The switch to the contracts for difference (CfD) regime for large-scale solar in the UK could deter some investors, a City lawyer has warned.
The switch away from the Renewable Obligation (RO) scheme, which will be mandatory from 2017 onwards, will see investors guaranteed a price for the electricity they produce for a period of 15 years. The RO provides support for 20 years.
Isabella Roberts, a partner with the law firm Simmons & Simmons, warned that some types of investor were already uneasy.
“…The level of returns currently offered by solar is largely dependent on obtaining 1.6 ROCs, as those drop and there is a movement to CFD, we may find that with falling returns the present level of interest falls away a bit as the returns are not high enough,” she said.
“I know that a number of infrastructure funds are of this view already and are therefore not investing in solar,” said Roberts.
At the moment, solar is enjoying strong interest from the investment community with climate change minister Greg Barker calling it a better investment for individuals than a pension annuity. Despite this, concerns over the CfD's effect on investment in the solar industry remain.
“There is a wall of money trying to get into UK solar,” Ben Cosh, director of TGC Renewables told Solar Power Portal. “I have a list of over 200 organisations, some of them timewasters, who have approached us trying to invest in projects. However, there are problems with the detail of each of the feed-in tariff, RO and CfD which put some investors off, depending on their risk profile.
“CfDs in current form are highly problematic,” said Cosh. “DECC tell us they are going straight to auctions, because of EU State Aid guidelines. There is no detail on how auctions will work, or how solar will compete with offshore wind to ensure consumers bills are kept as low as possible.
“Had CfDs been structurally as proposed in the autumn, that is, set by the administrative process, they would be much more attractive to investors,” said Cosh.
Jamie Richards is a partner at the Foresight Group, which has more than £1 billion of assets under management, including a £150 million solar fund. He acknowledges that subsidy support is highly attractive to certain groups of investors.
“Because of the subsidy, those cashflows are very predictable and are locked in for 20 years under the ROC scheme,” said Richards.
Acquiring an income from the support scheme is part of the reason that pension funds and other big institutional investors are so keen on solar.
“That forms a huge proportion of the cashflows of the project and it is explicitly RPI linked. That’s a feature that pension funds like. Finding inflation-proofed cashflows is quite difficult,” he said.
With interest in solar well and truly piqued, there is no shortage of financing options.
“There are enough different sources of capital because it is such an attractive asset class. Capital will find its way to the projects, it’s just a matter of which kind of capital will get there quickly enough. At the moment the non-public market pension and insurance funds are taking longer,” said Richards.
“To hit the targets that Greg Barker is talking about implies in the order of £2bn plus of deployment annually will be needed,” predicts Richards. “So there’s plenty of opportunity for the pension and insurance funds. It would be helpful if they accelerated their processes so they didn’t miss out on the opportunities that they have missed out on so far.”