Investor view: what CfDs mean for the UK solar industry

“The early introduction of the CfD scheme will force the UK solar industry to respond by improving efficiency and reducing costs.”

The UK solar sector has come a long way since the introduction of the first feed-in tariff in April 2010. The attractive and highly predictable returns generated by large-scale ground-mounted installations under the current Renewables Obligation subsidy regime has driven growth set to reach 6GW by the end of the year, and has seen new investment flood into the sector.

The decision by the Department of Energy and Climate Change to replace the existing obligation scheme with a new contracts for difference (CfD) subsidy mechanism for solar projects larger than 5MW from April next year is not expected to slow the sector’s long-term growth trajectory, for a number of reasons.

First, for funds such as Foresight Solar Fund Ltd (FSFL), the emergence of a vibrant secondary market in large-scale solar assets will present a significant opportunity in 2015 and beyond.

Second, the obligation scheme will remain open to solar projects of less than 5MW and we expect to see large portfolios of aggregated projects of 5MW or less becoming available to acquire.

Finally, onshore wind, with which large-scale solar would need to compete under the new CfD mechanism, will remain eligible for support under the obligation scheme until 2017. Competition for CfD subsidies with onshore wind will therefore be limited and will likely drive efficiencies in the solar industry, leading to the development of even larger projects than seen under the obligation scheme to achieve economies of scale.

The early introduction of the CfD scheme will force the UK solar industry to respond by improving efficiency and reducing costs. In the long term, this will help to ensure the industry’s continued and sustained growth.

FSFL is one of the UK’s largest investors in operational, large-scale solar power plants, with a portfolio of nine assets totalling 185MW. Growing investor interest in the UK solar sector was evident on 25 September when FSFL announced its intention to raise up to a further £100 million of equity to refinance 74MW of capacity recently acquired using a debt facility.