The interesting thing I found about the wholesale market was the inclusion of “Non Physical Traders” 1 .
The other interesting thing about the wholesale market is the impact that renewables are having, even causing negative prices in some cases! 2 This is caused by renewable energy (e.g. Solar PV and Wind) generators flooding the market with more electricity supply than is demanded at that particular time. In these instances, the generators can either switch off their production or pay retailers to take the electricity. These electricity surpluses are both inefficient and can be dangerous to the health of the grid. Similarly, the practice of 'baseload', whereby controllable (e.g. fossil fuel) generators are used to produce a minimum supply of electricity regardless of actual demand poses similar inefficiencies.
As a result, the government and industry are going to great lengths to create a smarter system whereby supply and demand is better monitored, reported, managed and balanced. There are 3 complementary solutions to the Demand Management problem:
A major announcement from UK Gov Business Secretary Greg Clark MP yesterday (24th July 2017) has done exactly this. The Department for Business, Energy & Industrial Strategy has put forward an exciting ambition to establish the UK as a world leader in battery technology through the launch of a £246m Faraday Challenge. The secondary part of this news story included new rules that will enable money saving via two-way smart-grids and smart appliances.
The BBC's environment analyst Roger Harrabin reports 3 :
“The rules are due to come into effect over the next year.”
“And they will even support people who agree to have their freezers switched off for a few minutes to smooth demand at peak times.”“The tiny energy savings of millions of people and firms will be pulled together into packages by traders, who will offer substantial chunks of energy saving to the National Grid at the click of a computer.”
Perhaps there is a value-adding role for energy traders after all!
Personally, I agree there is a bright and essential future for energy storage (be it at a utility, commercial and/or residential level) and for better exchange of information to improve demand management. At a push, the two-way flow may even extend from embedded/micro-generation systems (e.g. solar PV/ wind turbines) to include (re)claiming electricity from storage batteries when most needed by the grid.
However, I can't see a future where consumers allow for their appliances (e.g. fridges/freezers) to forgo charging temporarily for the sake of the greater good, or for their electric vehicles to be allowed to discharge in order to provide electricity back to the grid. The consumer society we live in is simply not accustomed to this two-way interaction with a utility and would struggle to understand and accept the complexity which this would bring. As it is, even in the non-smart one-way electricity supply model most of us live in, more than 60% of customers aren't benefiting from the best deal, remaining on their supplier's standard variable tariff 4 – in many cases because they don't have the knowledge or awareness to take action. So far, consumers have been shielded from the price volatility existing in the wholesale market and the retail market model has not pushed the burden of demand management onto the consumer. Besides basic 'time of day' tariffs (e.g. Economy 7), there are currently very few pricing signals available to the average consumer to assist with grid-wide demand management.
Add to this a new market in which traders can aggregate and sell households' electricity to the grid, and you head towards something that can become a speculative derivatives market akin to what caused the financial crisis of 2007-8.
The BBC article also warns about the potential security risks that a more connected two-way grid may bring about:
“Some will urge a degree of caution amongst the enthusiasm: the more the energy industry embraces the digital age, the more vulnerable it will be to hacking.
Recent reports suggest that Russian hackers may already have tried to compromise the system.”
In summary, I'm very
excited to see the UK step up to the Energy Storage challenge that
goes hand in hand with a move towards more (variable/intermittent)
renewables. However, I caution how much two-way control the grid
should be able to exert on households. Instead, I would rather the UK
government reverse their recent cuts to the FiT and encourage more
micro-generation and self-consumption. Either way, the grid must
undoubtedly become smarter.
Previous governments have supported initiatives that encouraged solar panel uptake among homes, schools and at utility-scale through subsidy schemes including the Renewable Obligation Certificate (ROC) and Feed-in-Tariff (FIT). UK’s solar panels produced more electricity than coal in both the summers of 2016 and 2017. Whilst the current government may have all but killed subsidies for any new solar deployments, this has not deterred developers from taking advantage of falling prices and battery storage to plan post-subsidy solar farms that are still economically viable.In fact, since existing developments benefit from inflation-linked subsidy payments over 20 years, these conditions have created a thriving secondary market and a handful of firms are driving market consolidation. Through Special Purpose Vehicles and listings on the London Stock Exchange, the likes of NextEnergy Solar Fund (NESF) , Foresight Solar (FSFL) and Bluefield Solar Income (BSIF) are attracting significant sums of money, mostly from institutional investors like asset management firms and pension funds. However, these funds are also available to individual investors through ordinary share trading platforms.
Directors believe that the UK solar market remains attractive,
the recent recovery in wholesale power prices. There is uncertainty
regarding the UK Government’s future support for providing
subsidies to new solar power projects on the basis of the Renewable
Obligations Scheme being withdrawn with effect from 31 March 2017.
However, the Directors believe that solar energy infrastructure
assets continue to provide an attractive, risk-adjusted return for
the following reasons.
1. Expected steady growth in demand
In its 2015 projections, the DECC forecasted that the UK’s electricity demand would increase by between 14% and 25 % by 2035. Despite increasing energy demand, the UK’s electricity supply is decreasing. Existing nuclear and coal-fired power stations are reaching the end of their technical lives and European environmental legislation has resulted in the closure of approximately 12Mtoe of coal capacity since 2012.
Furthermore, in 2008 the UK passed the Climate Change Act requiring an 80% reduction in greenhouse gas emissions by 2050 (and at least a 26% reduction by 2020) against the level of greenhouse gas emissions recorded in 1990. In October 2016 the UK’s Committee on Climate Change (the “CCC”) noted that the vote, passed by the UK electorate on 23 June 2016 to leave the European Union, did not change the UK’s legal commitments to reduce its greenhouse gas emissions under the Climate Change Act. The Board believes that this increasing demand, decreasing supply and required reduction in greenhouse gasses highlights the importance of the move towards renewable and low carbon technologies in electricity generation.
2. Regulated revenues linked to RPI
The UK Government has provided regulatory support for renewable energy and included solar as a “key technology” to meet its 2020 carbon targets. The UK’s Renewable Obligation Certificate regime provides a stable 20 year subsidised revenue stream for accredited solar assets which is linked to RPI inflationary increases applied by Ofgem in April of each year. It is estimated that, for the year ending 31 December 2016, approximately 60% of the Company’s revenues were derived from regulated revenues (ROCs and embedded benefits, both of which are linked to RPI) and 40% were derived from selling electricity on the wholesale market.
3. High degree of contracted revenues
Approximately 59% of the revenues derived from the Company’s portfolio are fixed and index-linked and received in the form of regulated revenues. The remaining 41% are received through the sale of electricity through PPAs, entered into on a bi-lateral basis between the individual solar power plant SPVs and creditworthy offtakers in the UK. Exposure to merchant power prices can be mitigated further through fixed price PPAs.
4. Active secondary market providing further pipeline
The growth and scale of UK installed solar capacity over the past five years has created an active market in large-scale secondary assets. The Board believes that a large proportion of UK solar assets are currently held by short-term investors, including construction companies, solar developers or panel manufacturers, that are not intending to hold the assets for the entirety of the anticipated asset life. Notwithstanding the announcement by the UK Government to withdraw the RO scheme to all new renewable energy projects with effect from 31 March 2017, the UK solar sector is expected to remain attractive given its size and the opportunities to acquire operating assets as an active secondary market emerges in the UK.
5. Low volatility of solar irradiation
Irradiation is the key determinant of solar power production and it is dependent on the hours of daylight available as opposed to direct sunlight. This means that there is less variability in the generation of the electricity by solar power plants as they are still able to generate electricity even on days without clear skies. It has been demonstrated that levels of solar irradiation exhibit lower variability than wind. The standard deviation of annual irradiation across the existing utility scale solar power plants operated by the Foresight Group in the UK is relatively low at only approximately 4%, over the past 21 years.
In addition, the levels of solar irradiance in the southern parts of the UK compare favourably with other established European solar markets such as Germany, making the UK a similarly viable location for solar investment. Regions in the south west of England experience irradiance up to approximately 1,200 kWh per M2 per annum. The majority of solar power plants in the UK tend to be located in the southern parts of England and Wales to maximise levels of production.
6. Mature technology
Solar PV systems rely on well proven technology that has a demonstrated lifespan in excess of its guaranteed life of 25 years along with low technical degradation over time. The initial application of PV technology took place in the 1960’s with one of the first UK grid connected systems in the UK being installed for 22 years, presenting a performance above the expected technical degradation.
7. Managed by [a large, well established investment management firm]
[The firm] has an experienced management team in the solar and renewable infrastructure sectors. Founded in [x], with [£y billion] assets under management, [the firm] has a global presence with operations in [z] countries.
There are of course other ways to invest in solar without putting any panels on your own roof, e.g. Community Solar and/or Renewable Energy Supply Tariffs, which I will cover in later blogs.
Disclosure: the author does not currently hold shares in any of the aforementioned funds, but is considering buying into one or more of them.
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Reason 1: UK is on track for 20GW solar PV capacity by 2020
Back in 2012-13, when the UK Government had both a Department of Energy & Climate Change and a UK Solar PV Strategy, the UK had ~2.4GW of solar PV capacity generating ~1.4TWh from July 2012 to June 2013. They estimated, “At the upper limit, by 2020 solar PV could reach up to 20GW and with a potential for 7GW at the lower end (including both large and small-scale).”
Technical deployment potential to 2020 for solar PV: 
The interesting thing I found about the wholesale market was the inclusion of “Non Physical Traders” 1 .
In my last blog , I published a summary of the various avenues that I could see currently being pursued towards raising solar energy adoption globally.
In summary, I mentioned:
Compared to the other summary points, I didn't elaborate on my 5th and final point on the financing of solar energy. This was solely because I hadn't done the necessary learning on that topic to provide any detail at that point.
The fact that I limited the financialization in the solar industry to simply solar power generation shows how I underestimated the reach of finance in all aspects of the solar energy market.
I have since learnt more about the economics applied to solar energy, including but not limited to:
Add to the above, disciplines such as Secondary Markets, Refinancing, and Asset Management, the solar energy world is increasingly looking and sounding like something from "The Wolf of Wall Street" or "The Big Short". A far cry from "The Good Life", with which solar fans may rather associate themselves.
In fact, PPAs can come in Sleeved/Physical and Synthetic/Virtual varieties, which are openly acknowledged as financial derivatives 4 .
There are concerns that the financialization of the solar industry has impeded (and is continuing to impede) the level of progress needed for solar energy adoption globally 5 . I believe this is only bound to continue as we try to apply very flawed scarcity-based capitalist thinking and systems (including the same practices that gave us financial derivatives, collateralized debt obligations and other such gems that exist outside the 'real economy') to what is a post-scarcity situation.
In short, the financing of solar energy needs serious simplification!
What are you views on this topic? Please leave a comment below.
1 LCOE (levelized cost of energy) is one of the utility industry's primary metrics for the cost of electricity produced by a generator. It is calculated by accounting for all of a system's expected lifetime costs (including construction, financing, fuel, maintenance, taxes, insurance and incentives), which are then divided by the system's lifetime expected power output (kWh). All cost and benefit estimates are adjusted for inflation and discounted to account for the time-value of money. As a financial tool, LCOE is very valuable for the comparison of various generation options. A relatively low LCOE means that electricity is being produced at a low cost, with higher likely returns for the investor. If the cost for a renewable technology is as low as current traditional costs, it is said to have reached “Grid Parity”.
We live in very exciting times, where we are seeing daily
breakthroughs and records being set - where clean, green solar energy
(and other renewable energy sources) are rapidly displacing dirty,
non-renewable fossil fuels (coal in particular). And due to rising
efficiencies and reducing costs, solar energy is winning the economic
argument too, even without subsidies in many cases.
But we know that the transformation is not happening fast enough! (our friends at 350.org make the case clearly enough: https://350.org/science/
So I've been studiously analysing the market to understand where we
can make the biggest impact. I don't intend for the summary below to be
exhaustive, but I think it represents the main avenues being pursued
globally at the moment.
I would really appreciate comments from those in the industry to
validate, challenge or expand on my thoughts and to help prioritise
where you think we should focus our efforts as we begin this noble
In no particular order:
1. Solar cell and panel product R&D/ bring to market – including Third-generation photovoltaic cells 1
2. Peripheral product R&D/ bring to market - Storage batteries, inverters, monitors, BOS (Balance of System)
3. Utility Solar energy long distance electricity export using HVDC transmission grid – projects considering solar electricity generation in deserts for long distance transmission (e.g. Sahara to Europe 4 )
4. Increasing Residential and Commercial solar adoption
1 Solar cells that are potentially able to overcome the Shockley–Queisser (efficiency) limit.
2 The semiconductor chosen for a solar cell has to absorb as much of the solar spectrum as possible, therefore a low band gap is desireable. However, this is counter balanced by the desire to also have as large a built-in voltage as possible which requires a larger band gap. Therefore as a compromise, a band gap between 1.0 and 1.7 eV makes an effective solar semiconductor. In this range, electrons can be freed without creating too much heat.
The photon energy of light varies according to the different wavelengths of light. The entire spectrum of sunlight, from infrared to ultraviolet, covers a range of about 0.5 eV to about 2.9 eV. The primary reason why solar cells are not 100% efficient is because semiconductors do not respond to the entire spectrum of sunlight. Photons with energy less than silicon's bandgap pass through the cell and are not absorbed, which wastes about 18% of incoming energy. The energy content of photons above the bandgap will be wasted surplus re-emitted as heat or light. This accounts for an additional loss of about 49%. Thus about 67% of energy from the original sunlight is lost, or only 33% is usable for electricity in an ideal solar cell.
3 All energy from photons greater than the band gap is converted to heat (~47%).