June highlights - Mint Selection Newsletter

Posted on 22 June 2023

The time has come for Distributed solar

Distributed solar business models are now increasingly on the radar of investors, in part due to the intense energy crisis which engulfed Europe last year, but also as utility-scale PV development has seemingly become harder to successfully pursue.

Permitting and grid connection delays for larger solar farms across Europe are leading some to question whether the sector is the best place to deploy capital, particularly if a relatively swift pay-back period is desired. Indeed, some distributed solar businesses boast of a pay-back period within just four to five years, while larger solar farms can take much longer to recoup investment costs (now that record wholesale price rises are seemingly in the rear view mirror).

While this is still a somewhat niche view, the European solar-as-a-service (SaaS) sector is now booming, with new investment and financing announcements starting to roll in almost on a weekly basis.

Some of the most recent DG developments have taken place in the UK, with commercial & industrial rooftop solar developer Electron Green in mid-May for example announcing it had raised GBP 15m in a first round equity raise as the first part of a goal to ultimately funnel GBP 1bn into new projects into the space.

At around the same time, Spain-based Powen unfurled its recruitment of Edward Morello to head up its UK market entry, with the Brookfield Energy Transition Fund-backed developer, already active across Iberia and Mexico, clearly having identified the country as a growth market.

And newly formed UK-based financial advisory and investment group OME Capital has also in recent weeks launched an initial GBP 10m capital raise for a start-up C&I distributed solar generation platform.

In the UK context, which groups ultimately succeed in the space could be “increasingly determined by those that are able to be flexible with PPA contracts and more transparent on pricing,” notes one pan-European DG developer.

“People looking at inflation-linked PPAs in the UK market now with inflation where it is are shocked - multinational corporates with experience of more mature C&I markets with more fixed prices won’t settle for it,” they add.

Several factors are driving the interest in the C&I segment more generally, not least the availability of already operational grid connections and generally quick permitting phases, even if, with average project sizes paling in comparison to utility-scale, the ever-present challenge for distributed solar platforms is about achieving scale.

Companies can also enjoy tax advantages from on-site generation, as well as not needing to pay grid costs, as would typically be the case with a PPA.

The SaaS model also, crucially, does not demand any balance sheet investments from customers, which is a boon for the sector in the midst of increased financing costs and high inflation.

Meanwhile, the often 10-year-plus contracts can make the sector bankable for the developers, across both residential and C&I segments.

German residential solar-as-a-service group Enpal is one stand-out in the sector, with the group having to date raised an approximate EUR 1.5bn in both debt and equity to fund its continued roll-out.

Meanwhile, at the end of May, Swedish energy-as-a-service company Recap Energy and Finnish fund manager Evli raised EUR 25m in debt from Triodos Bank for the construction of a 40-50MW portfolio of C&I solar in Spain and Portugal.

However, sector challenges remain, not least in the area of installation capacity. In Spain, for example, several SaaS businesses were last year understood to have installed less than half of the capacity they had contracted, because they simply didn’t have access to the workforce required to complete their orders.

And it isn’t just about being able to install panels on time. There is also a concern that as the DG solar market proliferates there is a greater risk of smaller, start-up installers emerging which may do shoddy work putting panels on roofs, which could result in reputational damage for the industry as a whole.

More generally, the installation bottleneck could lead to consolidation as larger players enjoying economies of scale increasingly come to the fore.

Depreciation concerns for Spanish renewables projects

Spain’s ministry for the ecological transition and demographic challenge (MITECO) ultimately provided favourable environmental impact statements (DIAs) for over 30GW of 50MW-plus renewables projects in Q1this year, which was overall a positive development for the market, as for the successful sponsors it cleared up a sizeable chunk of development risk on the road to projects achieving ready-to-build.

Nevertheless, it did immediately spark fears of a supply chain bottleneck, as (predominantly) solar PV developers will, provided full RTB status is achieved, now have to rush to secure EPC contractors ahead of themid-2025 commissioning deadline which most are subject to. This squeeze has been compounded by a similar volume of sub-50MW projects and other developments also now pushing toward RTB.

Indeed, while the Spanish solar industry has to date been able to accommodate around 4GW of new-build PV annually according to industry experts, the wave of DIA-approved projects that is now potentially forecast to come to market looking to get built over the next two years could dwarf this figure.

This in turn is leading well-funded sponsors to implement proactive and potentially risky mitigating measures, such as putting down firm supply chain orders before their projects have fully reached ready-to-build and in some instances paying EPC contractors advance fees up to a year ahead of when they believe plants will be ready for the start of construction.

But for many sponsors, the growing threat of their delayed projects not being able to meet the mid-2025 commissioning deadline, and therefore losing their grid access] means that with each passing day these projects are potentially losing value, according to multiple industry sources.

This depreciation is being compounded by ongoing concerns over the “cannibalization” impact of more and more solar PV coming online over coming quarters, in doing so increasing the periods of time when the wholesale power price collapses.

As such, many developers may now look to sell on project pipeline as quickly as they can in order to realise as much value as possible. Yet potential acquirers are also keenly aware of this changing market dynamic.

“Those with the capital and the resources are in wait and see mode, with the expectation that it will be a buyer’s market in the coming months,” says one M&A advisor active in the Iberian market.

Other market players do not fully agree with the assertion that Spanish pipeline valuations are decreasing however, arguing that competition for late-stage development assets is as strong as ever. Some also point to the stringent conditions that have come attached to many favourable DIAs, highlighting that numerous developers simply won’t be able to comply with these stipulations and will therefore lose grid access, in doing so reducing supply chain pressures.

Ireland signals offshore wind intent

Ireland announced the results of its first ever incentives auction for offshore wind in May, crowning a handful of projects with a combined capacity of 3.1GW with volume-weighted average contracts of EUR 86.05/MWh. 

While the ORESS winners – EDF and Fred Olsen, RWE and Saorgus Energy, Statkraft and Copenhagen Infrastructure Partners, and Corio Generation – can be satisfied with securing  partially indexed long-term revenues, those missing outwill now have to secure alternative routes-to-market. 

For these projects, Park wind and ESB’s Oriel Wind Park and SSE’s Arklow Bank II, the Irish government has encouraged the signing of corporate PPAs to fill the void, and the companies have already stated they are committed to pursuing other avenues, but it is not yet clear how straightforward that will be. 

The country’s Commission for Regulation of Utilities (CRU) has not yet publicly confirmed whether the grid connection assessments it previously provided for projects will last beyond three months after the date of ORESS, according to a market source, and a full grid offer was stipulated as dependent on an ORESS contract, raising uncertainty for the two unsuccessful projects.

Meanwhile, there may be little point in losing bidders chasing comparable terms to what they would have enjoyed had they prevailed in the ORESS auction. In particular, the payments for curtailment provided under the ORESS 1 terms and conditions are seen as especially valuable in a market currently grappling with the issue, but this is very unlikely to be replicated by corporate offtake deals. 

Generators could seek to offset this with much higher PPA prices, but that will naturally be dependent on prevailing offtake appetite and market conditions for delivery of power starting a few years down the line still. 

However, It is quite difficult to imagine that corporates would opt right now to take up a 20-year PPA at EUR mid-80s or higher for first delivery of power likely from 2027.

The highlights were created in partnership with Energy Rev.

Share this article