Putting a cost on solar
In my last blog , I published a summary of the various avenues that I could see currently being pursued towards raising solar energy adoption globally.
In summary, I mentioned:
- Developments in solar cells/panels (including Thin Film, 3rd Gen. PV, Concentrated PV, etc.)
- Developments in solar energy peripherals (including storage batteries, smart monitors, etc.)
- Utility-scale long distance solar energy exporting (including desert-based solar farms, High Voltage Direct Current transmission, Supergrids, etc.)
- Measures for increasing Residential and Commercial solar adoption (including government policies & incentives, education & consultancy, supply chain & market conditions, etc.)
- Financing of Residential, Commercial and Utility solar power generation
Compared to the other summary points, I didn’t elaborate on my 5th and final point on the financing of solar energy. This was solely because I hadn’t done the necessary learning on that topic to provide any detail at that point.
The fact that I limited the financialization in the solar industry to simply solar power generation shows how I underestimated the reach of finance in all aspects of the solar energy market.
I have since learnt more about the economics applied to solar energy, including but not limited to:
- LCOE (Levelized Cost of Energy) [1] — a $/kWh figure representing a system’s expected lifetime costs (including capital and operating expenditures) that can be used for cost/benefit comparisons between projects and different energy sources.
- PPAs (Power Purchase Agreements) — contractual agreements between energy sellers (in this case often solar micro-generators) and buyers. PPAs have become a crucial part of the solar energy scene, facilitating the necessary vehicles of trust in the commercial market. This enables an office-block freeholder invested in rooftop solar to sell electricity to either a tenant in their block or to a utility company for resale. PPAs have developed from simple (inflation-tracking) fixed price agreements covering 5–20 years to more complicated and dynamic variants, including CFDs (Contracts For Difference) [2] where a generator can benefit (or not) from receiving the difference between the Strike Price (predetermined at start) and Reference Price (current market price).
- Financing and lease plans [3] — PPAs are also used in the residential market where customers can benefit from solar panels without having to put any cash down. In this model, the solar panel installer company retains ownership of the power generation equipment and the customer agrees to pay per kWh produced. Lease plans work in a similar way but the customer pays a fixed charge per month instead. Of course, if the customer wants to retain ownership, there are plenty of loan options for those unable to stump up the cash upfront.
Add to the above, disciplines such as Secondary Markets, Refinancing, and Asset Management, the solar energy world is increasingly looking and sounding like something from “The Wolf of Wall Street” or “The Big Short”. A far cry from “The Good Life”, with which solar fans may rather associate themselves.
In fact, PPAs can come in Sleeved/Physical and Synthetic/Virtual varieties, which are openly acknowledged as financial derivatives [4] .
There are concerns that the financialization of the solar industry has impeded (and is continuing to impede) the level of progress needed for solar energy adoption globally [5] . I believe this is only bound to continue as we try to apply very flawed scarcity-based capitalist thinking and systems (including the same practices that gave us financial derivatives, collateralized debt obligations and other such gems that exist outside the ‘real economy’) to what is a post-scarcity situation.
In short, the financing of solar energy needs serious simplification!
What are you views on this topic? Please leave a comment below.
[1] LCOE (levelized cost of energy) is one of the utility industry’s primary metrics for the cost of electricity produced by a generator. It is calculated by accounting for all of a system’s expected lifetime costs (including construction, financing, fuel, maintenance, taxes, insurance and incentives), which are then divided by the system’s lifetime expected power output (kWh). All cost and benefit estimates are adjusted for inflation and discounted to account for the time-value of money. As a financial tool, LCOE is very valuable for the comparison of various generation options. A relatively low LCOE means that electricity is being produced at a low cost, with higher likely returns for the investor. If the cost for a renewable technology is as low as current traditional costs, it is said to have reached “Grid Parity”.
http://www.renewable-energy-advisors.com/learn-more-2/levelized-cost-of-electricity/
[2] https://www.gov.uk/government/publications/contracts-for-difference/contract-for-difference
[3] http://www.solarcity.com/residential/how-much-do-solar-panels-cost
