Solar in the UK had a bumper year in 2021, with continued growth bolstered by high power prices and the emergence of an expanding subsidy-free market. However, it was not without its challenges, with the impact of COVID-19 continuing to be felt along with supply chain challenges.
Foresight Solar’s head of UK solar Ricardo Pineiro chatted with Solar Power Portal just before Christmas to reflect on the solar sector's growth over the past year, and the key trends that are continuing into 2022.
What were the key developments that impacted the solar sector through 2021?
I would say it has been power prices creating momentum and the increased scrutiny and focus on sustainability issues like supply chain.
There's a third trend developing, which is expected to impact 2022 more than it did 2021, which is supply chain costs. In the last few months we have started to see that there's a serious disruption in the market in terms of materials and the impact that has on construction costs. While we see positive momentum around power prices, this is now being impacted by an increase in specialty panel costs that we're currently seeing in the market.
It's currently very difficult to get prices from providers because everything is changing quite quickly. The information we're getting shows that polysilicon has increased by around 300% since the start of the year and that shipping costs have increased by 200%, so this is now causing an impact in the sector. It feels like it's a timing issue but the message we're getting at the moment from suppliers is that we expect this to impact equipment costs for most of 2022.
At the moment, it is difficult to understand what the result will be because, on one hand, you have the high power price environment but, on the other hand, you have the EPC prices eroding returns. It's quite volatile at the moment and, I would say, it's a period of uncertainty. We're now seeing that impacting development activity in the market. I think it's more transitioning from ready-to-build projects to projects under construction. I think that's the issue we're seeing at the moment where the timing of the start of construction will be impacted by the high construction costs environment.
And how long are you predicting that it'll impact it?
Well, it depends on who you ask to be completely honest. But the message we're getting from suppliers is anything between six to 12 months. It feels like this could last for all of 2022 and then it should start to improve in 2023.
I think it depends on how much pressure investors will have to build their projects. If you can wait, it might be possible to obtain better terms and hope for prices to come down. But obviously, there's no certainty. It's quite difficult at the moment to predict the direction of travel of construction costs.
How will power prices – which are at record high now but are expected to fall as we move into the summer – impacting the building of solar pipelines when compared to the high module prices?
I think that's the key question, especially if you have projects. If you can secure an attractive PPA, perhaps the returns that we're seeing because of the high power price environment are enough to absorb the increase in construction costs. I think it'll be on a project-by-project basis.
But we can still see a scenario where, if you can secure an attractive PPA or if you decide to keep your project merchant, it could be that the increase in revenue that we're seeing will more than compensate for the additional costs. Some investors might decide to progress with a construction anyway.
I think the challenge we're seeing at the moment is that some contractors are not giving prices that will hold for too long. They tell us that we can guarantee this price for a few weeks but no longer. Previously, you could easily get some sort of visibility on pricing for two or three months. So that that's the challenge: you have to move a lot faster to secure equipment. There will be delays if you’re still negotiating the acquisition of the project or negotiating a PPA.
But overall, I think that doesn't change the direction of travel of the sector and its positive momentum. There is significant development activity - it is slowing down slightly the growth path of the UK market but we don't think it's a transformational shift. We don't think this will have a long term impact but, in the short term, we do expect the increasing construction costs to potentially slow down the pace of growth that we would expect in the market.
How much demand do you think there will be from the solar sector in the CfD, and does the technology still need the support?
Let me put it this way. I do think the target will be filled in terms of interest. Assuming the target of 3.5GW of wind and solar, I don't expect they'll have any issues in receiving bids for that capacity. I'm not going to give you my prediction on clearing price because I think it's difficult at the moment and I'm not sure anybody will get it right, but we are starting to see PPA prices in the high £40/MWh in the long term. We expect the auction to be filled because there's been a lot of development activity in the last few years and recent months. There are a lot of projects out there looking to identify the best way to structure the revenue streams.
What is changing is that because the power price environment has improved, we believe some developers and asset managers will probably look at this as more of an option which would reduce the competitive tension of the auction. Previously, the CfD would be the better option when looking to secure long-term contracted revenues. Investors might start looking at the corporate PPA market as an option too. You might not be willing to sacrifice a high level of return by bidding at a very low CfD clearing price, if you know you could still get an attractive level of return by aiming to merchant strategies.