is 3.6 kWp in size, which in this model is rounded upto 4 kWp.
51 SolarPower Europe, “Ahead of the Pack: Solar the new gateway forthe decentralised energy system”, May 2016. Available here:http://www.solarpowereurope.org/insights/solar-and-storage/.
52 The discount rate is in effect the interest rate that person could getelsewhere, which means that future money is worth less than currentmoney.
53 SolarPower Europe, “Ahead of the Pack: Solar the new gateway forthe decentralised energy system”, May 2016. Available here:http://www.solarpowereurope.org/insights/solar-and-storage/.
54 EU PV Technology Platform “PV Costs in Europe 2014-2030”, June2015. Available here: http://www.etip-pv.eu/publications/other-publications/pv-costs.html
55 The yield for Frankfurt was estimated from:http://re.jrc.ec.europa.eu/pvgis/cmaps/eu_cmsaf_opt/PVGIS_EU_201204_publication.png.
44
EU-WIDE IMPLEMENTATION GUIDELINE
The profitability analysis of any individual project inany EU country will vary hugely from one country,location and system size to another. Therefore anyEU-wide profitability analysis should be conductedand used with extreme caution, as averages fromacross the EU do not represent any particularmarket or project.
In this section we will conduct sensitivity scenarioson a broadly EU-average base case. The followingassumptions were used in the base case:
• The project is a typical residential 4 kWp system.50
• The system is 40% self-funded and 60%financed by personal loan debt financing.
• The specific system cost for a residentialsystem of this size is 1540 EUR/kWp, which isbroadly in line with the cost in mature solarmarkets such as Germany and the UK andhas been used in previous EU-wide analysesof residential solar PV.51
• The interest rate is 3.1% and discount rate52 is4%, again from previous EU-wide studies.53
However it is important to note that this varieshugely from country to country and betweendifferent application segments.
• The degradation is 0.5% per annum, as recommended by the EU PV Technology Platform.54
• The yield is assumed to be 1,105kWh/kWp/year which is that found in Frankfurt,Germany, as that is broadly recognised as thegeographical mid-point of the European Union.55
4.4. EU-WIDE SELF-CONSUMPTIONSENSITIVITY ANALYSES
45
4. SELF-CONSUMPTION BUSINESS MODEL• The retail electricity price is assumed to be
0.21 EUR/kWh as that is the EU-28 averageaccording to Eurostat.56
• No self-consumption tax is assumed in thebase case, but a sensitivity analysis isconducted on this later in this section in orderto show how variations in such a tax can havea major impact on a business model.
• The Feed-in Tariff or export price is assumed tobe 0.15 EUR/kWh as that is representative of agood export price in a number of leading solarmarkets with adequate support frameworks.This is considerably higher than the wholesaleprice of electricity across Europe.57
• The self-consumption rate is assumed to be 35%as that is the average of the national analysesconducted within the PV FINANCING project.
The main profitability drivers in a self-consumptionmodel are: self-consumption levies, fees and gridcharges, the retail electricity price, the export pricefor excess electricity and the self-consumption rate.
A sensitivity analysis was conducted on the yieldof the location. As stated in Section 2.1, locationand therefore solar irradiation levels influence theoutput of a PV installation. This graph in Figure 16shows that as yield increases payback period fallsand the equity IRR increases. However it isimportant to bear in mind that as you move fromone regulatory framework to another and yield goesup or down the cost of capital can also vary hugely,as does of course the regulatory framework.
56 Eurostat energy statistics: http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Electricity_prices_for_household_consumers,_in_2015_sem_2_(EUR_kWh).png
57 Agency for the Cooperation of European Energy Regulators “ACERMarket Monitoring Report 2015”, November 2015, p. 75. Available here:http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER_Market_Monitoring_Report_2015.pdf
Figure 16. Sensitivity analysis for self-consumption based on yield
Amortisation (a)
Equity IRR (%)
Base Case
600 800 1,000 1,200 1,400 1,600
1%
4%
7%
9%
11%14%
16%
9.0
10.6
14.5
17.7
12.2
8%
A further sensitivity analysis was conducted basedon the debt interest rate (Figure 17) to simulate whathappens as the cost of capital increases, as happensfrom country to country and depending on thecreditworthiness of the power offtaker. It shows thatas the debt interest rate increases the payback time(or amortisation) also increases significantly makingprojects less and less economically attractive.
58 This graph should be interpreted as a gradual increasing of theinterest rate with decimal values instead of integers.
46
EU-WIDE IMPLEMENTATION GUIDELINE
Figure 17. Sensitivity analysis of self-consumption based on debt interest rate58
Amortisation (a)
Equity IRR (%)
Worst Case
2% 2% 2% 2% 3% 3% 3% 3% 3% 4% 4% 4% 4%
14.514.5
14.5
14.6
14.7
14.9
15.1
15.3
8% 8%8% 8% 8% 9% 9%
8%
© Aleo Solar
47
4. SELF-CONSUMPTION BUSINESS MODEL
A further sensitivity analysis was conducted on theself-consumption rate (Figure 18).
The assumed 35% self-consumption rate in thebase case above is typical of a household that doesnot take any further measures. It is possible for ahousehold to increase the self-consumption ratefurther with the use of the measures described inSection 3.7 such as battery storage, smart meters,heat pumps and electric vehicles. Load shifting oraltering consumer behaviour to use power duringdaylight hours with household appliances such asdishwashers and washing machines can push theself-consumption rate up to 40%. The analysis inFigure 18 above shows that as the self-consumption rate increases the payback timereduces and the equity IRR or rate of return on theproject increases.
A note of caution is required with regards batterystorage however. Up until now battery storagesystems have been too expensive to justify theadditional savings and decrease rather thanincrease the financial returns of a solar investment.A recent study59 showed that adding storage lowersthe IRR of a solar PV installation in Germany, theUK and Portugal.
Figure 18. Sensitivity analysis of self-consumption based on self-consumption rate
Equity IRR (%)
Base Case
22% 24% 26% 28% 30% 32% 34% 36% 38% 40% 42% 44% 46% 48%
5%6%
7%8%
8%
9%
10%10%
14.5
17.816.6
15.614.8
14.113.5 13.0 12.5
8%
Amortisation (a)
59 SolarPower Europe “Ahead of the Pack: Solar the new gateway forthe decentralised energy system”, May 2016. Available here:http://www.solarpowereurope.org/insights/solar-and-storage/.
48
EU-WIDE IMPLEMENTATION GUIDELINE
The analysis in Figure 18 above assumes thatthere are no taxes or charges on self-consumedsolar electricity. However in Figure 19 above welook at what happens if you start applying suchlevies and fees on self-consumption. As levies andfees increase from zero upwards equity IRRreduces to zero and payback increases to almost19 years. To put this in the context of currentcharges and fees across Europe, Austria applies a0.015EUR/kWh fee and Spain an average of0.01787EUR/kWh fee on self-consumed power forclients on a specific tariff, putting both towards theleft hand side of the x-axis in the figure below.
Figure 19. Sensitivity analysis for self-consumption based on levies and fees on self-consumed electricity
Amortisation (a)
Equity IRR (%)
Worst Case
0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18
0%
3%
5%
7%
8%18.7
15.714.5
© AltiBreizh
49
4. SELF-CONSUMPTION BUSINESS MODEL
Finally a sensitivity analysis is conducted on theFeed-in Tariff or export tariff offered to theinstallation (Figure 20). As you would expect thereturn on investment increases and payback periodfalls as the Feed-in Tariff increases.
A conservative assumption would be to assumethat solar PV installations receive an export priceof 0.05EUR/kWh, which is similar to the averagewholesale price in many markets. This would beslightly beyond the left hand side of the x-axis.However even assuming that solar will berewarded with average wholesale prices could beseen as an optimistic assumption as once there ismore and more PV deployed at times of peak PVgeneration wholesale prices may reduce due to theMerit Order Effect. In Portugal exported electricitygets 90% of the average wholesale price thatmonth, with the percentage reducing gradually asthere is more and more solar PV on the system. Inthe UK solar is awarded a fixed inflation linkedexport tariff of 0.05664EUR/kWh designed to bebroadly in line with the wholesale price.
These sensitivity analyses show that self-consumption business models vary depending ona broad range of factors.
Figure 20. Sensitivity analysis of self-consumption based on Feed-in Tariff level
Amortisation (a)
Equity IRR (%)
Base Case
0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.22
4%
5%
6%
7%
8%
11%
10%
12%
16.615.1
12.711.8
10.9
18.3
14.5
8%
4.5.1 Dairy farm - France
4.5. CASE STUDIES
50
EU-WIDE IMPLEMENTATION GUIDELINE
The first case study of a self-consumption businessmodel is in Wittelsheim in the Alsace region inFrance, where the Wittelsheim GroupementAgricole d’Exploitation Collective (GAEC) dairyfarm installed a PV system.
The dairy farm had a 14 kWp PV system installedon its roof. The system produces almost 15,000kWh/year, practically all of which is self-consumed.The output covers 22% of the site’s total demand.Dairy farms use electricity for the pumping systemand processing and refrigerating the milk.
The system cost just under 23,000 EUR in total, ora specific system price of 1,630 EUR/kWp. Theretail electricity price for the dairy farm is 0.1525EUR/kWh.
Approximately 10% of the system funding wasthrough subsidies. Overall this resulted in a particularlyshort payback period of just over seven years.
Figure 21. Wittelsheim GAEC dairy farm(Web-agri/Terre-net Média.)
4.5.2 Domus Energethica - Italy
The “Domus Energethica” is a new build six storeymixed residential and commercial building withabout 40 apartments and several shops on theground floor. It is located in Tradate near Varese,in the Lombardy region of Italy.
The building is an energy efficient building withEnergy Performance Certificate A. It has 80 kWpof PV on the roof. It also has electric space heating,cooling and hot water which maximizes theelectricity demand in the building despite the highenergy efficiency. A geothermal installation alsosupplies heat to the building.
The PV installation cost 100,000 EUR, or 1,250EUR/kWp. It was financed together with thefinancing of the construction of the building.
The PV plant is and will remain under theownership of the building company which will usean Energy Services Company (i.e. a company thatis contracted to provide all types of energy to thebuilding with the aim of achieving a certain comfortlevel or range of temperatures) to sell a holisticenergy package to the occupiers.
Figure 22. Domus Energethica building,Tradate, Italy (F.lli Bertani S.p.A.)
51
4. SELF-CONSUMPTION BUSINESS MODELThe total annual electricity demand is forecasted to
be just over 100 MWh, and the PV system isexpected to generate 95 MWh/year. The self-consumption rate is expected to be higher than forresidential only buildings thanks to the shops on theground floor.
The Energy Services Company (ESCO) will savebetween 16,000 and 20,000 EUR/year thanks toself-consuming the PV electricity rather than buyingit from the grid at the retail price of 0.23 EUR/kWh.Because this is done with an energy services model,the developer has been able to guarantee to tenantsthat the energy costs will be maximum 750 EUR peryear per apartment, replacing their utility bills.
The self-consumption business model is likely tobecome more and more of relevance across theEU as retail electricity prices rise and financialsupport schemes are reduced. Many nationalmarkets across Europe see it as the mostpromising and future-oriented PV business model.
The main regulatory challenge is ensuring that self-consumption is (a) permitted in general and (b) notoverly taxed or subject to unfair grid charges. It isimportant for regulatory authorities to recognise therole that self-consumption and locating generation atthe point of demand can play in reducing pressure onelectricity transmission and distribution infrastructure.Electricity self-consumed is electricity that does notneed to be transported across large distances.
4.6. OUTLOOK
© Evo Energy
52
© Quadran
A Power Purchase Agreement is a contractbetween an electricity generator and an offtaker(a consumer or reseller) which sets a price perkWh for a relatively long period of time e.g.
5-20 years. Additionally the contract usuallystates a defined minimum amount of electricityto be supplied per year. Figure 23 shows atypical PPA business model.
5. POWER PURCHASEAGREEMENTS (PPAS) SUPPLYCONTRACT BUSINESS MODEL
Here the operator is a self-contained entity calleda Special Purpose Vehicle (SPV). See Section 3for more details on SPVs. The Power Consumer (ofwhich there can be more than one) then contractswith an electricity provider for the residualelectricity. The operator SPV contracts with theO&M service provider, the grid operator/utility tosell excess electricity (currently often via a Feed-inTariff), the EPC for construction and the bank andequity providers for financing.
The PPA price can be set in several ways:
• A fixed PPA price for the duration of the contract
• A set discount on the wholesale or retailelectricity price, known as a “tracker PPA”
• A dynamic discount on the retail electricityprice, where the higher the increase in theprice the greater the discount.
53
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL
Figure 23. Typical onsite private wire PPA business model structure
PV is an ideal technology for long-term fixed pricecontracts as most of the costs of a system are up-front costs at the beginning of the project. WherePPAs track the electricity price, there is a risk to theinvestors of a sudden decrease in electricity prices,but this can be mitigated with floor and roof prices.Some PPA contracts also include a buyout clausewhere the power consumer can buy the systemoutright after a period of time, usually 5-8 years,and switch to a self-consumption business modelwithout having had to pay out the full amount at thebeginning of the project.
The fact that the PV system is owned by a thirdparty is beneficial because it shifts the investmentdecision to an entity that often has a longer-terminvestment horizon and longer-term criteria thanthe corporate power customer. PPAs are generallyfinanced with debt, equity or crowdfunding.
More information on the PPA framework andvarious revenue streams in the UK is available inAnnex IX.
In Germany this business model is used whenthere is more than one power consumer.
EPC
InvestmentCapex
EPCContract
Power Consumer Electricity Provider
LoanContract
Payout,Debt Service,Fees
Bank
Shares
Payout,Dividends
Equity Investors
Service Contract
Service Fee Opex
O & M Service
GridContract
Exportprice
ExcessGrid Operator/Utility
SupplyContract
Powerprice
PowerPrice
SupplyContract
Operator
Special purposevehicle (SPV)
Cashflow
Powerflow
Contracts
54
EU-WIDE IMPLEMENTATION GUIDELINE
The regulatory framework for PPAs varies a lotacross the EU and Europe as a whole. It is importantto distinguish between corporate and wholesalePPAs. More detail on this is below, however broadlyspeaking corporate PPAs are with a businesswhereas wholesale PPAs inject electricity into thegrid and sell it on wholesale markets.
There are many countries such as the UK,Germany, Italy, the Netherlands and acrossScandinavia where corporate PPAs are verycommon. However in some other marketscorporate PPAs are not authorised.
In order to be able to set up a corporate PPA youneed a few basic regulatory elements in place.First, power consumers should be free to choosetheir electricity supplier and be able to have twoelectricity supply contracts at the same time (e.g.one solar PPA and one for the residual demand). Ifthis is not permitted in the regulatory system, itcould still in theory be possible to get a solar PPAbut this would have to be combined into a singlecontract and provided by a licensed supplier.Second, any taxes and grid charges levied on thesolar electricity should be reasonable so as not todisincentivise solar projects. Third, for onsite directwire PPAs it has to be possible to build a private
wire. Fourth, competition authorities must allowSPVs to sign long-term PPAs with customers asultimately this is a way of creating more not lesschoice in the market, even if the counterparty issometimes a market dominant utility player.
PPAs are not currently authorised or have not beenlegislated for in France, Spain and Turkey. In Spaina power consumer is not allowed to have twoelectricity supply contracts. In Turkey the powerconsumer, operator and investor cannot be differententities for projects less than 1 MW in size. Austriaonly allows wholesale PPAs and special forms ofcorporate PPAs like onsite direct wire PPAs.
Note that in some ways Feed-in Tariff supportschemes are state-guaranteed mandatory PPAswith utilities, grid operators or public authorities,often at a higher than market price.
In France it is also very difficult to build a ‘privatewire’ between two locations adjacent or near to oneanother. The only exception is if it can be proventhat the private wire provides a better service thanthe grid. There is currently only one example of aprivate wire in France, that belonging to theCompagnie Nationale du Rhone, which deals withtransport and energy on the river Rhone.
5.1. REGULATORY FRAMEWORKS FOR PPAS
In this section a number of variations of the PPAmodel are examined. A lot of the innovation in solarbusiness models is in this field.
5.2.1 Wholesale PPA
The wholesale (or utility) PPA business model isused for ground-mounted solar farms feedingpower into the grid and selling power on thewholesale market. In this business model theinstallation is owned by a company, the generator,usually a Special Purpose Vehicle (SPV). Thiscompany establishes a Power PurchaseAgreement contract with a grid operator such as alicensed electricity supplier or balancing party. Thelicensed supplier or balancing party then sells theelectricity on the open market and to its customers.
5.2. VARIANTS OF PPAS
55
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL
60 The PPA variant diagrams are from the PV Financing UK NationalImplementation Guidelines. Solar Trade Association “Making SolarPay: The Future of the Solar PPA market in the UK”, October 2016.Available here: http://www.pv-financing.eu/wp-content/uploads/2016/11/D4.1_UK.pdf.
61 European Commission, “Communication on energy prices and costsin Europe”, 2014. Available here:https://ec.europa.eu/energy/sites/ener/files/documents/20140122_communication_energy_prices.pdf
Figure 24. The wholesale PPA model (Solar Trade Association/Bird&Bird60)
Titleto power
£
PPA for all power produced by Generator
Generator Grid
Licenced supplier/
Balancing party
The PPA contract can be signed for a long periodof time e.g. 15 years however if wholesaleelectricity prices are difficult to forecast the pricewill only be fixed for the first period e.g. 3 years andthen track the wholesale price thereafter.
With wholesale PPAs there are no offtaker risks –under normal circumstances the power will alwaysbe remunerated, the question is just how much. Thismakes them much less risky than corporate PPAs.It is also a simple model and so legal costs are low.
The disadvantage of the wholesale PPA is that theforecast for wholesale electricity prices does notprovide for a good business environment as pricesacross Europe are currently low and likely toremain low.61 This means that the financial returnsof ground-mounted wholesale PPA projects arecurrently low. Ironically because of the Merit OrderEffect the more zero marginal cost renewables likewind and solar there is on the system the lowerwholesale prices will become at times of peakgeneration. It would be beneficial if policy-makerscould put in place a “market-stabilising” frameworkto ensure that the business case for new wholesalePPAs can continue.
5.2.2 Corporate PPAs
Given low wholesale prices, developers haveinnovated to try and increase the value of the solarelectricity and be able to sell that power at a pricecloser to the retail power price rather than just thelower wholesale power price. The followingbusiness models are all variants of corporate PPAsi.e. models where the final consumer of the poweris a corporate consumer that is using the solarelectricity to save money on energy costs.
© Anne van der Stegen
56
EU-WIDE IMPLEMENTATION GUIDELINE 5.2.2.1 Onsite private wire PPA62
In the onsite private (or direct) wire business modelthe generator SPV builds a solar installation on thepower consumer’s side of the grid meter, usuallyon the building’s roof. The generator SPV contractsvia a corporate PPA with the power consumer tosell them all or most of the power.
Where possible, the generator then signs aspillover or excess PPA with a licensed supplierand any excess electricity (e.g. power generated atweekends or public holidays) goes via a separateconnection between the installation and the grid.(Note that such a separate connection point is notalways available.)
The spillover PPA, which is competing withwholesale prices, will get a lower per kWh pricethan the onsite direct wire PPA, which competeswith retail prices.
It is possible for both the onsite direct wire PPA andthe spillover PPA to be bundled together into onecontract from a single supplier.
The advantage of the onsite private wire PPA isthat the electricity is not transmitted via the publicgrid and therefore, in most countries, is not liablefor grid charges.
The disadvantage is the offtaker risk. The corporateconsumer has to be considered sufficientlycreditworthy to facilitate the financing of the solarinstallation over a long-time period. As describedin Section 2.2, the risk of the corporate consumergoing bankrupt or moving away can make a projectlike this too risky to finance.
The neighbour solar supply or onsite direct wiremini PPA model for multi-family residentialbuildings described in Section 1.2.2 is a sub-variantof this model.
Figure 25. Onsite private wire PPA model (Solar Trade Association/Bird&Bird)
Corporate Consumer
Power directlyfrom generator to Consumer
£
Onsite private wire PPA
Generator
Licenced supplier/Balancing party Grid
£Excess Power
Separate Spillover PPA between Generator and Licenced Supplier for excess power not used by consumer
62 In Italy this is similar to the system called “Sistemi Efficienti di Utenza”.
57
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL5.2.2.2 Sleeved off-site PPA
A sleeved off-site PPA63 is therefore an attempt tomaximise the value of the solar electricity to a valuecloser to retail prices but avoid the offtaker risk bycreating a model where there are a multitude ofpotential offtakers.
In a sleeved off-site PPA the generator companysells to a corporate consumer (PPA1) at the pointat which the solar installation is connected to thegrid (“meter point”), who then immediately on-sells
the same volume of power on to the utility (PPA2).The utility then sleeves the power through the gridand sells the equivalent amount of power (PPA3)back to the corporate consumer at its site elsewherein the country. The utility performs a balancingservice by topping up the renewable electricity withnon-renewable electricity when needed. Both thepower and the legal contracts are sleeved throughthe corporate consumer, licensed supplier and gridand then back to the corporate consumer.
63 Also known as a back-to-back PPA.
Figure 26. Sleeved PPA model (Solar Trade Association/Bird&Bird)
PPA1
£
PPA for all power produced by Generator
PPA2
£
PPA3: Back to back PPA - Electricity Supplier purchases all power purchased by Consumer. Consumer repurchases power it uses (performing balancing function)
Generator Corporate ConsumerLicenced Supplier/
Balancing PartyGrid
The advantage is that the risk that the corporatecounterparty might go bankrupt is not so important,as other offtakers can always be found, althoughperhaps not at the same price. The physical ground-mounted solar project has a grid connection so theelectricity can always find a route to market.
The disadvantages are that it is a relatively complexmodel and the licensed supplier acts as a middleman, setting prices and adding costs for its sleevingand balancing services. The next model, the syntheticPPA, therefore seeks to eliminate this price risk.
5.2.2.3 Synthetic PPA
The synthetic PPA is the same as a sleeved PPAbut with the addition of a direct contract betweenthe generator SPV and the corporate powerconsumer which fixes a certain volume of electricityat a certain price over a long period of time. Thefixed price is often similar to the market price, butfixed over a long period of time, which is a benefitfor both the generator and the power consumer.
It is useful here to consider an example. Assumethat the Generator and the Corporate Consumerset a price of 100EUR/MWh as their fixed price.The sum of the Corporate Consumer’s contractswith the Generator and the Licensed Supplier mustalways come to 100EUR/MWh. If retail prices goup and the Licensed Supplier starts charging theCorporate Consumer 110EUR/MWh, then theGenerator has to pay the Corporate Consumer10EUR/MWh. If retail prices go down (which rarelyhappens) and the Licensed Supplier startscharging the Corporate Consumer 90 EUR/MWh,then the Corporate Consumer has to pay theGenerator 10EUR/MWh.
58
EU-WIDE IMPLEMENTATION GUIDELINE
Figure 27. Synthetic PPA model (Solar Trade Association/Bird&Bird)
Licensed supplier/Balancing party
Title to power
£
PPA for all power produced by Generator - Generator receives market price for power produced
Generator
Corporate Consumer
Grid
£
Synthetic PPA: Contract(e.g. hedge or Contract for difference) where Generator and Consumer agree fixed price - Generatorreceives market price under PPA and Generator and Consumer split difference between market price and fixed price
£
Consumer purchases power requirements from licensed supplier
The Generator benefits as it gets a higher thanwholesale price for its power. The CorporateConsumer is effectively taking a gamble that retailprices are going to rise over the next 20 years, andis locking in its power prices at a low level over thelong term. It is a hedge against rising prices.
This is the model that Google have used in the USA.In this case the electricity can be consumed at multiplelocations. It is good for large power consumers withmultiple sites, and could be of particular interest toutilities or other big licensed suppliers.
A disadvantage of this model is that as wholesaleprice forecasts are becoming more uncertain powerconsumers are less willing to lock in at a fixed priceover a long period of time. Also the financial flowswithin the business model depend on the pricesoffered by the Licensed Supplier. The nextbusiness model, the mini-utility PPA, is an attemptto try and cut out this middle man.
© HochBild Design
59
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL
Figure 28. Mini-utility PPA model (Solar Trade Association/Bird&Bird)
Mini-utility/Trading SPV
Title to power
£
PPA for all power produced by Generator
Generator
Corporate Consumer
Fund/Corporate Consumer
Grid
£power
100% 100%
PPA - Consumer purchasespower it uses from Mini-utility. Mini-utility performs balancing function
5.2.2.4 Mini-utility PPAs
The mini-utility business model is where thegenerator sells the power to a licensed supplierwholly owned by either the generator or thecorporate consumer, called a trading SPV. Thetrading SPV then contracts to sell the power on tothe corporate power consumer.
EU-level electricity market design regulation can beused to encourage this kind of model. Thisbusiness model is currently in use in Ireland in thewind sector and in the US.
The advantage is that it cuts out a link in the chainand therefore reduces costs overall, allowing thegenerator to get more money for its power and/orthe Corporate Consumer to save more on its bill.
The disadvantage of this business model is thevery high up-front costs (often about 1million EUR)of obtaining a supply license.
Another disadvantage is that there is a risk that thetrading SPV could go bankrupt if it misjudged itsbalancing strategy. This adds more risk to the model.
Another disadvantage is that the mini-utility PPAbusiness model requires large volumes of power inorder to be viable. It is difficult at present to scalethese business models down to smaller sizedprojects due to the overhead costs of gaining asupply license.
64 The contract templates can be downloaded on the PV FINANCINGwebsite here: http://www.pv-financing.eu/project-results/#Contract_Guidelines
60
EU-WIDE IMPLEMENTATION GUIDELINE
These steps encompass both ground mount androoftop projects. The steps to implement a PPA arevery similar to those for the self-consumptionmodel. Therefore these steps will not repeat thesteps listed above, but highlight differences whenit comes to PPAs
1. Locate appropriate site.
2. Assess the electricity demand pattern of thepower consumer, if any.
3. Gather information on the retail electricitytariff paid by the power consumer.
4. Conduct a full analysis of the project todetermine whether PV can undercut the powerconsumer's retail electricity price and by howmuch, or compete with the wholesale price inthe case of a wholesale PPA. Generallyspeaking the power consumer needs to see asaving of at least 10-20% on its electricitycosts in order to make consideration of a PVsystem worthwhile.
5. Secure grid connection. For rooftop systems,confirm whether it is possible to have aseparate direct grid connection – this isimportant for spillover PPAs. Confirm whatprice excess electricity sold to the grid will get.
6. Commission one or more EPCs to survey thesite, roof space and provide a quotation forinstalling a PV system.
7. Forecast the operation and maintenancecosts.
8. Obtain permission from the local municipalityor a construction permit for the project, if required.
9. Secure a Letter of Intent from the corporateofftaker to confirm their commitment. The lettershould specify the PPA rate and duration ofthe contract, as these should already havebeen pre-negotiated.
10.Secure financing for the project. PPAs are notgenerally self-funded, and so are financedusing debt, equity or similar.
11.Sign the PPA contract, specifying the price,duration and minimum amount of electricity tobe supplied. Note there are a number oftemplate PPA contracts for the countriescovered by PV FINANCING available fordownload on the project website .
12.Commission the installer or EPC to build thesolar installation.
13 Complete any administrative processes.
14.Secure an operations and maintenanceservice provider.
15.Generate power for system lifetime.
5.3. BROAD STEPS FOR PPA PROJECTIMPLEMENTATION
61
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL
As mentioned above, an EU-wide average analysisalways has to be approached with caution as theproject described below will not correspond to anyindividual country. National implementationguidelines should be used for more detail on anyparticular market.
In this section we will conduct a number ofsensitivity scenarios on a broadly EU-average basecase. In this analysis the same assumptions as inthe self-consumption analysis in Section 4.4 wereused apart from:
• The project is a typical commercial 100 kWpsystem.
• The retail electricity price for commercialcustomers is assumed to be 0.18 EUR/kWh as that is the EU-28 average according toEurostat.65
• It was financed with 70% debt and 30% self-funded equity.
• A PPA price of 0.144 EUR/kWh was assumedas that is 20% less than the commercial retailpower price (see Section 5.3 above).
• The specific system cost for a commercialsystem of this size was assumed to be 1,366EUR/kWp, which was an average of the costsfor systems of this size used in the nationalimplementation guidelines.
The main profitability drivers for corporate PPAsare retail electricity prices, as that is what the PPAis competing with, the risk of the power consumerchanging, re-locating or going bankrupt and theself-consumption rate, especially the pattern of thepower consumer’s demand across the day.
Senstivity analyses were conducted on a numberof different variables.
Figure 29 provides a sensitivity analysis on yield orlocation. The left of the x-axis represents Scotlandor Scandinavia and the right represents the southof Spain, Sicily and Cyprus. As yield increasesreturns go up and paybacks reduce.
5.4. EU-WIDE PPA SENSITIVITY ANALYSES
65 Eurostat energy statistics: http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Electricity_prices_for_household_consumers,_in_2015_sem_2_(EUR_kWh).png
Figure 29. Sensitivity analysis of PPA project based on yield
Amortisation (a)
Equity IRR (%)
Base Case
600 800 1,000 1,200 1,400 1,600
4%
6%
7% 8%
9%
11% 12%
8.99.7
10.6
11.8
17.2
14.9
13.1
10%
9%
62
EU-WIDE IMPLEMENTATION GUIDELINE
Figure 30 shows a sensitivity analysis of the PPAbusiness model to the extent to which the PPAsupply price is set to rise over the course of thecontract, usually designed to be in line with inflationor electricity price escalations. Many PPAs trackwholesale or retail prices in the later years of a PPAcontract. The L’Oreal case study in section 5.5.1 isan example of this, where the PPA supply pricetracks the retail price for that business. The moreprice escalation in the PPA price, them morereturns increase and payback times drop.
Figure 30. Sensitivity analysis of PPA model based on PPA price escalation
Amortisation (a)
Equity IRR (%)
Base Case
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14%
8%
3%
1%
5%
10%
12%
13%
15%
10.39.3
8.5
14.0
11.8
18.4
9%
63
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODEL
Figure 31. Sensitivity analysis of PPA model based on debt
Amortisation (a)
Equity IRR (%)
Base Case
60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000
9%8%
8%8%
9% 9% 9% 9%
11.8 11.8
11.8
11.8
11.8
11.7
11.7
11.7
11.7
9%
Finally Figure 31 shows that as the amount of debtin the project, which has a total system cost of136,600 EUR, the equity IRR and payback periodpretty much stay the same, displaying an smallincrease as the debt amount doubles.
© Urbasolar
64
EU-WIDE IMPLEMENTATION GUIDELINE
5.5.1 L’Oreal PPA – Italy
This 3 MW rooftop PV installation is located nearthe town of Turin in Piedmont, Italy on the roof ofthe L’Oreal building.
This PV system cost just over 3,000,000 EURwhich corresponds to a specific system cost ofabout 1,000 EUR/kWp and is owned by an EnersolSPV, with Enersol being the main investor in theproject. The solar electricity generation estimatedfor the plant is 3,600 MWh/year, with a specificyield of 1,200 kWh/kWp. The power is sold toL’Oreal through an onsite direct wire PPA, and isthe largest PPA project in Italy. The PPA pricetracks the retail electricity price for the companyminus a discount of between 8-12%. It received nosupport scheme or tax incentive. It is assumed thesolar system will supply about 30% of the powerrequired on site.
The PV installation complements the existingbiomass boiler and district heating system.
Figure 32. L’Oreal building, Torino, Italy(Qualenergia)
5.5.2 Ketton Cement Works – UK
The Ketton Cement Solar Farm is located justoutside the village of Ketton on a former quarry, inthe county of Rutland in the United Kingdom. Thesolar farm is 12 MW in size and is on land adjacentto and owned by the cement factory. It is a rareexample of a ground mount onsite private wire PPA.
The project is currently 100% self-consumption forHanson Cement, but a connection to the localdistribution grid exists as a back-up. A third of thepower is provided to Hanson free of charge (in lieuof land rental payments) and the rest is sold at afixed PPA price.
Over the course of the project lifetime the solarfarm will reduce the cement factory’s energy bill byapproximately 10million GBP, although the maindriver for the project was reducing CO2 emissions.Overall the project generates enough energy tocover 13% of the cement work’s annual demand.The project was developed by Lark Energy inpartnership with Armstrong Energy and HansonCement, who own the cement factory. The fundingwas provided by Downing.
Figure 33. Ketton solar farm, Ketton, UK(Lark Energy)
5.5. CASE STUDIES
65
5. POWER PURCHASE AGREEMENTS (PPAS) SUPPLY CONTRACT BUSINESS MODELLark Energy designed the solar farm to enable
active and reactive power management and toprotect the grid from reverse current. This has anumber of advantages, including minimising theneed for costly 33kV distribution grid upgrade work,reducing the energy costs for Hanson and enablingthe inverters to be used as capacitor batteriesstorage at night. This was the first time invertershad been used in this way in the UK.
The outlook for PPAs in solar is excellent. This is abusiness model where there is a lot of scope forinnovation. However regulatory barriers need to beovercome in a number of key markets includingSpain, France and Turkey. These are usuallyregulatory barriers to selling electricity on-site or inthe local area.
The financial challenge for wholesale PPAs is thatthe wholesale price obtained for the power is atpresent often not high enough to incentiviseinvestment in solar.
The financial challenge for synthetic PPAs and mini-utilities is that they require large volumes of powerin order to be viable business models. It is difficult atpresent to scale these business models down tosmaller sized projects. In the case of synthetic PPAsthis is because it is a business model that is suitedto power consumers with a large number of differentsites, each with significant power demand. In thecase of mini-utilities this is because the businessmodel requires the creation of a trading SpecialPurpose Vehicle (SPV) with a supply license, andthis license can cost 1million EUR to obtain. Thisadds a major overhead cost to the project.
5.6. OUTLOOK© Tenergie
66
Cooperatives, which from a financing schemeperspective are a form of equity crowdfunding,have a separate legal status and managementstructure to other business models.
They should be distinguished from debt or grant crowdfunding which are purelyfinancing schemes.
6. COOPERATIVE SCHEMES
The benefit of cooperative schemes is that regularcitizens can own and benefit from a share of energygenerating assets. An experienced investor oractor can act as an intermediary for a large numberof smaller private and non-professional investors.They also facilitate and promote social acceptanceof renewable energy projects.
However again a certain number of regulatorybasics have to be in place to implement acooperative model, as there has to be a levelplaying field for cooperatives to enter the market.
In France a new provision has recently beenbrought in for collective self-consumption, whereelectricity can be sold between a number ofproducers and consumers within a single low-voltage branch of the grid. This opens the way forcommunity and cooperative business models. Thismodel is described further in Annex IV.
Cooperatives are not yet common in Italy but is apromising scheme, especially as the tax benefitsfor residential solar are also applicable when theproject is financed through a cooperative.
6.1. REGULATORY FRAMEWORKS FOR COOPERATIVES
© Marcus Lyon
67
6. COOPERATIVE SCHEMES
66 The Debt-Service Coverage Ratio (DSCR) is a measure of the cashflow available to pay current debt obligations. The ratio states netoperating income as a multiple of debt obligations due within oneyear, including interest, principal, sinking-fund and lease payments.
The broad steps for implementation of acooperative or crowdfunding project are similar tothose for self-consumption and PPAs. To avoidrepetition this section will only look at the additionalsteps in a cooperative project.
1. Go through the relevant steps listed insections 4.3 and 5.3 above.
2. When choosing a site or project it can beuseful to prioritise those that are eitherlocated in the target community for raisingfunds and/or have particular social importance,such as on a school, social housing project orin a disadvantaged area.
3. When project reaches the stage of having tosecure financing, contact a local energycooperative (or select a crowdfunding platform).Consider founding a local energy cooperative ifone does not already exist. If using a cooperativeit will be an equity scheme. Decide whether thecrowdfunded finance is going to be combinedwith regular debt or equity. Investigate pastprojects and obtain project references from thecooperative. Determine whether the platformoperates an ‘all or nothing’ policy – whether theproject will be dropped entirely if the targetamount is not achieved.
4. Submit a funding application to thecooperative, including a profitability analysis.The crowdfunding platform may also ask foran overview of the other funding sources,insurance contracts and the project owner’sDebt Service Coverage Ratio.66
5. Sign a contract with a crowdfunding platform,which will specify the commission taken by theplatform. Some platforms operate at a fixedfee, others take a percentage commission.Careful attention should be paid to any earlywithdrawal clauses.
6. Advertise and market the project to the targetaudience, raising as much awareness aspossible. Often this is the cooperative’sresponsibility.
7. Secure individual investors and signstandard contracts with them as regards theinterest rate payable etc. This often anautomated online process facilitated by thecooperative. The cooperative will on the wholerepresent the interests of the investors in thisprocess. In Germany interest rates for debtcrowdfunding are generally 3-8%.
8. Receive the transfer of funds if and when thetarget amount has been raised.
9. Commission the installer to build the solar PV project.
10.Submit any regular financial updates to thecooperative members or crowdfundingplatform as required by the agreement andpay out interest or dividend payments.
11.Hold an Annual General Meeting (AGM) of thecooperative investor-members, as required tomake decisions on the operation of the project.
12.If you want to finance multiple projects throughthe same organisation, consider signing aframework agreement with the platform in orderto streamline the process for the next projects.
6.2. BROAD STEPS FOR COOPERATIVEPROJECT IMPLEMENTATION
In the UK community involvement in renewableprojects is incentivised both within the Feed-inTariff support scheme and, in the case of Scotland,generous tax benefits. Community InterestCompanies are a common business structure forthis type of project.
In Turkey, the legal framework for an energycooperative exists and cooperatives benefit from subsidised loans and tax incentives but at the time of writing no energy cooperative has yetbeen established.
68
EU-WIDE IMPLEMENTATION GUIDELINE
The PV FINANCING cash flow model does nothave cooperative specific inputs and the analysisis therefore similar to that carried out in thebusiness models above. In a cooperative projectthe transaction costs of acquiring, signing andcommunicating with hundreds if not thousands ofinvestor-members could conceivably increaserunning costs slightly.
However a cooperative project, indeed anycommunity energy project, is arguably a lower riskproject as community acceptance and thereforeplanning permission from the municipality shouldbe a much easier process. If the cooperativefinancing is combined with regular debt or equitythen that finance should or could therefore in theorybe provided at lower cost.
6.3. EU-WIDE COOPERATIVE SENSITIVITY ANALYSES
6.3.1 Heidelberger cooperative – Germany
Figure 34. Neue Heimat buildings, Heidelberg,Germany (Heidelberger Energiegenossenschaft)
The Heidelberger Energiegenossenschaft “NeueHeimat” cooperative family homes in Germanyhave seven east-west solar PV systems installedon their buildings that together add up to 445 kWp.The total generation is around 370,000 kWh peryear. The buildings are located in Nußloch, nearHeidelberg. The total investment cost for theinstallation was 525,000 EUR.
All 116 tenants were given the opportunity to investin the PV facility and become shareholders of theHeidelberger Energiegenossenschaft, allowingthem to benefit from dividends from the company’sprofit. Tenants are offered a “package” of 1000EUR consisting of an 800 EUR loan and twoshares with a nominal value of 100 EUR each. Theloans are repaid over 20 years at 3% interest. Atthe end of the 20year period the tenant will havereceived about 1400 EUR back. This is thereforean example of a cooperative or equitycrowdfunding scheme where the investor-membersalso lend money to the cooperative, a debtcrowdfunding scheme.
The PV system electricity is combined with aresidual electricity supply from Naturstrom AG thatallows the tenants to purchase electricity at a pricelower than the price they would pay if theypurchased electricity at retail prices, and this priceis guaranteed for 20 years. The tenants buy theelectricity direct from the roof at a rate of 0.254EUR/kWh plus a monthly fee of 6.95 EUR.
6.4. CASE STUDIES
69
6. COOPERATIVE SCHEMES6.3.2 Oakapple single family
new build homes – UKThe Oakapple Renewable Energy project is aseries of PV systems installed on new build singlefamily homes. The project raised 480,000 GBP viadebt crowdfunding platform Abundance InvestmentLtd to purchase 435 kWp of PV installations. Theproject received generous support from a Feed-inTariff support scheme.
Abundance used debentures for this project, whichare long-term unsecured loans to a company whichwill be repaid at a specified date. Abundance alsoprovides ongoing services in relation to thedebentures, including acting as registrar, arrangingpayment of cash returns to debenture holders andcommunicating information back to the investors.Projects on Abundance could often offer individualinvestors returns on investment that were higher thanregular savings account and higher than the inflationrate, making these investments very attractive.
In this example Oakapple will repay its debentureafter 20 years and throughout that period will payinvestors between 7.4% and 8.6% interest per yearin twice-yearly payments.
Figure 35. Single family new build homes, UK(Oakapple Renewable Energy)
In many countries cooperatives and crowdfundingin general are seen as very promising businessmodels as it can sometimes be a way of securingfinance at a cheaper cost of capital and can allowprojects that would not be able to secure financingthrough conventional means to go ahead.
Som Energia’s Generation kWh project in Sevilla,Spain is another excellent example of acooperative project that does not rely on a supportscheme or feed-in tariff.
The minimum investment in a crowdfundingplatform across Europe is generally 50-100 EUR,although some platforms accept investments fromas little as 10 EUR. However the averageinvestment is usually significantly higher, with oneFrench platform reporting that average investmentwas approximately 1000 EUR. It is important topromote innovative cooperatives and crowdfundingmodels that are accessible for individuals with lowpurchasing power from disadvantagedcommunities to allow for broad-based involvement.
6.5. OUTLOOK
70
© Matthieu Colin
Virtual Power Plants (VPPs), also known asaggregators, are a business model wheredifferent technologies and users are combinedor aggregated into one pool of electricity andare operated together as if they were one powergeneration facility.
On the supply side this can include solar, microcombined heat and power, wind, biogas, smallhydro, back-up diesel generators and batterystorage. On the demand side this includes powerconsumers that have capacity to increase ordecrease their power demand, includinginterruptible load such as heating and cooling andelectric hot water heaters.
The aggregator company sells the electricity orancillary services via an electricity exchange. Thegoal is to create a generation profile that allows theparticipants in the Virtual Power Plant to takeadvantage of peak prices at certain times of day.
For individual installations a VPP can increase thewholesale or excess power price.
In the long-term this business model will gain inimportance as many feed-in tariff or similar supportschemes only include a mandatory offtaker for 20years. As many PV systems are likely to last for~35 years this means that over the next 10 yearsor more there is going to be an older generation ofsmall-scale often domestic systems coming onlinethat are still generating but no longer getting aguaranteed offtaker. It is possible that the ownersof these systems will look to include their systemsin an aggregator mechanism for the remainder ofequipment’s lifetime, if residential owners arewilling to invest in equipment that allows for remotecontrol of the installation.
7. VIRTUAL POWER PLANTS
71
7. VIRTUAL POWER PLANTS
The aggregator business model is very complexand involves complex algorithms and softwaredesigned to generate the most value out of smallchanges in price in the electricity market. Tocomplicate matters further, some aggregators givetheir partners or clients the option to opt out of thesystem at any time. (This is important as a hospitalalways needs the option to take back control of itsrooftop solar system as part of its UninterruptiblePower Supply in case of a power cut.)
Aggregators are very sensitive to medium-term andlong-term trends in wholesale prices. Price variationsacross the day are another driver. Finally a keyvariable is the extent to which solar and the othertechnologies in the VPP’s portfolio have access togrid services markets such as the balancing marketand ancillary services to the grid such as reactivepower, frequency response and voltage control.
7.3. EU-WIDE VPP SENSITIVITY SCENARIOS
As regards the regulatory framework, aggregatorsneed access to electricity markets which requiresa liberalised electricity market. Aggregators alsoideally need to be able to offer their serviceswithout the prior approval of the power consumer’selectricity supplier. The pre-qualification criteria formarket participation should not be too stringent asthis adds overhead costs for the VPP. In France forexample aggregators are just starting to establish
themselves since the new energy policy frameworkwas introduced in 2016.
Data and privacy concerns can also be a concernfor regulators when creating policy for VirtualPower Plants, and a balance needs to be foundbetween allowing these innovative new businessmodels to flourish and protecting citizens’ andcompanies’ privacy.
7.1. REGULATORY FRAMEWORKS FOR VIRTUAL POWER PLANTS
A VPP business model is different to the self-consumption, PPA and cooperative businessmodels as it often provides a route-to-market foroperational plants. Many of the steps are the sameas in the steps for the implementation of theprevious business models.
1. Go through the relevant steps listed insections 4.3 and 5.3 above.
2. Sign a contract with an aggregator platform.The aggregator will need to come and installits remote control equipment on the solar
installation and will conduct an analysis tooffer the customer a estimate price for optinginto the aggregator, or the plant owner may berequired to do this him/herself.
3. The aggregator will then participate in thewholesale and balancing markets on behalfof the installations in the Virtual Power Plantand maximise the value of the solar plant andits electricity.
4. The aggregator transfers revenues to theplant operator.
7.2. BROAD STEPS FOR VPP PROJECT IMPLEMENTATION
72
EU-WIDE IMPLEMENTATION GUIDELINE
The BestRES project, funded by the Horizon2020programme, has shown that aggregators are a verypromising business model moving forwards.However one key observation is that there is a lackof contract standardisation in this space whichincreases legal and transaction costs. Work needsto be done to bring these business models into themainstream and establish market standardcontracts, in particular to allow this model to tap intothe potential in smaller PV segments.
7.5. OUTLOOK
There are growing number of examples ofaggregators across Europe, including EDP,Oekostrom and Good Energy. Each functions in aslightly different way. Here we will look at twospecific case studies.
7.4.1 Next Kraftwerke - Germany
Next Kraftwerke is an example of a Virtual PowerPlant in Europe which bundles around 3,000 smalland medium scale power generators and consumers.All units are owned by their individual owners butoperated through the Virtual Power Plant’s centralcontrol room. Next Kraftwerke use an algorithm tosuccessfully manage supply and demand allowingthem to maximise profit for the participants. NextKraftwerke operates in Germany, France, Belgium,Austria, the Netherlands and Poland.
7.4.2 Limejump – UK
Limejump is a Virtual Power Plant and LicensedSupplier in the UK that aggregates solar, wind,biogas, hydro, energy from waste, diesel andenergy storage and offers fixed price and trackingprice PPAs. They act as the balancing party forthese generating assets. They also work withbusinesses who can be flexible with their energydemand such as retailers, water utilities, datacentres, hospitals and commercial refrigeration.They aggregate all these actors together to accessthe electricity markets in the same way aconventional power station would.
7.4. CASE STUDIES
73
© Arm
orgreen
The sections above have analysed anddissected each of the different elements andoptions within the three variables of a project –application segments, financing schemes andbusiness models. However as was said in theintroduction, an individual project can be acombination of a number of different financingschemes, a mix of business models and can beon buildings that have more than oneapplication segment within them.
Broadly speaking all the different options within thethree variables can be combined in variouspermutations. Mathematically this means there areover 140 different ways of building a solar PVproject. Furthermore, there may be financingschemes and business models that have not yetbeen applied to solar, so the number could getbigger over time.
8. BUILDING A PROJECT:COMBINING APPLICATIONSEGMENTS, FINANCINGSCHEMES & BUSINESS MODELS
74
EU-WIDE IMPLEMENTATION GUIDELINE In this section we will look at what are the most
common project combinations of the threevariables, which could be the most promising andwhich are unlikely to work in the near future:
• Single-family owner-occupied residential homesgenerally use self-funding, debt or leasingfinancing schemes and self-consumptionbusiness models, despite relatively low self-consumption rates. Perhaps the most promisingproject type in this segment would be acombination of self-consumption with a PPA forexport done using a Virtual Power Plantfinanced using leasing, and provided togetherwith other products and services.
• Multi-family residential building projects aregenerally done using corporate PPA andcooperative business models using all kinds offinancing. The neighbor solar supply model ispotentially the most promising business modelin this segment.
• Public and educational buildings could befinanced through pretty much any financingscheme and use any business model.
• Commercial buildings such as shoppingcentres, office buildings and industrial buildingstoday use self-consumption or corporate PowerPurchas Agreements. PPAs appear to be themost promising model in this segment.
• Ground-mounted installations are presentlygenerally done as wholesale PPAs, and canalso be cooperative projects. Self-consumptionschemes are very rare in the ground-mountsector. Solar farms use different financingschemes depending on the stage in the projectas described in Section 3. Corporate PPAs arelikely to be the most promising scheme goingforwards. It is unlikely that the leasing modelcould be applied to solar farms.
In sum it is precisely when financing schemes andbusiness models are combined in a new andinnovative way to an application segment that youcan make projects attractive to financiers andcreate breakthroughs in the financing of solar.
© Hochbild Design
75
© Flo Hagena
Many of the financing schemes and businessmodels described above are promising modelsin a low or no subsidy world. From sleeved off-site Power Purchase Agreements to leasingmodels, from neighbour solar supply tocrowdfunding platforms, solar’s modularnature allows it to be financed and deployed inmany different ways.
A key lesson is that innovation in financingmechanisms and business models is only possiblewhen the basic regulatory framework allows fornew entrants and ways of doing things. If theregulatory framework is overly restrictive, new low-risk models that can facilitate the up-frontinvestment required cannot come forward. It iscritical that electricity markets rules are opened upacross Europe to allow for more decentralisedelectricity generation and supply.
The key to finding the next generation of solarbusiness models is reducing the risk involved forinvestors. The lower the risks – such as the risk of thecorporate power consumer re-locating – the morecomfortable investors will feel about investing in solar.
Equally it is clear that there are many businessmodels that favour established players like utilities,as solar can be a way of increasing customer loyaltyin for example neighbour solar supply and leasing.
Another lesson is that it is of critical importance tohelp banks and other financial institutions gain abetter understanding of PV as a technology and thedifferent business models involved. Of courseEurope is further ahead on this learning curve thanthe rest of the world, but nonetheless there isevidence that more know-how is needed on solarwithin financial institutions. Once it has beenestablished that solar can generate a decent returnon investment and there are projects waiting formoney, capital will be made available. It is oftenthat initial lack of know-how that can prevent banksfrom taking that first leap into the solar market.
9. CONCLUSIONS
76
EU-WIDE IMPLEMENTATION GUIDELINE It is also important to bear in mind that with small
and medium sized applications of PV, semi-professional investors or investors that are notfamiliar with PV are often involved. This means thatoften even when the returns are high and on paperthe conditions are excellent, homeowners andsmall businesses will not go ahead with a projectdue to a lack of time, understanding and self-confidence when dealing with the technology. It isimportant that guidelines like this are thereforetranslated into material for a non-professionalaudience in order to enable them to invest.
All in all it is clear that the future is bright for solarin Europe, and that there are myriad ways of settingPV projects up. This report is merely a springboardfor investors and developers looking for new andmore creative ways to do things – the next stepshould always be detailed analysis of the nationalmarket concerned. We hope these differentbusiness models from the many corners of the EUwill help to spread good practice across thecontinent and support the transition to a zerocarbon decentralised electricity system.
© Altus Energy
77
© Duel Sun
DSO Distribution System Operator
EPC Engineering Procurement and Construction (NB this acronym can also be used for EnergyPerformance Certificate, but in this report only the former meaning is used.)
GW Gigawatt
IRR Internal Rate of Return
kW Kilowatt
kWp Kilowatt-peak
LCOE Levelised Cost of Electricity
MW Megawatt
MWp Megawatt-peak
O&M Operations and Maintenance
PPA Power Purchase Agreement
VPP Virtual Power Plant
LIST OF ABBREVIATIONS
ANNEX I: NATIONAL TEMPLATE CONTRACTSFOR SOLAR BUSINESS MODELS
These template contracts were developed to giveexamples of the legal contracts needed for solarbusiness models in Austria, France, Italy, Spain,Turkey and the UK. The guidelines for theimplementation of these business models areavailable for download on the PV FINANCINGwebsite. The contracts are only available in thenational language. Click on the links below todownload the document or visit www.pv-financing.eu.
AUSTRIA
Dachvermietung (Österreich)
Pachtvertrag (Österreich)
Vereinstatuten (Österreich)
FRANCE
Modèle d’autoconsommation collectived’électricité (France)
Modèle de contrat de vente du surplusd’électricité dans le cadre d’uneautoconsommation collective (France)
ITALY
Contratto di locazione operativa di impiantofotovoltaico (Italia)
Accordo per la costruzione di impianto dedicato esomministrazione di energia elettrica secondo loschema del sistema efficiente di utenza (Italia)
TURKEY
FV sistemlerin kiralanması için Örnek Kontrat
Kontrat tipi 1: Kamu Hizmetleri (Elektrik), yatırımcıve solar tedarikçi model I (Türkiye)
Fotovoltaik Elektrik Arzı ve Örnek Elektrik faturasıiçin Örnek Elektrik Arzı Sözleşmesi (Türkiye)
SPAIN
Contrato de cuentas en participación para laexplotación de una instalación fotovoltaicaubicada (España)
Contrato de representación de mercado para laventa de excedentes de una instalación delautoconsumo (España)
Plantilla de estatutos corporativa (España)
UNITED KINGDOM
Power Purchase Agreement (United Kingdom)
ANNEXES
78
© MRW Zeppeline Bretagne
79
ANNEX II: CASH FLOW MODEL
A cash flow tool is available on the PV Financingwebsite here. This includes both a simple web-basedmodel and a more complex Excel-based model foreach target country which can be downloaded in thebottom right hand corner of the webpage. The inputsto the model include timing, construction, operations,
revenues and savings, operational expenditure,funding, equity and macroeconomics. The modelallows users to choose between Feed-in Tariffs, Self-consumption, Net metering and Power PurchaseAgreements business models.
A screenshot of the cashflow model used for all thebusiness models, available on the PV Financingwebsite, is shown below:
Figure 36. Screenshot of self-consumption cash flow model used as base case
80
ANNEX III: GERMANY – THE “MIETERSTROM”NEIGHBOUR SOLAR SUPPLY MODEL
This is a translation of a section from the PVFinancing Implementation Guidelines for Germany,“Geschäftsmodelle Mit Pv-Mieterstrom”. For moreinformation please download the German versionof the guide or contact the author BSW Solar whomay be able to provide more detail.
In recent years the neighbour solar supply model(or Mieterstrom in German) has become commonin Germany. It involves multiple mini onsite directwire PPAs where electricity is generated on-site bysolar, Combined Heat and Power (CHP) or otherdecentralised electricity generation and isconsumed on-site by the tenants or owner-occupiers of residential and commercial multi-occupancy buildings.67
The electricity is generated and sold on-site and isalso referred to as direct electricity or buildingelectricity. The key feature of direct electricity is thatit is not considered to have used the publicelectricity grid when it flows from the place ofgeneration (e.g. building rooftop or basement) tothe place of consumption (e.g. apartment).
The tenant or owner-occupier in the multi-occupancy building is also provided with additionalor residual grid electricity. This can be from adifferent supplier to the provider of the neighboursolar supply model.
Not all tenants or owner-occupiers have to take partin the scheme, a building can have participatingand non-participating tenants.
Providers of the neighbour solar supply modeldeliver electricity to final consumers and musttherefore satisfy the requirements of a licensedsupplier as stipulated in the Energy Industry Law(EnWG). However the legislation states that withinthe neighbour solar supply model, supply onlyoccurs within a “customer installation”, which leadsto less of an administrative and regulatory burdenon the supplier.
The neighbour solar supply model, which is withina single building, must be distinguished from othermodels such as regional electricity, boroughelectricity or neighbourhood electricity, all of whichdo use the public grid. (See Figure 2 for more info.)
Figure 37. Diagram of the neighbor solar supply model (BSW-Solar)
67 In addition to tenants in the apartment building, members of a homeowners’association can also become neighbour solar supply customers.
Residual consumption Non-participating tenants
In-feed Participating tenants
ANNEXES CONTINUED
81
The neighbour solar supply model can also beused in office buildings, business parks and publicbuildings. Hospitals, schools or swimming poolsmay also be interested in the model as that couldallow them to pay a lower EEG levy.
The power consumers save money on their electricitybills as the on-site solar electricity is cheaper thanelectricity purchased from the grid at the retail price.
It is expected that the neighbour solar supply modelwill be incentivised in delegated legislation due topass in Germany in 2017, specifically theamendment of the German Renewable Energy Act(EEG) 2017. This model is being strategicallyencouraged and targeted as being worthy of supportin order to spread the benefit of solar PV to the multi-occupancy building segment, and it is hoped thatthis market will grow in the coming years.
Figure 38. Comparison of business models for on-site, local or regional electricity (BSW-Solar)
Supply relationship
Grid use and grid charges
EEG levy (tax)
EEG remuneration or feed-in tariff
BUSINESS MODELS
The plant operator and finalpower consumer must be the same entity.
Note: This is establishedthrough the lease contract orsale of the PV installation tothe power consumer.
No use of the public grid.Consequently, no gridcharges are due.
Up to 40% of the EEG levyis due.
For small installations the“small installation regulation”applies where electricity frominstallations with a maximumcapacity of 10kWp up to anon site consumption of 10MWh/year, is 100% exemptfrom the EEG levy.
For the self-consumedquantity of electricity, in accordance with EEG, no remuneration is paid.
ON-SITE CONSUMPTION AND LEASE MODEL
Supply to third parties
No use of the public grid.Consequently, no gridcharges are due.
100% of the EEG levy isdue, although this is due tochange shortly (with theEEG amendment 2017) andthe installation will be powerwill be exempted from apercentage of the levy.
For the directly-consumedquantity of electricity, inaccordance with EEG feed-intariff, no remuneration is paid.
NEIGHBOUR SOLAR SUPPLY
Supply to third parties
Use of the public grid. Gridcharges are due.
100% of the EEG levy is due.
The quantity of electricity fedinto the grid will beremunerated at the valid EEGfeed-in tariff rate for 20 years.
REGIONAL ELECTRICITY,BOROUGH ELECTRICITY AND NEIGHBOURHOOD
ELECTRICITY
82
ANNEX IV: FRANCE – THE COLLECTIVE SELF-CONSUMPTION MODEL
This is a translation of a section from the PVFinancing Implementation Guidelines for France,“Guide de mise en oeuvre de projets PV enFrance”. For more information please download theFrench version of the guide or contact the authorObserv’ER who may be able to provide more detail.
This section looks at the collective self-consumption model, where the solar PVinstallation(s) and consumers need to be locatednear to one another.
The consumer does not bear the cost of the initialinvestment, but purchases the PV power at a pricedefined by a PPA contract with the generator,usually below the retail price of electricity suppliedfrom the grid.
A recent government order in France has created alegal framework for these kinds of projects called‘collective self-consumption’, where electricity can besold between one or more generators and one ormore consumers. Note that the details of thisregulatory framework have not yet been completelyfinalised and could change further as per theapplication decrees that are going to follow the order.
A requirement of the collective self-consumptionmodel is that the players in the model need to allbe part of a single legal entity. Possible optionscould be associations, cooperatives or a co-ownersmanagement body (similar to a tenantsassociation), but there is a lot of freedom as to thetype of legal entity.
It is understood that collective self-consumptioncould potentially be used for multi-occupancybuildings, or small neighbourhoods. It could also beused in the social housing sector. This depends onone key aspect of the text as it stands: collectiveself-consumption is only allowed within a low-voltage branch of a grid, or low-voltage connection.This limits de facto the size of the projects. Thiswould not allow projects at the scale of largeneighbourhoods or boroughs for example. Ideallythis limitation needs to be got rid of. It may be thatthe government will want to proceed gradually onthis issue. More will become clear when theregulatory details are finalised and projects startbeing implemented on the ground.
France currently allows on-site direct wirePPAs where the installation is either on thebuilding’s roof or where the generator andconsumer are connected via a private wire.The European directive that authorisesprivate grids has not yet been transposed intoFrench law. A private wire is very difficult toset up in France because by law it has to beproven that the private wire will provide abetter service than the public grid.
Off-site PPAs where a generator sells powerto a power consumer via the public grid arebeing introduced in France. In France thismodel involves aggregators, who buyelectricity from a large number of generatorsand sell it on to consumers.
ANNEXES CONTINUED
83
ANNEX V: TURKEY – REGULATORYFRAMEWORK OVERVIEW
This is a translation of a section from the PVFinancing Implementation Guidelines for Turkey,“Ulusal Uygulama Rehberi”. For more informationplease download the Turkish version of the guideor contact the author Gunder who may be able toprovide more detail.
In Turkey solar PV is awarded a feed-in tariff of0.133USD/kWh, for systems between 0-1MWp thatare installed before the end of 2020. This is paidfor just 10 years and there is a lot of uncertaintyaround whether a solar installation’s power will beable to be sold after that period and what price itwill get. The Feed-in Tariff payments are paid inTurkish Lira according to the official exchange rate,for the billing day any electricity exported orinjected into the grid, as declared by the CentralBank of Turkey and set by a market mechanism.
In the past if an installation used components thathad been manufactured in Turkey the Feed-in Tariffincreased, however this no longer applies.
There are a number of other measures in place tosupport renewables in addition to the Feed-in Tariff:
• The distribution and transmission operatorsgive priority for the connection of renewableenergy installations.
• The distribution operators have to ensure that20% of the electricity supplied to certaincustomers is renewable.
• Renewable installations are exempt from theannual license fee for the first eight years ofoperation and pay only 1% of the regularlicense fee.
• Renewable installations only pay 15% of thesystem usage fees for the first five years ofoperation.
• Renewable installations get a 85% discount ontransmission infrastructure investment fees.
In Turkey solar projects can either be licensed or unlicensed.
Licensed projects - Applications or bids for solarlicenses were being accepted by the Turkishgovernment in June 2013 as part of a tenderprocess. In these tenders the state identifies areasof land (e.g. Konya or Karapinar) which are flat, notree cover and low agricultural output, andguarantees that it will build the transmission linesto that site. Most of these projects should havebeen finished by the end of 2015. The governmenttendered for 600MW of capacity but receivedapplications for over 9GW. (The GeneralDirectorate of Renewable Energy (YEGM) thenannounced another round of applications in April2015 but that was later suspended.)
Unlicensed projects – unlicensed solarinstallations are intended to be primarily for self-consumption, are permitted up to 1MWp in size andbenefit from the Feed-in Tariff. In theory a systemcan be a maximum of 30 times the power demandof the consumer. Therefore in theory demand of33kW would allow you to install a 1MWpinstallation. All unlicensed PV projects must beapproved by the Turkish Electricity DistributionCompany (TEDAS) and a lack of grid capacity is asignificant source of delay and uncertainty fordevelopers looking to implement unlicensedprojects. In addition, projects of this size must applyto the local DSO for a grid connection and pay gridcharges on any electricity injected into the grid. Thesystem usage fees are published every year on thewebsite of the Electricity Market RegulationAuthority (EPDK). The fees change depending onthe system size. In Turkey the distribution grids arerun by 21 regional monopolies who receive licensesfrom the Energy Market Regulatory Authority.
Systems above 1MWp do not receive Feed-in Tariffpayments.
Retail electricity prices in Turkey are very low whichundermines the economics of solar PV projects,especially in the agricultural and industrial sectorsand in Organised Industrial Zones. In January2014, the retail electricity price was at0.088USD/kWh in certain segments, which is lessthan the Feed-in Tariff of 0.133USD/kWh. The onlypossible exception is the commercial sector where
84
there can be an economic incentive to self-consume solar electricity from an unlicensedproject. In this case, normal profitability driversapply such as the load profile, self-consumptionrate and the retail electricity price. Other drivers arepeak shaving and green image.
The Turkish Electricity Market Law No 6446 fromMarch 2013 and the update of the LicenseRegulation from November 2013 state that in orderto generate electricity a license has to be obtainedfrom the Energy Market Regulatory Authority(EPDK). Licensees must either be limited liabilitypartnerships or publicly listed companies, as perthe Turkish Commercial Code.
Licensed companies can enter into powerpurchase agreements with themselves when theyown a generation asset or with third parties.
Most investors judge that the incentives and returnson solar PV in Turkey are not yet sufficient totrigger investment at scale, but there is nonethelessgreat potential in the Turkish solar market.
ANNEX VI: AUSTRIA - POTENTIAL“GEMEINSCHAFTLICHEERZEUGUNGSANLAGE”68 SHAREDGENERATION FACILITY MODEL
This is a translation of a section from the PVFinancing Implementation Guidelines for Austria,“Leitfaden zu PV-eigen-verbrauchsmodellen”. Formore information please download the Germanversion of the guide or contact the author PV-Austrian who may be able to provide more detail.
NB This model is currently the subject of politicaldebate and the regulatory framework to enable thismodel has not been decided or finalised. Thesepolitical discussions should be borne in mind whenreading this section.
Generally, the self-consumption model can offereconomic benefits in the multi-occupancy buildingssegment as well as in the single-occupancysegment. This allows tenants/occupiers who do nothave access to their own roof space to neverthelessactively participate in the energy transition. Newbuild housing developers can offer additional valueto environmentally conscious tenants by grantingaccess to green PV electricity. And this segmentallows solar PV to be expanded in urban areaswhere a large amount of unused roofspace isavailable. On commercial buildings such asshopping centres or office buildings, the installationof PV systems can contribute towards a “green” andsustainable image and thus become more attractivefor prospective tenants and customers.
A number of requirements within the Austrian GreenElectricity Act (ElWOG 2010) hinder the installationof PV systems in multi-occupancy buildings:
• It is not possible within the current legalframework to assign a single PV system tomultiple power consumers.
• Combining several metering points is prohibited.
• The cables within the building (but not insidethe individual flats) are considered to be thepublic grid and the electricity cannot betransferred via the public grid. Only utilitieswith grid licenses are permitted to use thepublic grid. The term ‘direct transmission’ doesnot apply to multi-occupancy buildings.
Due to these requirements, the use of PV electricityin multi-occupancy buildings is currently restrictedto installations that serve the building’s communalelectricity consumption or several technicallycompletely separate PV systems. Neither model iseconomically viable or easy to implement.
However a number of key legal amendments arecurrently under discussion to try and fix this situation.
An amendment of the Electricity Act (ElWOG 2010)is currently under discussion to legislate for a“common generating plant”. This term will betechnology neutral and hence applies to various formsof on-site renewable energy, including solar PV.
68 This term can broadly be translated as “shared generation facility”.
ANNEXES CONTINUED
85
The following specific regulatory changes arecurrently being discussed:
• It will be permitted for a common generatingplant to be connected to the building’s mainpower supply line (which also supplies theindividual occupiers) and will receive its ownmetering point.
• Currently, various possibilities fortenants/occupiers to voluntarily take part in thescheme are under discussion. For instance,tenants who choose to take part could do soby buying a “symbolic” share in the plant. Thefreedom for every consumer to choose his/herown supplier is therefore guaranteed, asrequired by EU law.
• The plant is operated with a focus on self-consumption with only excess electricity beingfed into the grid.
• All rules governing the distribution of theoperating costs, revenues from the excesselectricity, and the distribution of self-consumed electricity shall be covered by acontract between the common generatingplant SPV and the tenants/occupiers.
• Both the solar PV system and everytenant/occupier must be equipped with a smartmeter. The utility or grid operator isresponsible for metering each flat/office’selectricity consumption and billing theconsumers per metering point.
• It must be guaranteed that by connecting thesystem to the building’s main electricity line,the tenants/occupiers would not be liable forgrid charges, as this would then no longer fallunder the definition of the public grid. However,under this amendment it would still not belegally possible to sell the produced electricityto third parties, e.g. buildings across the street(unlike the German Mieterstrom model). It canonly be used by occupiers within the building ifthey become part of the SPV operating (andown a symbolic share) of the PV system.
• The amendments to the Green Electricity Actdescribed above will not alter other laws andregulations on e.g. residential tenancy,property law or building permits.
These legal amendments, widely expected to beadopted in the coming months, would create aneconomically viable model for solar PV on multi-occupancy buildings.
ANNEX VII: SPAIN – REGULATORY FRAMEWORK OVERVIEW
This is a translation of a section from the PVFinancing Implementation Guidelines for Spain,“Pautas de Implementacion Nacional”. For moreinformation please download the Spanish versionof the guide or contact the author Creara who maybe able to provide more detail.
Solar PV deployment in Spain is currently very rare,mainly due to the high levels of uncertainty createdby the many retroactive regulatory changes thathave been implemented since 2010. These arelisted below:
• In 2010 the government passed the RoyalDecree-Law 14/2010, which required allelectricity generators to pay a fee of0.0005EUR/kWh for electricity fed into the grid inorder to reduce the electricity sector’s tariff deficit.
• Later in 2010 the Royal Decree 1565/2010modified government support for electricityproduced from existing solar PV plants.Existing Feed-in Tariffs (FiTs) were cut by:
• 5% for small-size roof installations (< 20 kW)
• 25% for medium-size roof installation (> 20 kW)
• 45% for ground mounted installations
86
• In January 2012 the Spanish governmentimposed a moratorium on the Spanish Feed-inTariff mechanism for new renewable energyinstallations.
• Later in 2012 the Royal Decree-Law (RD)9/2013, completely abolished FiTs withretroactive effect.
It was widely expected that a net metering law wasgoing to be put forward, however in the end it wassubstituted by a self-consumption regulation(October 2015). This new law regulates theadministrative, technical and economicarrangements for generation and supply ofelectricity for self-consumption. The Self-consumption RD 2015 sets both a fixed and avariable fee on self-consumers, who can sell theexcess electricity only under certain conditions. InSpain self-consumption models therefore basetheir return mainly on savings on electricity bills, aswith some types of self-consumption schemes theowner receives zero revenue for any excesselectricity exported to the grid.
Other solar PV business models and supportschemes such as Power Purchase Agreements,net metering and Feed-in Tariffs either do not existor are not economically viable.
Before the last elections (December 2015) severalpolitical parties signed an agreement which statedthat if they form a government they will introduce aseries of positive changes within the self-consumption regulation. At the time of writing thepolitical situation in Spain is changing rapidly.
It should be noted that the Royal Decree (hereafterRD) affects all supply points connected to theelectricity distribution network. Isolated or off-gridfacilities, i.e. installations which do not have anygrid connection point, are exempt from complyingwith the RD.
The new law establishes two types of self-consumption with different conditions, which aresummarised in the following table.
ANNEXES CONTINUED
87
Figure 39. Main characteristics of different self-consumption schemes in Spain
Consumer
Owner
Registration
Contracted power
Excess electricity
Measuring equipment
• There is only one power consumer for the installation
• The owner of the installation must be thesame as the owner of the supply point
• It is not necessary to register thegeneration facility as an electricityproduction facility
• However, it is necessary to enlist it in the self-consumption register (Registro Administrativo de autoconsumo,Royal Decree Law 24/2013, of theElectricity Sector)
• Contracted power of the consumer/supply point can be up to a maximum of100kW and the generation facility’scapacity cannot exceed the supply point’scontracted power
• The consumer does not receive paymentfor the excess electricity injected to the grid
• It is mandatory to install measuringequipment to register net generation
SELF-CONSUMPTION 1 (JUST FOR SELF-CONSUMPTION)
• There might be a consumer and aproducer for the same installation
• The owner of the generation facility maydiffer from the owner of the supply point
• It is necessary to register the generationfacility as an electricity production facilityin the electricity production facilitiesregister (Registro Administrativo deinstalaciones de producción de energíaeléctrica, Royal Decree 413/2014)
• The generation facility’s capacity shall notexceed the supply point’s contractedpower, but there is no limit as in self-consumption 1
• The consumer may receive compensationfor the excess electricity injected to the grid by selling the electricity on thespot market
• It is mandatory to install bidirectionalmeasuring equipment to register netgeneration as well as measurementequipment at the associated consumption point
SELF-CONSUMPTION 2 (SELF-CONSUMING AND SELLING)
88
For Type 2 self-consumption, the only way toreceive remuneration for the excess PV electricityis by selling it on the spot market at current prices(“precio del pool”). In order to do so the owner mustobtain several licenses (self-consumption andelectricity production facilities registration forms,electricity trading license etc).
The procedure of obtaining the various certificatesand licenses is very laborious for both Type 1 andType 2 self-consumption and is regulated by RoyalDecree 1699/2011, which refers to all grid-connected installations.
Complying with the procedure established in theRoyal Decree 900/2015 is the only legal option toreceive remuneration for the injected excesselectricity. In order to be able to sell electricity onthe spot market the consumer can either:
• Become an electricity trader in order to be ableto sell the electricity on the spot markethimself; or
• Hire an electricity trader who sells theelectricity on the spot market for the generator.
Either option includes additional costs that reducethe revenue from the excess electricity, especiallyfor a small producer.
It is worth mentioning that the sale of electricity issubject to the payment of a tax (Impuesto sobre elValor de la Producción de Energía Eléctrica) inSpain, as regulated by the Law 15/2012. Thus,those consumers injecting the excess electricityinto the grid would have to pay 7% in tax of theremuneration received (excluding VAT).
Consumers who decide to self-consume under theRD 900/2015 will have to continue paying theelectricity access tariffs for consumption like anyother consumer. At the same time, they will haveto bear additional charges. For now, these chargesare divided into two types (the law indicates thatthis might change in the future as the charges haveonly been set for 2016 and 2017), which presentdifferent exceptions regarding its payment:
• Fixed charges, based on capacity:
• PV systems up to 100kWp with neither ameter which measures the overallconsumption of the consumer (not legallyrequired) nor a battery system are exemptfrom paying the fixed charges
• Cogeneration production facilities areexempt from fixed charges until December31, 2019.
• Variable charges for self-consumed electricity(kWh), based on the contracted electricity tariff:
• Consumers whose contracted power is lessthan or equal to 10 kW are exempt frompaying the variable charges for self-consumption.
• Cogeneration production facilities areexempt also from variable charges untilDecember 31, 2019.
• Mallorca and Menorca have reductions inthe variable charges for self-consumptionand the Canary Islands, Ceuta and Melillaand Ibiza-Formentera’s electrical systemshave total exemptions of these payments.
ANNEX VIII: ITALY – SUPPLY CONTRACT PPAS OR “SISTEMI EFFICIENTI DI UTENZA”
This is a translation of a section from the PVFinancing Implementation Guidelines for Italy,“Impianti Fotovoltaici Linee Guida perl’Implementazione”. For more information pleasedownload the Italian version of the guide or contactthe author Ambiente Italia who may be able toprovide more detail.
In Italy solar PV supply contracts or PowerPurchase Agreements are governed by the“Sistemi Efficienti di Utenza” (SEU) regulatoryframework. This section will provide an overview ofthe regulatory framework.
ANNEXES CONTINUED
89
Resolution no. 578/2013/R/eel by the RegulatoryAuthority defined SEU (and SEESEU) as systemsfor production and consumption made up of at leastone production plant and a power consumer, directlyconnected by a private wire without the obligation fora connection with a third party. They are alsoconnected, directly or indirectly, to the public grid.
Getting the SEU qualification or certificate is criticalas the grid and system tariff conditions on the self-consumed electricity are much better than withoutSEU status. Since 2015, the “system levies” aredue on both the self-consumed energy and theelectricity taken from the grid, at a rate of 5%.
If no SEU qualification is requested, then thedeveloper must pay the general levies on the self-consumed PV electricity. This also applies to theplants in operation before 2015. To benefit from thededicated SEU tariffs, power consumers andgenerators must apply to the energy regulator (GSE)on their dedicated web portal for a SEU certificate.
However it is important to note that there are bothvariable and fixed levies on electricity bills in Italy.The fixed levies remain the same with or without asolar PV system and the possible future shifttowards levies being applied to the fixed part of thebill is a major risk for the self-consumption and PPAbusiness model in Italy.
Other details of the SEU framework were publishedin resolution no. 578, the Application Guidelinespublished by the energy regulator (GSE) as well asadditional resolution from the Regulatory Authority.
Note that small PV plants (lower than 20 kWp) areexempted from the SEU framework and fall undera “scambio sul posto” net billing scheme, for whichthe levies are applied only on the grid electricity andnot self-consumed electricity. For PV plants usingthe “scambio sul posto” mechanism, the SEUcertificate is automatically released by GSE.
In order to be certified as a SEU, a system shouldhave the following characteristics:
• One or more on-site electricity generationinstallations with a maximum total installedcapacity of 20 MWp. They have to be
managed by the same entity, but this can be adifferent entity to the power consumer. Thesecan be either renewable energy installations orhigh efficiency cogeneration.
• The meter point can only belong to one powerconsumer. This therefore excludes buildingswith multiple users and a number of interestingapplication segments, such as shoppingcentres, multi-family residential buildings,office buildings, airports.
• The installation must be located in an areaowned or managed by the final powerconsumer, and this area must begiven/rented/donated and fully available to thegenerating entity.
Another key regulatory issue is the reform of theelectricity dispatching system, which is underconsultation at the moment. According to theseproposals PV plants could receive revenues notonly for selling electricity but also for additional gridservices such as curtailment, demand responseand voltage management. Combined solar andstorage systems could provide more grid services.
Another key regulatory factor for PPAs is the reformof the electricity bill. Through Resolution no.582/2015/R/EEL, the Regulatory Authority hasintroduced a reform which will be implemented infull by 2018. The reform changes the system tariffsso that instead of being proportional to consumptionit will be a fixed fee for all domestic customers:
• Costs for measuring, commercialising anddistributing electricity will be covered by thefixed charge per customer (€/year) andaccording to the power level (€/kW per year);
• Transmission costs will be covered by thevariable part of the grid charges (EUR/kWh);
• Costs for system levies will be different forresidential customers, for which they will beentirely on the variable part (EUR/kWh), and for non-residential users, for which theywill be a combination of fixed charges andvariable charges.
90
Once these changes are implemented, 75% of thebill will still depend on variable consumption, whichwill therefore still incentivise energy efficiency.
The changes will introduce many different powerlevels, so that the consumer can choose the onebest fits his/her needs. The experimental tariff forheat pumps will be extended to 2016, alsoconsidering its potential application to otherdomestic clients.
As a summary, the gradual introduction of thereform foresees the following steps:
From January 2016:
• The current “step tariff” is maintained.
• Changes introduced to flatten the progressiveeffect of grid charges on consumption.
• Fixed share of grid charges increased.
• Data regarding the maximum power demandis collected and made available to customers.
From January 2017:
• Non-progressive grid charges implemented.
• Beginning of changes on system levies, toflatten the progressive effect of these charges.
• Introduction of all the new power levels.
From January 2018:
• Reforms fully implemented, including the fixedsystem levy tariffs.
Let us consider the following example. Forresidential consumers, from 2018 the bill total willbe 25% fixed charges (per connection point andper kW of power) and 75% variable charges (perkWh of electricity consumed).
For more detail please download the Delibera582/2015/R/EEL from the energy regulator’s (GSE)website.
ANNEX IX: UNITED KINGDOM – POWERPURCHASE AGREEMENT REVENUES
This is a section from the PV FinancingImplementation Guidelines for the United Kingdom,“Making Solar Pay: the future of the solar PPAmarket in the UK”. For more information pleasedownload the full version of the guide or contact theauthor, the UK Solar Trade Association.
Variants of a PPA Project Investment Model haveoperated profitably within the UK solar market overthe last 5 years. This is due in part to the maturityof PPAs within the wider UK electricity market andthe development of solar as a forecastable, secureand reliable generator of electricity backed by tariffbased policy frameworks.
The underlying economics of all PPA ProjectInvestment Model solar project companies, nomatter how they are arranged, rest on several inter-dependent and fundamental factors. These include;
(i) Project revenues
(ii) Project capital expenditure (capex)
(iii) Project ongoing operational expenditure (opex)
(iv) Cost of capital to finance the project.
Scale also plays a part both at a project and marketlevel as economies of scale apply within a project(the larger the project, the lower the cost / unit) aswell as within the market (for example the largerthe market, the more efficient the supply chain).
What is a PPA?
At its most basic, a PPA is a contract for saleof electricity between two parties. There issignificant variation in contract length, priceand structure of these contracts, dependingon the market conditions, the types of bodiesinvolved and their credit-worthiness.
ANNEXES CONTINUED
91
In this section, we provide a general outline ofthese factors with some background.
Within the PPA Project Investment Model, twoaspects of project revenues are critical: the valueof the revenue stream and the perceived securityof the revenue stream. This means that, to aproject, a lower price from a very secure creditor(such as government) may be worth more than ahigh price from a less creditworthy counterparty.
Projects receive revenue from a number of sources.These sources include;
(i) The payment of tariffs and/or sale ofrenewable obligation certificates
(ii) The sale of the electricity generated
(iii) Locational revenues such as embeddedbenefits (revenues and avoided costsdetermined by the size and location of the project)
(iv) Tax incentives (although not strictly revenueit acts in a similar nature)
(v) National Grid auxiliary services revenues.
Three primary tariff mechanisms have been usedin the UK to date, namely the Feed-in Tariff,Renewables Obligation Certificates (tradablecertificates) and Contract for Difference (tenders)structures. However, as noted earlier in the report,the ROC scheme is in the process of closing andin the FIT scheme, tariffs have been reduced withonly certain projects now eligible to receive these.Solar is eligible for a CfD however at present itappears that no further auctions will be held forsolar and other “mature technologies” in the nearterm at least.
The revenue for (i) & (ii) above is typicallycontracted through the PPA between the Ownerand a counterparty. That counterparty can vary andis outlined in more detail below. More informationon (iii) & (iv) is provided below.
There are a number of types of PPA counterparties.
The first are licensed suppliers and balancing parties
In this situation, the Owner will sign an agreementwith a ‘traditional’ off-taker, such as: one of themajor utilities, known in the UK as the ‘Big Six’; abalancing party member who does not have theirown supply license but instead intends to trade theelectricity; or a smaller licensed supplier. Such anoff-taker will sign PPAs of any duration up toaround 15 years, but will only agree to fixed pricesfor the period over which the forward physicaltraded market contains sufficient liquidity - typicallythree years in the current UK market. Beyond thisfixed price period (or for the entire term of the PPA),pricing is typically set as a percentage of a definedwholesale price index, such as the clearing priceon one or more of the UK electricity exchanges.Once these PPAs are signed, the off-taker willtypically seek to hedge the generation they areprocuring in the forward market, progressivelyrevising their position nearer real-time. These off-takers will take volume risk (i.e. the risk that theactual annual generation volume will differ from theforecast) and profile risk (i.e. the risk that theexpected profile of that generation volume overindividual days and seasons will differ from theforecast). An element of profile risk can be sharedwith the Owner during the fixed-price period if theoff-taker provides a pricing matrix that providesdifferentiated prices for certain periods e.g. wintervs. summer, weekday vs. weekend, day vs. night,peak vs. non-peak. This will be part of an Owner’snegotiation with the PPA off-taker.
As well as selling electricity through this contract,ROCs (and historically LECs until July 2015) havetypically also been sold through the same PPA, withpricing being a percentage of the regulated value.These PPAs typically also provide for payment ofembedded benefits to the Owner. Electricity suppliersare incentivised to procure sufficient ROCs to meettheir Renewable Obligation (which is proportional tothe volume of electricity they supply to end users)and to contract with embedded generators withinareas where they supply end users.
92
Big Six utilities are deemed to have a highercreditworthiness, relative to smaller licensedsuppliers and balancing parties who do not havetheir own end-customers. This is relevant to bothequity owners and lenders. Lenders to largerprojects typically require a floor on revenues (eitherelectricity-only or bundled electricity together withROCs), and in this case, only a limited number ofpotential off-takers will be able to provide creditsupport for this guarantee. Such a market dynamicmeans that there is likely to be a trade-off forOwners in securing the highest priced PPA and themost creditworthy contract and counterparty.
The vast majority of renewable projects benefittingfrom tariffs have used PPAs of this type for avariety of reasons:
(i) The ability to sell all products (electricity,ROCs, LECs and embedded benefits)under a single contract,
(ii) The ability to procure a guaranteed revenuefloor (particularly relevant for projects withlong-term non-recourse finance),
(iii) Availability of these contracts due to theincentives on suppliers.
Another potential PPA counterparty is a corporate PPA provider.
Sleeved PPAs and other arrangements allowcorporate PPA providers to take the place oftraditional off-takers as the primary counterparty tothe Owner. Historically, when electricity priceforecasts showed continual electricity price rises inboth the medium and long term, the prospect of along term fixed price arrangement was a ‘win-win’for the Owner and the corporate PPA off-taker.Corporates would be able to ‘lock-in’ price certaintyfor longer than was available through wholesalePPAs, and Owners were able to hedge themselvesagainst the anticipated price rises in the future.Owners were also attracted to the revenuecertainty and creditworthy off-takers. However, incurrent market conditions of lower prices and
weaker forecasts, this ideal scenario hasweakened. Many large electricity users haveadopted a least regret model of contracting only forthe next season - if electricity prices fall, they willbenefit from the lower prices when they re-contract,and if prices rise then they also do so for all theircompetitors, which will not entail a commercialdisadvantage. By comparison, locking in for thelong term exposes the user to the risk thatelectricity prices fall during the term of the contract,leaving them at a commercial disadvantage to theircompetitors. This risk currently appears to be morepressing than the potential benefit of fixing pricesat current low levels and having wholesale pricesrise during the term of the contract. Should theforward market pricing rise significantly (perhaps inresponse to an expected capacity shortage), thenthis position could quickly change.
However, corporate consumer energy decisionsmay not be motivated purely by economicconsiderations. A number of end customers havesustainability and decarbonisation targets to meet,along with wider corporate social responsibilityobjectives. This incentivises them to contract withrenewable electricity generators, but they do havechoices. Some corporates are willing to buy“REGO-backed” electricity69 via a green tariff fromtheir retail supplier, while other corporates insist ona principle of ‘additionality’ i.e. they require theirpurchasing to be from new projects constructed asa result of their PPA.
There are also a number of other project revenuesother than the revenues from the PPA.
An example is auxiliary services provided to the National Grid.
The National Grid, in its role as System Operator forthe UK system, is responsible for maintainingelectricity supply and safe operation across thenetwork. In order to do this, it uses a number offinancial instruments to incentivise electricitygenerator and consumer behaviours, such as byramping up electricity generation to meet peak
69 The Renewable Energy Guarantees of Origin (REGO) schemeguarantees that electricity is from a renewable source.
ANNEXES CONTINUED
93
demand. Solar generation is not well placed toparticipate in these operations due to its reliance onthe sun and the peaks in demand most often beingin the winter evenings. However, the addition ofelectricity storage technologies may well change thisin the future, with the ability to store excess solar fora few hours from earlier in the day until the eveningpeak demand time. Battery storage can also help tosmooth sun/cloud ‘bumps’ during the daytime.
Another revenue sources is embedded benefits.
In order to pay for the maintenance of the DNO andTSO networks, end users pay fees (through acomplicated process) based on a calculation ofhow much of the physical electricity grid is used tomove electrons generated at one location to wherethey are consumed. If generation assets areclassed as ‘embedded’ - connected within thedistribution rather than the transmission network -generators are treated as negative forms ofdemand (i.e. supply), which makes them eligible fornegative charges (i.e. payments). This effectivelymeans that generators can receive funds foravoiding using the transmission network insituations where end users are located nearby tothe generator.
Finally solar projects can also receive tax relief.
Whilst not strictly income, tax relief structures suchas Enterprise Investment Scheme (EIS) andVenture Capital Trust (VCT) have played animportant part in building the financial justificationfor investment in solar projects in the UK to date. Itis not currently anticipated that these will beavailable in future.
© Flo Hagena
www.pv-financing.eu
SolarPower Europe(European Photovoltaic Industry Association)Rue d’Arlon 69-71, 1040 Brussels, BelgiumT +32 2 709 55 20 / F +32 2 725 32 [email protected] / www.solarpowereurope.org
