Saturday read: Rapid growth becomes new normal

In 2021, the place of solar in the energy market has been transformed. The International Energy Agency (IEA) has crowned it the “king of electricity,” and says its 2020 global capacity growth rate of 45% (to nearly 280 GW) is the new normal. This year will see the return of international climate negotiations, as the U.S. has returned to the Paris Agreement and the EU is driving forward with its Green Deal, with US$21 billion (AU$27 billion) approved for the green transition. Meanwhile, economies around the world, including China, are committing to net zero targets.

Georgios Gkiaouris – acting director, head of Energy Europe at the European Bank for Reconstruction and Development (EBRD) – said that both the climate change context and the EU’s green agenda are increasingly important market drivers. Of course, the rising cost of carbon emissions is also playing a significant role, with emissions credits recently passing €50 (AU$78)/ton. At a basis of €40 (AU$62) or above, the cost of solar is lower than the cost of the emissions, and this changes the economics of coal.

Alessandro Boschi, head of renewables at the European Investment Bank (EIB), believes that the EU’s Sustainable Taxonomy will be key to ensuring that investment goes toward truly green investment options like renewable energy. The Taxonomy is going to affect companies far beyond European borders in an increasingly globalised economic environment. The EIB is fully aligned with new definitions in sustainable finance and Boschi agrees that we are seeing a structural shift in the market.

Merce Labordena, senior policy adviser at SolarPower Europe, said that solar growth will continue to be driven by falling costs of the technology, by scalability, modularity on rooftops, carports, water surfaces, and innovative applications.

Structural shift

Investor concerns about risk are driving interest in understanding externalities, while the rising cost of emissions is driving corporate action on emissions. This has driven growth in demand for climate and sustainability risk reporting and is behind the huge boom in ESG investing. According to 2021 research by Bloomberg, global ESG assets are expected to reach more than US$53 trillion (AU$70 trillion) by the middle of the decade – over one-third of total assets under management (AUM) of US$140.5 trillion (AU$137 trillion). At the same time, new analysis of Bloomberg data has shown that more than US$1.3 trillion (AU$1.7 trillion) of green bonds and loans have been issued to relevant projects since 2015.

Boschi confirmed that any talk of a bubble doesn’t relate to investment in clean energy assets, but may be in relation to the market value of some related companies.

For Gkiaouris, it is the combination of ESG with increasing climate-reporting demands, like the Task Force on Climate-related Financial Disclosures (TCFD), that are driving change. Greek utility PPC, a lignite owner, recently announced a coal phase-out accelerated to 2025.

“We have worked with PPC on that journey, from the provision of a working capital facility to developing an action plan to implement the TCFD,” Gkiaouris said. The collaboration even expanded to the launch of its first sustainability-linked bond in March, where the EBRD was the anchor investor.

Corporate appetite is also growing for renewable energy assets like power purchase agreements (PPAs), which nearly tripled in 2020. For the EBRD, the world of PPAs is fairly new, and the bank is supporting development predominantly through auctions, FITs and other forms of revenue stabilisation.

“We know corporates see solar as a lower cost energy which, combined with increased sensitivity on sustainability and their emissions profile will continue to act as a driver,” said Gkiaouris.

For the EIB, the landscape is more familiar. In Spain, for example, many of the projects it has financed have been based on PPAs where the LCOE of solar is lower than the current level of power prices. That creates an investment opportunity for some private investors, even in the absence of subsidies and in the face of the pandemic. On average, the EIB has financed around €1 billion a year in loans to solar over the last four years, and Boschi expects this to continue.

Funding solar

A challenge for the oil majors moving on the energy transition is historical returns. With previous project returns starting at 14%, solar returns are averaging closer to 7%. Gkiaouris points out, “There’s a lot of competition, especially for auction supported plants, so their IRR is getting low – we’re seeing it go below 10%.”

“There can be reasonably profitable returns of 5% to 6%, but the market needs to understand that shift, stop thinking about reasonably profitable, and start thinking about reasonable, profitable but reliable returns,” said Zula Luvsandorj, project finance adviser to the UK government’s Infrastructure and Projects Authority at the Cabinet Office.

Paul Glendinning, head of power networks and renewables at WSP, believes that one of the issues the solar sector should grapple with is the shift in mindset needed as it moves from subsidy support to the mainstream. He points to a 75 MW, subsidy-free solar plant in Wales as an example of what can be done. Glendinning believes that while the system may need inertia and backup, we’re potentially only five years away from net zero in a number of markets. “It’s all about increasing yield. It’s about the lowest cost of power and then improvements in site performance,” he said.

Technologies and costs

While solar’s success has been driven by cost decreases of 90% in a decade, Boschi still sees margins for improvement. “There are still margins on the cost side in PV modules,” he said. “The International Renewable Energy Agency (IRENA) has estimated cost reductions of 20% every time capacity is doubled.”

The big challenge is capex and efficiency. Boschi says the EIB expects to continue to see technology efficiency improvements, as well as in bifacial and non-silicon materials, plus research, development and innovation (RDI) in building-integrated and asset-integrated PV.

One issue, especially in Europe and Asia, will be land availability. With much already developed, limitations on new solar farm developments emerge. Opportunities exist in cross-sectoral approaches such as floating and agrivoltaics.

Where Glendinning expects to see technical innovation is in the grid, which he described as being at the forefront of innovation. He said there are many opportunities to change the way in which energy is managed, not least of which is the use of DC transmission. In the U.K., National Grid has launched its Stability Pathfinder project to explore how more flexible capacity and devices on the grid can support system strength. The intent is to be able to operate the grid safely and securely without carbon.

Storage is also now becoming more cost-competitive for the variable nature of wind and solar. Glendinning accordingly believes that we should no longer be using the term “intermittent generation,” but rather than we should start looking at electricity as predictable and schedulable.

Regulatory concerns

One problem that arises from continually falling power prices (due to the increasing penetration of renewables) is how to maintain investment return over time. “In order to reach projected capacity we will need regulatory support such as auctions and CFD for revenue support or stabilisation to regulate income,” Boschi said.

Permitting is also seen by the industry as a major bottleneck for growth.

“In some places, the growth of the industry is outpacing the capacity of the economy and the country to cope,” Gkiaouris explained.

The investor demand is there, but the networks still struggle to remove bottlenecks, and that is what the regulators need to consider.

Meeting increasingly high renewable energy targets will need stronger legislative provisions to overcome existing administrative and regulatory barriers in the power sector, along with building heating, cooling, and transportation, as Labordena pointed out.

“The key objective today is decarbonising electricity through renewable energy. By 2030 we need to get 60% to 80% of our electricity from renewable sources,” Boschi said. The technology exists today to create a low-carbon future, without unnecessary offsets. Effectively decarbonising the grid within the decade means that renewable energy with flexible generation and storage will be the only affordable option.

That means that politicians, fossil fuel companies, and energy companies are going to have get comfortable with the fact that solar is no longer an alternative energy source, but a key route to the green electrification required for a sustainable low-carbon future.

Author: Felicia Jackson