The future of the UK solar PV market: Part two

In the second part of this exclusive two part blog for Solar Power Portal, NPD Solarbuzz team leader Finlay Colville discusses the key factors influencing the different scenarios for UK solar PV deployment over the next five years. The first part of the blog was featured on Solar Power Portal on 15 July 2014.

Baseline forecast

Under the NPD Solarbuzz Baseline (or most likely) scenario, solar PV capacity deployed in 2014 reaches 2.9GW (a 100% increase compared to 2013). Again, the exact phasing of Q4’14 and Q1’15 ground-mount capacity may see some give and take as we review and update the numbers and projects weekly until 31 March 2015.

Looking at 2015 as a calendar year gives a rather distorted picture of course. Deployment will be heavily weighted to Q1’15. In fact, solar PV capacity installed in the UK during Q1’15 will probably be sufficient to make the UK the largest solar PV country in Europe during 2015, (almost) regardless of what happens in the UK between 1 April 2015 and 31 December 2015; such is the state of PV flux in mainland Europe today.

Going through the segments one by one now under the Baseline scenario:

  • The residential segment is assumed to remain a steady 0.5GW-level annual market, with system price declines largely matching degression phases to sustain attractive ROIs for this segment. It is assumed that the FiT budget is somewhat ring-fenced and not adversely affected by ground-mount deployment under 1.4ROCs or early depletion of the unofficial solar ‘carve-out’ under the LCF (more on this below).
  • The small commercial rooftop segment is assumed to remain largely aligned with the residential side of the market, with schools and other public sector/government-owned buildings (championed by the government) ensuring market robustness over the next few years.
  • The large rooftop market (highlighted in the government’s 2014 solar strategy as the key focus) is assumed to remain weak during 2014 and 2015. This part of the market is forecast to pick up from 2016 onwards and then become a more integral part of the overall 2GW annual market from 2017 onwards. Tender actions from the Cabinet Office are expected to play a role here from 2016, and not before, with the timings and details still unknown factors at this point.
  • The ground-mount segment is assumed to see strong build-out to 31 March 2015, with a partial impact from grid-connectivity, EPC/supply availability and financing. The worries of some developers (related to the aforementioned factors) are assumed to be valid, but not show-stoppers for the industry to see strong ground-mount activity between July 2014 and April 2015. After 31 March 2015, the ground-mount segment is forecast to see partial build-out of <5MW projects under ROs with (as yet unspecified) mechanisms put in place to avoid issues seen in the past few years under 2 and 1.6ROCs. Ground-mount deployment is then forecast to be controlled with greater supervision under CfDs within the scope of the overall LCF budget, with ‘carve-out’ allocations under EMR preventing this segment from reaching the highs of 2014-2015. Finally, grace-period ground-mount build of >5MW solar farms is expected to be minimal during 2015/2016 (although this is a hotly debated topic right now).

Figure 1: NPD Solarbuzz Baseline solar PV deployment from 2010 to 2018, split into the key market segments for developers and installers. Source: NPD Solarbuzz European PV Markets Quarterly report July 2014.

Downside forecast

The Downside scenario is very real in the UK, and there are a whole bunch of factors behind this (see part one of the blog for the Downside projection). The largest risk factor is what I referred to previously as the unofficial solar ‘carve-out’ within the LCF budget.

Whether FiT, ROO-FiT, NIROC, ROC, CfD etc., each has a financial impact on the Treasury – whatever the label, and however it is budgeted/allocated. The LCF budget takes in FiTs, RO and (from October 2014) CfDs, so there is no hiding behind the acronyms for anyone active in the UK solar PV industry. That is, of course, until ‘grid-parity’ is reached – but let’s firmly park comments on this misnomer until later in the blog.

The Downside scenario captures the nightmare-scenario of some project developers in the UK whose business models are contingent on there being a thriving large-scale solar PV industry in the country. Let’s look at the key factors driving the Downside forecast, with the UK declining to a sub-GW market from 2016 onwards.

  • Under the Downside scenario, solar PV is assumed to eat into too much of its unofficial allocation for solar under EMR, with the large-scale segment (in particular the ground-mounted segment) bearing the brunt of the 2013-2015 capacity deployed. Government focus on shale gas, wind (both onshore and offshore) and nuclear remains central to long-term energy policies, both before and after the May 2015 general election.
  • The Downside forecast assumes that ground-mounted RO deployment under 1.4ROCs before 1 April 2015 is lower than expected, mainly due to grid-connection issues and some developers failing to arrange finance deals for approved projects (deemed to be too high risk in getting certified before end 31 March 2015). Councils are assumed also to become more stringent on existing applications awaiting decision, or at public-consultation/screening opinion stages. Projects on appeal are assumed to be viewed upon (even) more unfavorably by the Secretary of State than in the past (something that has already started to happen in certain councils across England during the past few months).
  • Grace period allocations (after 31 March 2015) for >5MW RO projects are assumed to be extremely small, with some project developers having to terminate solar-related business, lay-off staff, or even enter administration.
  • Contributions for solar PV under CfD are assumed to be on the low-side of current estimates, with onshore wind potentially even joining the competitive CfD process ahead of 1 April 2017; a scenario that could become more likely if solar farms under 1.4ROCs end up impacting on any mature renewable technology that was relying upon RO budget availability out to the end of FY’17.
  • The large rooftop market is assumed to remain small, with finance models and government boosters to this market taking longer than hoped for to have any real impact. The large-scale rooftop market, under the Downside scenario, is assumed to remain small until 2017.

However, for every Downside, there is an Upside. So, to see how completely different things could be, please read the final part below!

Upside forecast

The Upside scenario takes a much more optimistic view for the UK solar PV industry: one that sees lobbying having a key impact on solar’s allocations within the LCF budget (or indeed, upward revisions being made to the FY’21 budget projections, or the public’s voice related to fracking or nuclear build-out having an impact at the policy level).

  • The ground-mount segment is assumed to thrive under 1.4ROCs before 1 April 2015, with project developers pulling out all the stops to deploy capacity. Financing flowing in from Asia provides a safety net to hedge against the increased risk from legacy funders of solar PV in the UK.
  • It is assumed that the rooftop market grows to become a secure GW market by 2017.The residential and small commercial market is assumed to remain strong, with rising electricity prices central to this prognosis. (New concerns about long term electricity price forecasts being on the high side turn out to be false alarms also).
  • The Upside forecast here sees solar overcoming government skepticism and becoming a stable 3-4 GW market out to 2018, aligned with upgrades to the grid to enable the increased solar capacity deployed. ‘Increased solar PV deployment’ becomes a positive phrase used without hesitation within the Treasury and at weekly parliamentary question time.
  • Demand under the Upside scenario also sees contributions at the latter stages of the five-year period from unsubsidized solar, with system prices declining at a faster rate than currently being forecast within the Baseline scenario; the ‘grid-parity’ reality unfolding.

Final analyst thoughts

Whether Upside/Baseline/Downside, Conservative/Labour/Coalition, nuclear/fracking/renewables, or ROC/FiT/CfD, the input conditions are wide and varied, making it a very hard one to call in terms of the five-year outlook.

But – let’s remember – there was no UK PV industry five years ago, and today we are talking about a 2.5-3GW market in 2014 without any hesitation. So, five years is clearly a very long time and strange things can and do happen.

Five years. The next government will have come and gone within this time period, likely accompanied by even more ministerial changes. But, solar PV efficiencies and panel ratings will be higher, system prices will be lower, and new financing models will be more prevalent – whether the UK is part of this drive, or not.

However, what is becoming more apparent this year is the context around the 20GW-by-2020 mantra that excited so many about the UK solar PV industry over the past two years, and what may ultimately become part of the UK solar epitaph written about the author of this phrase, Greg Barker.

Indeed, as Greg Barker prepares to leave the scene, it is now becoming clear that the 20GW was including a rather large contribution from unsubsidised solar PV deployment. So, for ‘grid-parity’, read ‘unsubsidised’: for 20GW, read ‘aspiration’ in as broad a context as you wish.

Nobody could ever argue with the grid-parity element of the aspirations: the more the UK solar PV industry can deploy that is unsubsidised by the government, the better for everyone involved; the ultimate win-win scenario.

In fact, this rounds us out nicely with what I termed earlier in the blog as the ‘unofficial solar carve-out’ under EMR. In practice, if that carve-out is depleted by the end of 2015, then the lion’s share of the 20GW-by-2020 can only come from unsubsidised solar PV. So the push for the industry to reach grid-parity, as a pre-requisite to 20GW being achieved, now takes on an altogether different meaning.

Nobody would disagree with the government’s aspiration for the industry to shift from a subsidised to an unsubsidised industry before 2020, but the challenge will be if that transition is expected to occur in early 2016 or in the latter months of 2019.

The first signs of this may well emerge in the next few months when the RO changes are formalised and the allocated capacity under the October 2014 CfD auction is released. More than the RO details impacting on <5MW ground-mounted solar and grace-period allocations from 1 April 2015, the level of capacity auctioned out in October must surely be the strongest indicator of how solar is really being viewed by the government of today.

Absent of that however, the solar PV industry has until 31 March 2015 to build solar farms under 1.4 ROCs, no matter what. For some, that may be the only certainty on offer for the next five years. For others, it may simply mark a line in the sand to exit from UK solar PV activities.

But for the vast majority, it is the longer-term picture that is more important, and whether solar can truly become a cornerstone of UK energy policy, with more certainty attached to annual deployment levels over the next five years.

Too much too young? Or the logical transition from a cottage to an established industry? For now, the jury is well and truly out.