The business case for commercial PV projects stacks up, despite government policy barriers
Climate change is more prominent than ever in UK and world news. The UK has had its first coal-free week in power generation since the 1880s, and the UK Parliament has recently declared a climate emergency. The Committee on Climate Change’s recently released report recommended a reduction in carbon emissions to nearly zero by 2050. Solar photovoltaics (PV) have an important role to play in meeting this ambition.
However, the majority of PV suppliers and installers have lost confidence in the sector, and there has been a significant and sustained drop in the total installed UK solar capacity in the last few years. This is primarily as a result of the closure of the Feed-In Tariff and export tariff, plus other policy changes that have contributed to the erosion of the business case for solar.
The 2017 business rates increase has penalised self-owned PV installations, as well as battery storage systems, through higher re-valuations (which subsequently set individual business rates) - by up to 8 times according to the Solar Trade Association. While this increase can be minimised by setting up alternative ownership structures in which the electricity generated can be deemed to be exported, such arrangements can be complex and time consuming to set up, especially for smaller businesses looking to self-procure PV systems.
There is also bad news for the domestic sector, with a VAT hike proposed for residential installations from 1st October 2019.
Finally, Ofgem’s current Targeted Charging Review (TCR) proposals will erode revenue streams for both solar and battery projects built solely for grid export. By some estimates this will delay subsidy-free build out of solar farms by 2 to 5 years.
Meanwhile, the industry is still waiting to hear from government on their proposed Smart Export Guarantee for generators exporting to the grid. Some green suppliers are seizing the opportunity to offer their own tariffs to woo customers with PV.
But despite all of this, there is an important and overriding reason to be positive about PV in the UK. Costs for installed PV have reduced significantly – by more than 70% in the decade to 2015 (KPMG, UK solar beyond subsidy: the transition, 2015). This, combined with increased electricity prices, has resulted in shorter payback periods and attractive financial returns. This is particularly true for systems where there is limited exported electricity, where payback periods may be as low as 5-7 years. Prices are expected to drop further (Brexit concerns on equipment imports aside) - the International Renewable Energy Agency estimates that the global average weighted levelised cost of electricity of PV could reduce by as much as 59% by 2025 compared to 2015 costs.
Roof-mounted PV for large scale commercial buildings offers huge technical potential in the UK. We estimate that this type of installation could achieve a typical (unleveraged) Internal Rate of Return of as much as 13%. And there is plenty of scope to improve the business case further still through the development of collaborative approaches such as bulk procurement and the use of Special Purpose Vehicles to deliver a portfolio of complimentary initiatives e.g. energy storage and EV charging. These structures can also allow businesses and groups of public and private organisations to take advantage of low cost finance solutions such as the Mayor’s Energy Efficiency Fund in London.
So, while there is clearly a need for a more coherent and logical approach to encouraging investment in PV at a national policy level if we are to come close to achieving our carbon reduction ambitions, for the right type of projects, PV can offer clear benefits – both environmental and financial today.