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ECEM: Renewables obligation set for solar spike before slowdown

22 May 2014 11:59:13 | ecem


The UK is set for a spike in large-scale solar power deployment over the next 12 months under government plans to bring forward the cut-off date for projects to qualify for renewables obligation certificates (ROCs).

Each 100MW of capacity pushed through could shave £0.10/ROC from the value of the market, according to ICIS figures.

This will be followed by a slowdown, a major ratings agency said. “We are talking in terms of people becoming familiar with the switchover,” Fitch Ratings global infrastructure and project finance associate director Christiane Kuti said. “That will have an impact on the speed of development.”

Under Department of Energy and Climate Change (DECC) proposals put forward earlier this month for consultation ( see sister publication EDEM 13 May 2014 ), solar schemes above 5MW capacity will not be eligible to receive RO subsidy from April next year – a full two years earlier than previously thought.

A grace period will be provided to protect solar developers that made a “significant financial commitment” to projects on or before 13 May this year, DECC said in the documents that laid out its plans.

Solar has grown substantially under the RO, to the detriment of the subsidy model’s economic sustainability. “Large scale solar PV is deploying much faster than previously expected,” DECC said. “While this is good news, we are concerned about the impact this speed of deployment under the RO could have on the levy control framework, which sets annual limits on the overall cost of DECC’s levy-funded policies.”

This reflects how attractive the RO has become to large-scale solar, meaning a rush to deploy before the cut-off is certain.

According to latest figures from energy regulator Ofgem, around 500MW of solar power was supported under the RO at the end of last year. Yet just three months later this had grown to scrape 600MW. Of 17 new projects commissioned in the first quarter of this year, 16 were over 5MW in size.

Based on this, a very conservative growth figure of 100MW per quarter equates to an additional 400MW of capacity supported under the RO by the end of March next year. And this is before any deployment spike to meet the cut-off date is taken into account.

This compares to a DECC-commissioned impact assessment of its most recent review of RO support, which foresaw approximately 80MW coming on line over the same period. Therefore 320MW of what was until recently unexpected capacity should hit the grid.

Assuming a load factor of 11.1%, as in the impact assessment, 320MW means 400,000 ROCs enter the market using the 1.4xROC/MWh band employed by DECC for solar in the ongoing compliance period (CP13).

This output of ROCs can exert a swing factor of some £0.30/ROC on the market, according to ICIS calculations.

Moreover, the RO headroom calculation, which partly dictates the value of a ROC, is based on a DECC forecast of renewables production plus 10%, set 18 months in advance of the completion of a compliance period.

DECC published the CP13 headroom, set at 72.3m ROCs, last September. Using the above figures, every 100MW of solar capacity that was not anticipated at that time can wipe around £0.10/ROC from the market.

After the rush, a slowdown will emerge as the transition to contracts for difference takes place, according to Fitch Ratings’ Kuti.

And Kuti also added that, if applying a credit rating, Fitch pays close attention to any power purchase agreement terms that a solar generator may have in place. “We don’t look at the upside risk – we only look at the downside. That’s how we apply haircuts and stresses,” she said. Jamie Stewart

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