Rapidly falling technology costs mean subsidy-free solar is “coming of age”, according to a new study from Aurora Energy Research, which predicts 5GW will be deployed by 2030.
The consultancy expects a typical standalone project to be viable without subsidies by late 2024. The tipping point will come sooner for hybrid systems with co-located batteries.
Based on discussion with industry stakeholders and clients, Aurora estimates that the required internal rate of return (IRR) for new merchant solar projects to go ahead is between 9 and 12 per cent.
The firm says a model standalone project is expected to reach the lower end of this range in late 2024. A project commissioning in 2020 could be expected to deliver an IRR of just 4 per cent.
One of the main risks for investors is price cannibalisation, whereby “high deployment of solar capacity leads to reduced captured prices for all solar assets, due to correlation in generation patterns.”
“We expect this to drive solar capture prices to a 14 per cent discount on average baseload prices for the 2020-2045 period,” the report states.
It says one of the best ways to mitigate this risk is co-locate solar farms with batteries.
Co-location could bring benefits to both, including: lower costs through the sharing of assets and services; the avoidance of balancing charges; and avoidance of “energy spilling” in cases where solar capacity is larger than the grid connection.
A model hybrid system commissioning in 2020 with an equally sized solar farm and battery, and grid connection the same size as both combined, could be expected to deliver an IRR of 6.6 per cent.
If the grid connection was reduced to the same size as the solar farm by itself, then the project could be expected to achieve an IRR of 7.2 per cent. The figures rise to 7.1 per cent and 7.6 per cent respectively if the storage capacity of the battery is doubled, allowing it to store two hours of full output from the solar farm.
Aurora told Utility Week it does not have an exact view on when these hybrid systems would start to reach the 9 per cent threshold for economic viability, but said it would happen “substantially sooner” than 2024 and “possibly in the next couple of years”.
Aurora has previously warned that Ofgem’s planned overhaul of residual network charges and removal of embedded benefits – favourable charging arrangements enjoyed by generators connected to distribution networks – could delay the advent of subsidy-free renewables by up to five years.
Its latest modelling does not incorporate all of the changes proposed by Ofgem – only the removal of the avoidance payments that generators can earn from suppliers for helping to reduce their balancing charges.
The report says this alone reduces the modeled IRR of hybrid solar farms commissioning in 2020 by 0.8 percentage points.
But it also highlights a series of coming changes that will benefit hybrid systems. They include reforms to allow developers to build some hybrid systems of greater than 50MW without applying for a development consent order, the removal of final consumption levies from batteries and enhanced access to the balancing mechanism.
It additionally notes that the recent blackout could prompt National Grid Electricity System Operator to increase its procurement for frequency response. This would work in favour of batteries, which are ideally suited to the service due to their fast response times.
The report was commissioned by solar and battery developer Anesco and Wyelands Bank.