UK solar PV: what next?

The past five years has seen a ramping up of solar capacity in the UK, but with subsidies for new installations slashed, where does the industry go from here? It consolidates, says Gareth Baker.

The 2009 European Renewable Energy Directive sets a target for the UK to achieve 15 per cent of its energy consumption from renewable sources by 2020. In January this year the Renewable Energy Foundation estimated that if total planned and under-construction capacity (an additional 44.6GW) is built, the UK will overshoot this target by 35 per cent.

The UK boasts 622 solar photovoltaic farms either built, under construction or in planning, as well as extensive onshore and offshore wind, hydro and biomass.  

From a climate change perspective, these statistics are certainly positive. However, the rate of new projects coming online and anticipated further deployment means the Department of Energy and Climate Change (Decc) may far exceed the Levy Control Framework budget. In a continuing environment of austerity, and as the supply chain continues to innovate to reduce costs, subsidies for new generation have been slashed.

The resultant slowdown in development indicates this solar PV development phase could be coming to a close.

Decc’s provisional statistics for UK energy production and consumption in 2015 indicate that low-carbon electricity (nuclear and all types of renewables) grew by 13.8 per cent and accounted for 42.9 per cent of all supply, up from 35.6 per cent in 2014.

Taking solar PV on its own, by the end of Q3 2015, a further 4.2GW of capacity had been installed, an increase of 28 per cent on Q3 2014. Energy generation from solar PV increased by 73 per cent (1.1TWh) over the same period. By the end of Q3 2015, with installed capacity of 8.8GW, solar PV comprised 29 per cent of all renewable electricity generating capacity.

These trends highlight the increasingly dominant position of solar PV, with only onshore wind generation producing similar percentages in 2015. Whatever happens, the UK is expected to have deployed more than 10GW of solar PV by the end of last month, creating a major industry in just five years.

Many of the current owners and funders are not long-term assets holders. They (and their investors) will need to recycle capital. We (and many others in the sector) expect a new phase of activity where asset owners seek to extract value from the debt markets or dispose of assets.

There will be challenges ahead as the market consolidates. First, the price of electricity in Europe is falling. This, more than any other factor, will impair value. Longer-term forecasts do not look positive. As more capacity comes online, the price environment may become worse in the short term.

The government is withdrawing or substantially reducing subsidies for new installations. While this should not affect installations already accredited, these steps create a perceived higher regulatory risk and will discourage investors.

There will also be an impact of all this new capacity. Government policy has caused successive bubbles of development activity – a dash to connect new capacity in advance of a milestone date when subsidy levels reduce or fall away. A final dash to connect before the end of March 2016 has recently come to an end. This is likely to mean that in a few months’ time, a substantially increased asset pool will compete for debt capital and exit opportunities. One would expect a greater supply/availability of assets to impair pricing across the market.

Then there is the nature of the operating assets themselves. UK solar is still a relatively young market and many assets have not been in the ground for long. Limited operating data is available, so benchmarking the quality of installations is limited to testing and perceived quality/fundability of the components. In addition, there have been a number of insolvencies in the supply chain.

Assets with a longer, stable operating history and which have been accredited with a higher level of subsidy are likely to be more saleable. Smaller, newer installations may struggle unless they are aggregated with a larger and more mature portfolio.

So, who are the buyers and funders? Many are institutions looking at different types of assets. Yield, risk, stability and other factors are considered as they look across the asset classes.

Solar farms are potentially compatible with the needs of pension funds. Investments must be stable, low risk and predictable. Solar farms fulfil this requirement. They have one input – the sun – and two outputs: power and benefits. The engineering is relatively simple, which means a lower likelihood of operating issues arising. In addition, the assets contribute towards sustainability targets and green credentials.

In conclusion, there are challenges ahead. However, the UK solar industry is accustomed to innovating and working in a changeable environment. What remains certain is the important role solar and renewables generally has in the future of UK electricity generation.

Gareth Baker, partner, corporate & energy, Gowling WLG