The recent decision by the Court of Appeal to uphold the High Court’s ruling that the government’s cuts to the Feed-in Tariff (FIT) for PV were unlawful appears to be at best only a delay in their implementation. Even if the Department of Energy and Climate Change’s (Decc’s) latest appeal to the Supreme Court is unsuccessful, it will impose the cuts from 1 April 2012 for installations with an eligibility date on or after 3 March 2012.
Prior to the publication of the government’s FIT review, the solar industry was flourishing, with tens of thousands of domestic and industrial installations completed since the FIT was introduced in April 2010. For utilities with high energy requirements and large property portfolios, the existing FIT was an attractive opportunity to reduce exposure to rising energy prices and cut emissions.
Under the changes proposed by Decc, the return on investment may be too low for many investors, who may instead look to other countries with more favourable tariff regimes when deciding where to deploy available capital. However, we believe there remains an opportunity for UK utilities under the proposed revised tariff through the use of power purchase agreements (PPAs).
In February, Thames Water announced the completion of 3.7MW of PV capacity at three of its sites near London covering an area equivalent to more than ten football pitches. The sites will provide an annual output of more than 3,500MWh, which will save the company £100,000 a year on electricity as well as reducing its carbon emissions. These installations were attractive to investors because a 25-year PPA was put in place under which the installation and maintenance costs are repaid by selling the electricity produced back to the utility at a market-competitive price.
The Thames Water model presents a glimmer of hope for the UK solar industry. The use of a PPA allows a developer or investor to build and own a PV system on a customer’s property and sell the power back to the customer or another industrial off-taker. For the off-taker, in this case a utility company, a PPA guarantees that it can buy the electricity generated by a solar installation for an agreed price for a fixed period, usually 25 years, hedging against future increases in market prices. In addition, the contract enables the utility to avoid most or all of the initial capital cost of the installation, as well as responsibility for operation and maintenance, both of which are typically transferred to the developer.
The 0.75MW first phase of the Thames Water project was completed before the 1 August deadline, qualifying the full 3.7MW for the higher FIT of 30.7p per kWh. Under the proposed revised tariff regime, in the short-term at least, any new PPA agreement would need to be at a level slightly higher than the current electricity market price to compensate for the cut in FIT and so make it attractive to investors. However, the long-term predictability of the cost of energy could still make this an attractive option for many utilities.
Traditionally PPAs have been used by utility companies to purchase energy from each other and from independent power producers such as the owners of renewable energy assets. In 2006, PPA contracts were first applied to the distributed energy generation markets in California, pioneered by developers such as SunEdison and Renewable Ventures and quickly adopted by others. By 2008, PPAs had become the most widely used financing model for non-residential solar installations in the US by efficiently transferring the upfront capital costs from the customer to a developer with greater access to capital.
These early PPAs were typically fixed price arrangements providing absolute price certainty over the period of the agreement. PPA contracts have come a long way since 2006 and now range from fixed priced agreements to flexible contracts designed to maximise opportunities in volatile energy markets. Somewhere on this spectrum it will be possible to find a PPA contract that makes the installation of PV an attractive option over the long term for both utilities and developers.
Patrick Charignon, chief executive, Europe Solar Utility.
This article first appeared in Utility Week’s print edition of 2 March 2012.
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