Lay the right foundations

Ground-mounted solar generation can be an attractive proposition for investors, but would-be developers face various challenges that require careful planning if they are to succeed, says Gareth Baker.

The push towards renewables has been driven by several factors: climate change commitments and a need to decarbonise our fuel sources; security of supply; and consumer demand to lower costs for the user. The fact that renewables are becoming more cost-competitive at a time when generating power is becoming more costly is one factor driving the rise in solar developments. It is an exciting time for renewables and this is only set to grow with government’s vision for the photovoltaic (PV) market, outlined in its Roadmap to a Brighter Future.

According to government sources, installed PV capacity has increased 25-fold since the end of 2010, being deployed on more than 500,000 buildings, with installed capacity set to reach more than 4GWp by the end of 2014. The solar industry states that ground-mounted installations accounted for more than 90 per cent of new large-scale PV added in the UK in 2013.

It is easy to see why solar is a popular choice. Compared with many other forms of generation, it is low risk, enjoys stable returns, is quick to deploy and does not involve the construction risks of many technologies. The cost of key components – modules, inverters and frames – has also fallen.

There has been a shift in the type of active participants in the market, however. Traditionally, power companies have invested in building, owning and operating a renewables portfolio. More recently, they have been forced to divest assets and withdraw from projects as falling share prices have constrained their ability to invest. Big corporates such as Sainsbury’s, Coca-Cola and GSK have entered the market. These corporates have strong balance sheets – and investing in green energy is ticking a lot of boxes on their environmental checklist.

Subsidies have played a big role in the growth story. The gradual reduction in the availability of incentives will change the market. In the UK, we will see a move away from Renewables Obligation Certificates (Rocs) to the contracts for difference (CfD) regime. The uncertainty could stall deployment and investment.  

The European Commission has published its Energy and Environmental State Aid guidelines 2014-2020, which come into force on 1 July. They include aid to energy from renewable sources with the objective of increasing market exposure for renewable energy, especially in the electricity sector. It remains to be seen how they will be interpreted at a national level.

There are challenges facing market entrants to ground-mounted solar. These depend on the aspirations of the developer, including the stages of involvement. Is it merely site selection and gaining planning consent or does it include construction? Does the developer want to own and operate the assets or sell an operating site to a fund?

Stage one: site selection. Site selection is critical – lease payments, irradiance levels and proximity to a grid connection are key inputs driving project returns – and ultimately success or failure.

Developers can start by seeking to secure an exclusive licence with which to conduct initial site investigations and take readings to ensure the best site is selected. The developer should then seek to agree binding options with the landowner, or possibly enter into a agreement for lease. Issues to consider include:

•    focus on key commercial terms such as the option fee and duration;

•    identify who owns or leases the land and check it is not affected by agricultural tenancies, for example, which may delay the granting of the lease;

•    if the land is subject to a mortgage, the relevant bank will need to give consent to the grant of the option. If the land is leased by the landlord, the freeholder may also need to give consent;

•    a draft lease appended to the option can give the developer confidence that the landowner is committed to specific terms;

•    is financing required?

Stage two: planning consent. The value of the development will rise once planning consent has been granted and key planning conditions satisfied. A developer may decide to sell at this stage.  

Developers should speak with the distribution network operator early on to assess the cost of the site being connected to the grid and seek to identify where there are economically available grid connections. The network operator will issue a conditional grid connection offer and the developer will make a deposit payment to secure the offer. Gaining planning consent before making a payment is crucial.  

Stage three: construction and maintenance. The most common approach is to appoint an engineering, procurement and construction contractor who will often continue post-build on-site services under an operation and maintenance contract. Points to consider include:

•    assess the credit rating of the contractor and equipment performance warranties;

•    protect the development against insolvency of the contractor and subcontractors;

•    what performance warranties are offered on key assets?  

•    can the developer insist that the procurement and construction contractor and operation and maintenance contractor enter into direct agreements with the bank?

Stage four: selling the power and benefits. Depending on the size of the development, there are different options for the sale of the power and benefits. From this autumn, developers will also be able to opt for CfDs instead of Rocs. With Rocs, power and benefits are usually sold through a power purchase agreement and it is best to liaise with a range of off-takers to find the best terms.  

We cannot see interest in the solar market subsiding. On the contrary, the government hopes to see a rise in the number of market entrants, from corporates to industry looking at industrial rooftop developments, usage of housing association stock and modules on government buildings. With a drive to innovate the PV sector, we will be seeing more inventive methods of harnessing the
sun’s energy and more efficient ways to distribute it.