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From the RO to CfDs: Can solar stand the switchover?

June 4th, 2014 | 3:19 pm

In May, DECC released their consultation on support mechanisms for solar PV, in which they proposed the closure of the Renewables Obligation (the RO) to solar projects above 5MW from April 2015. Instead large scale solar would be supported only through the Contracts for Difference (CfD) scheme, which will be introduced in October.

The new CfD scheme will see developers of mature technologies over 5MW (onshore wind, solar, hydro, Energy from Waste CHP and landfill and sewage gas) bid competitively with one another for support. CfDs will be granted to those whose sealed bid contains the lowest strike price necessary for their project to be viable. Developers of less established technologies (offshore wind, wave and anaerobic digestion) will also be eligible for support under the CfD scheme but will not face the same level of competitive allocation straight away.

The move comes as a result of significantly higher levels of solar deployment than expected. December’s Electricity Market Reform (EMR) delivery plan predicted up to 4GW of large scale solar deployment by 2020. But current Ofgem figures suggest that there could be over 5GW deployed by 2017; exceeding the 2020 target three years early.

In order to control the resulting expenditure, the Levy Control Framework, the overall budget under which schemes such as the RO and the FiT are administered, showed that support for solar needs to be reviewed. DECC proposes to move the support mechanism for large solar to the more cost efficient CfD scheme, 2 years earlier than previously planned.

Whilst the switchover from the RO to CfDs has been known for some time, it is the suddenness of the transition which is the main cause of uncertainty. Though a yearlong grace period has been proposed to allow developers to benefit from accreditation under the RO, a significant proportion of active projects are unlikely to be eligible. Eligibility requires planning permission, technology orders, a secure grid connection and a lease. Hence it is likely that for many projects, investors will need to readdress their financial modelling and pitch to debt funders to manage the uncertainty offered though competitive allocation.

Despite the present uncertainty in the industry, CO2Sense analysis shows that the move to the CfD scheme is unlikely to hinder the growth of solar and the sector can still prosper in the long term. We analysed a sample 10MW project comparing returns under the 2015 RO against the CfD scheme. The aim was to determine how a decrease in strike prices over time, resulting from direct competition with other developers, could affect a project. The results displayed in Table 1 suggest that strike prices could continue to fall by approximately 8% year on year until 2020 with no significant impact on the current returns achievable under the RO. This analysis, although quite simplistic shows that the CfD mechanism could be sound economically.

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The industry is positive that as solar is already one of the cheapest renewables technologies available, it should be able to compete with other established technologies under competitive allocation. However, a fundamental concern is the lack of clarity around the budget allocation for solar under CfDs. Without this clarity, with solar deployment exceeding projections, developers will be understandably nervous about whether there will be budget available. There is also still some detail to be worked through, particularly for SME players who currently may be hindered in the market by the much larger utility companies.

Under CfDs, solar could continue to see rates of return similar to levels available under the RO, whilst keeping expenditure under the Levy Control Framework managed efficiently. Clarity is still required to ensure a major boom in installations ahead of April 2015 does not absorb all the budget thrusting the sector into further uncertainty. After all, consultations and policy changes in the renewable energy sector can be more harmful than the outcome. are often more damaging to the renewable energy sector than the outcome.

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