From pv magazine 09/2021
Significant market price fluctuations and risks will threaten investor appetite, which could hamper long-term large-scale deployment of solar energy. This has already been seen in California, with Karen Edson’s famous “duck curve” in 2012 showing the disconnect between production and demand. Already, the increase in renewable energy penetration in the state, up to 26% of the energy market, has resulted in yields falling by around 30%.
Jenny Chase, head of solar energy at BloombergNEF, believes this is an important issue for all markets experiencing rapid solar penetration and a threat to a solar future without subsidies. “Large-scale solar generation lowers electricity prices, which can reach zero or even negative points during sunny periods,” Chase said. “It’s not an imaginary problem, and it’s not a market design problem – the only way to solve this problem is to shift demand.”
Michele Scolaro, senior analyst at Aurora Energy Research, agrees that price cannibalization is a risk for developers of non-subsidy solar projects. “Due to its nature, price cannibalization first hit markets where the business case for merchant projects was stronger, as solar PV penetration increased and eroded income captured by assets,” he said. declared Scolaro to pv magazine.
One obvious solution is power purchase agreements (PPAs). Under these contracts, the price risk is partly transferred to the buyer, thus facilitating the financing of the project. For renewable energy developers like BayWa re, most of the corporate PPAs they undertake are subsidy free, which means the company is exposed to market fluctuations.
Benedikt Ortmann, global head of solar projects at BayWa re, said the reduction and negative prices are concerns. However, he pointed out that normal market fluctuations depend on so many variables at any given time across the electricity market as a whole. The reality is that solar developers are “the generators producing the cheapest source of electricity.” Ortmann added that there are already measures to counter these market challenges.
LevelTen Energy produces the P25 Index, a quarterly PPA price update. It showed that Spain was the fastest growing market in Europe in the second quarter of this year, succeeding Italy in the first quarter. One in three offers on its marketplace concerned Spanish projects. A change in the average PPA price sparked the latest cannibalization discussion. In the second quarter of 2021, renewable PPA prices for Europe remained broadly stable, as in previous quarters, but the Spanish supply prices of P25 solar PPAs fell 10.3% to 30.50 € / MWh (AU $ 50 / MWh).
The reasons for the fall in prices for Spanish projects range from the obvious, including an abundance of resources during midday hours, to a mature industry with a strong pipeline, as well as competition. Luis López-Polín, senior director of business development at LevelTen Energy, said another factor is that an increasing number of companies are using the competitiveness of the Spanish markets to obtain a pan-European PPA on favorable terms.
Chase agrees that project life PPAs provide a different experience to the spot market, but cautions that buyers are increasingly aware of the potential price differential and are considering short-term contracts at around € 35 / MWh. (AU $ 56 / MWh). “You have to be really optimistic about the residual value of the investment,” she said.
It’s not all bad news, however. For example, prices for the Danish supply of PPA solar P25 increased by more than 14% in the second quarter. “Investors in commercial solar power may see this as a near-term concern today,” said Harald Överholm, CEO of Nordic supplier PPA Alight. “We don’t see this as a major issue for investors in Northern Europe, and not for contract solar construction which accounts for the bulk of solar deployment in these markets. “
Georgios Gkiaouris, regional director of the European Bank for Reconstruction and Development, said that while price cannibalization is not yet seen in the EBRD region, the bank expects to see if the price of electricity continues to be fixed by marginal cost. “We expect the catch price to be lower than the average wholesale price,” he said. “Our projects have a lifespan of 20 to 25 years, so we already take that into account.
Like other risks, however, price cannibalization can be fought. “It is important for developers to quantify this risk,” said Scolaro. “Price cannibalization will have an impact on markets… depending on factors such as solar PV penetration, market size, interconnection with neighboring markets, etc.
The likelihood of reduction and negative pricing is already built into the project cash flow estimates. Mike Bammel, managing director of JLL Valuation Advisory, said all investors want the highest price for the lowest risk. If Bammel admits to having seen a drop in yield on solar, he hesitates to make a concrete figure. He stressed the need to take a longer-term perspective, especially with regard to the growing pressure on the US market due to carbon and ESG concerns from investors keen to protect or improve their climate position.
Dan Bates, CEO of clean energy provider Rebel Energy, said solar should be seen as part of a bigger whole. He says: “Solar is part of a larger whole – the question is how it combines with wind, batteries, electric vehicles, etc. “, He noted.
The next solution to the cannibalization problem is revenue stacking, with storage being a key differentiator. “Cannibalization will happen, and its effect will stay with us. Therefore, looking to the future, we need to channel investments into innovative technologies designed to provide flexibility measures, ”said Merce Labordona, senior policy analyst at SolarPowerEurope. “We need to maximize sector coupling, adopt the right mechanisms to encourage renewable energy production to respond to market signals for flexibility and provide incentives for end users to absorb the excess supply. “
A smart grid with storage can enable the movement and aggregation of demand, while the sector coupling of combined projects of desalination, water treatment, agriculture, local deliveries with electric vehicles, etc. could be transformational.
Ortmann is clear in his belief that the market will respond to quality over time. In terms of environmental impact, sustainability and price, he thinks solar still beats the alternatives. While batteries represent a larger investment for solar projects, BayWa re, for example, is already applying for battery permits from its factories, even though they do not plan to integrate storage immediately.
Gkiaouris said that in many markets integration should focus on connectors, system balance, and rule synchronization. However, to combat cannibalization, the market needs to see new business models and explorations of how solar power plants can be remunerated, based on storage, carbon costs, and potential changes in system pricing. .
This is increasingly important as the question of cost and value is reassessed in many sectors, beyond the potential impact of carbon. The New York State Energy Research and Development Authority, for example, already has policies in place to factor social benefits such as air quality into pricing. This will play out in the utility market, rather than the wholesale market, and will become increasingly important as solar power grows in the United States. The Federal Energy Information Administration’s long-term plan is 45 GW of solar power, at about 50% of new capacity additions. Maintaining the Local Generation Tax Credit (PTC) will also benefit long-term stable solar growth in the United States.
Regulatory risk plays a big role in the solar market and the biggest danger is a change in thought leadership. “Usually there is a call to action, although it may be difficult how the powers that be implementing the necessary changes,” Bammel said. He adds that regulatory risk is just one of many market risks, with new or renewed government support in regions that need to make more climate ambitions a positive consideration on the rise.
While there are reasonable concerns about cannibalization, Ortmann said, these are the challenges that come with a more mature market. Identifying and managing market risks is a positive and necessary step. The price of carbon is already playing an important role in the growth of solar PPAs and the days of the separate sale of green certificates and electricity seem a distant memory.
No matter what happens, the focus is so much on decarbonization that LevelTen’s López-Polín believes governments and industry will find a way to continue the deployment. He added that we envision a fundamental shift in market dynamics – corporate PPAs are signed due to long-term sustainability goals and it is still not clear whether cannibalization will have a major impact or not.
Chase, meanwhile, warned that investors today must be optimistic about financing solar power: “We all have to be optimistic to have a future.”
Author: Felicia Jackson