Document added 21 June 2011 by Stephen Kennett, 2degrees
This report, in response to the government's fast-track review of UK feed-in-tariffs, takes an independent look at the level of support required to deliver targeted returns, as well as the associated cost of this support based on deployment scenarios.
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Response to Fast track review 170611 FinalConfidential
Ernst & Young UK solar PV industry outlook
The UK 50kW to 5MW solar PV market
June 2011
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Section Page
1 Executivesummary 3
2 Introduction 5
2 Currentsupport required 7
4 Cost drivers andmethodology 10
5 Projectedlevelsof support 14
6 Grid parity and deployment 16
7 Wider impact of PV 20
Contents
Appendices Page
A Purpose of our report and restrictions on 24
2
its use
B Methodology 26
C High and low resource levelisedcost 28
Section 1
Executive summary
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Executive summary
Tariff levels for 50kW to 5MW solar PV
► This analysis shows current cost data provided by ten UK solar PV developers in
May 2011 representing an estimated 10% of solar PV capacity deployed in the UK
in 2010 and a significant proportion of future build out.
► While costs are still above more mature markets, they are expected to align with
those in Germany and Italy.
► Approximately 40% of capex costs are currently attributed to modules; industry
expects module cost reductions of 13-17% annually driven by reductions in silicon
usage and efficiency of non-silicon based costs.
► If the UK were to adopt net metering, large scale building connected projects
could be generating 5% real pre-tax returns with 2 ROCs between 2013 and
2014. Without net metering and ROC or FiT support, our analysis indicates that
solar PV is likely generate this level of return to be the case by 2017.
Grid parity with retail prices is expected to be achieved in the UK by 2020 without
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS0
5
10
15
20
25
30
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Le
vel
ise
d c
ost
pe
nce
/kW
h
I&C retail and
2 ROC support
I&C retail
>50 -150kW
>150 -250kW
>250kW - 5MW
Ground Mounted
►
subsidy for non-domestic, on-site installations.
► Assuming support continues for solar PV under the FiT at the levels estimated in
this analysis, the annual spending will remain within the budget agreed under the
comprehensivespending review. However other industry forecasts are
significantly higher and may therefore exceedthe budget.
► The instability of the UK regulatory regime is reducing the attractiveness of the
UK market to investors, which is likely to increase the overall cost of finance for
solar PV above levels that would have existed under a stable FiTregime.
Contribution of solar PV to UK plc
► The emerging UK solar sector has resulted in a significant amount of
employment in the UK with over 2,400 MCSinstallers accredited to date.
Applying GreenPeace/ EPIA estimate of 30 jobs per MW installed implies
2,500 new jobs were created in 2010, increasing to around 15,000 by
2014, given deployment levels included in this report. As the industry gears
up, some of these jobs may be created in advance of capacity installation.
► Solar PV should be considered as playing an important role in contributing
to the wider UK renewable energy targets.
► The contribution to the UK economy, in terms of Gross Value Added(GVA),
also needs to be addressed by considering the cost of policy support, cost of
carbon saved, income and corporation tax revenues, and inbound
investment opportunities from the creation of new markets and
manufacturing opportunities for Building Integrated Photovoltaic (BIPV) and
reroofing. The Spanish REA estimate that for every €1 invested in PV the
benefit to the economy is €3.
► The solar PV sector has provided the opportunity for a number of new, non-
traditional players to enter the UK energy market. As such, the sector is a
useful platform for increasing the level of competition in the UK energy
market.
► Due to it’s relative simplicity as a passive asset, solar has been observed as
an entry point for large corporatesparticularly within the utilities and
facilities management sectors to change their business model to address the
decarbonisation of the built environment. The instability of the FiTregime
may impact on their confidence to invest in broader flagship Coalition
Government policies such as the Green Deal and RHI.
► Access to new sources of finance, including low cost, long term institutional
capital was starting to be introduced into solar PV projects. These sources
of capital are critical if the UK is to attract the £200bn of investment
needed in new energy infrastructure. The instability of the UK regulatory
regime is reducing the attractiveness of the UK market to such investors.
4
Section 2
Introduction
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Introduction
ThispaperhasbeencommissionedbytheSolarTradeAssociationin response
tariffstopresentanindependentanalysisonthelevelofsupportrequiredto
associatedcostofthissupportbasedondeploymentscenarios.Pleaserefer to
respectofrestrictionsontheuseofthisreport.
Wehaveundertakenanindependentanalysisofcostanddeployment information
installersandmanufacturersforarangeofsystemsizes,above50kW, being
Respondentsmadeupapproximately10%ofsolarPVcapacitydeployedinthe UK
therequiredlevelofsupporttodelivertheratesofreturnsthathavebeen targeted
Thisreportalsoseekstoidentifythecurrentandexpectedreductionin solar
comprehensivedatasetprovidedbyindustry.Thisdatahasbeenusedto recalculate
upto2015,coincidingwiththeproposedFiTcaptimeframe.Thecoststhat have
► Capitalcosts
► Operationandmaintenancecosts
Lifecycle costs
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
►
► Investorcostofcapital
RecognisingthattheregimeiscurrentlysubjecttoDECC’sdepartmental budgetary
budgetarycuts,weconsiderthepotentialcostoftheFiTunderthecurrent spending
deploymentscenarios.GiventhatDECCisrequiredtoreducetherevenue spent
effectivelyplacingacapontheoverallbudgetfortheFiT,wehaveincluded analysis
deploymentandtariffscenariosandconsiderwaysofdeployingthis limited
consideredsolarPVtechnology,andnotothertechnologiescoveredbythe current
WedrawacomparisonofthecostandtariffregimetomorematuresolarPV markets,
Germanyhavesimilarlevelsofsolarirradiationforlargeareasofthecountry, and
in2000,Germanyhasdevelopedasignificantsolarindustry.In2010, Germany
equatedtohalfofglobaldeploymentinthatyear(DeutscheBank).Assuch this
anddemandfactorsandrecentrevisionstotheirFiTregimeimpactheavilyon global
totheFastTrackReviewofUKfeedin
delivertargetedreturns,aswellasthe
AppendixAforanimportantnoticein
providedbyasampleoftendevelopers,
installedcommerciallyintheUK.
in2010.Thisdatawasusedtoassess
undertarifflegislation.
PVcosts,basedonarobustand
thelevelisedretailcostsofsolarPV
beenassessedinclude:
spendandthereforesubjectto
reviewperiodthroughanumberof
ontheFiTby10%in2014/2015,
onthelikelycostunderdifferent
levelofsupport. Thisreporthasonly
UKFiTregime.
mostnotablyGermany.TheUKand
sinceintroducingthesolarFiTregime
installedaround7GWofcapacity,which
marketisasignificantdriverofsupply
pricing.
6
Section 3
Current support required
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Our analysis of current cost data provided by industry shows a
generation tariff of 20 to 24p/kWh is required
Approach
► We have collated detailed data on current capex and ongoing operating costs as well as energy output data from
market for a range of system sizes.
► Data has been aggregated by applying a weighted average (by deployment levels) for system costs under each tariff category. T
modelled on a real, pre-tax basis to calculate the levelised cost over the 25 year tariff life. Based on this data
required in addition to the export tariff using this standard LCOE methodology required to give the stated level of return.
► We assume that the export tariff relating to all electricity generated is included in the project cash flows. We have calcula
assuming the export tariff remains flat in 2010 real terms at 3p/kWh, and that it increases in line with
electricity prices (shown on the following page).
► We present below the level of support required to generate a 5% and 8% real pre
addition to the export tariff payment. We have applied an average yield scenario throughout our analysis.
Generation tariff under constant export tariff
40.0
45.0 5% Discount rate 8% Discount rate
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Proposed fast track
review tariff
19p/kW 15 p/kW 8.5p/kW
Original 2011 tariff 33 p/kW 30.7 p/kW 30.7 p/kW
German tariff
(01.01.2011)
24.5/23.3p/kW 23.3 p/kW 23.3/19.4 p/kW
Germantariff scales 30-100/100-1000 kW 100-1000 kW 100-1000/>1000
Source: Sample of UK solar industry data May 2011, Ernst & Young Analysis
24.4 21.5 20.2
30.4 27.1 25.5
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
>50 -150kW >150 -250kW >250kW - 5MW
pe
nc
e /
kW
h
ten prominent developers in the UK solar
hisdata has then been
set, we have estimated the level of FiTsupport
tedthe required tariff levels both
OfgemProject Discovery forecasts for wholesale
-tax return, given the current level of costs within each proposed tariff band in
Key observations
► The 50-150 kW scale requires the highest
level of support per kWh, with weighted
8
8.5 p/kW
30.7 p/kW
19.0 p/kW
kW Ground-mounted
* Exchange rate: £0.8987 / €
Source: European Central Bank, 06 May 2011
average required FiTsof 24.4p/kWh and
30.4p/kWh at 5% and 8% return hurdles
respectively. Based on the highest developer
capexdata submitted for this scale, the
maximum tariffs required would be
34.1p/kWh and 42.4p/kWh respectively.
► The 150-250kW, 250kW-5MW and ground
mounted scales, all demonstrated similar
tariff requirements. The 250kW-5MW scale
displays the greatest uncertainty over
project costs, as the required FiTsvary from
14.6p/kWh to 28.6p/kWh at a 5% real pre-
tax return and 19.2p/kWh to 35.4p/kWh at
an 8% real pre-tax return on current capex
levels.
21.4
27.0
Ground Mounted
Applying wholesale power price increases
the required level of support is in the range of 16
Generation tariff assuming wholesale power price for export tariff
20.8
27.2 23.9 22.3
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
pe
nc
e /
kW
h
5% Discount rate 8% Discount rate
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Proposedfast track
review tariff
19p/kW 15 p/kW 8.5p/kW
Original 2011 tariff 33 p/kW 30.7 p/kW 30.7 p/kW
German tariff
(01.01.2011)
24.5/23.3p/kW 23.3 p/kW 23.3/19.4 p/kW
Germantariff scales 30-100/100-1000 kW 100-1000 kW 100-1000/>1000 kW
Source: Sample of UK solar industry data May 2011, Ofgem, Ernst & Young Analysis
17.9 16.6
0.0
5.0
>50 -150kW >150 -250kW >250kW -5MW
to the export tariff implies
-21p/kWh
Key observations
► We have estimated the level of FiTsupport
required in addition to the export tariff
where the export tariff increases rather than
remaining flat in the previous page analysis.
We have used for this scenario the Ofgem
Project Discovery projected wholesale power
prices until 2020, with prices assumed
constant in real terms thereafter.
► The weighted average tariff required at each
of the scales shown in the graph is circa 10-
15% lower than if it is assumed that export
tariffs will remain flat at the 2010 levels.
► The relationship between scales remains as
before, with the 50-150kW scale proving the
most expensive per kWh, with maximum 23.8
9
8.5 p/kW
30.7 p/kW
19.0 p/kW
Ground-mounted
* Exchange rate: £0.8987 / €
Source: European Central Bank, 06 May 2011
costs of 30.6p/kWh and 39.2p/kWh.
► Our analysis of data provided suggests that
costs have reduced from the original FiT
levels. A reduction in tariffs could be
supported whilst delivering the targeted
rates of return.
► Tariffs proposed in the fast track review do
not deliver proposed rates of return at
current costs levels.
► Based on data provided, the proposed tariff
reductions are not in line with cost
reductions seen during the last 12 months in
the market.
17.8
Ground Mounted
Section 4
Cost drivers and methodology
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Reductions in non silicon costs and silicon usage
drive annual module cost reductions of 13
Supply and demand factors
► The cost of solar panels has been declining due to industry learning from widespread deployment in countries such as Germany
of panels by manufacturers in the key EU solar markets, predominantly due to the recent regulatory change in Germany.
► Germany has now moved to quarterly tariff revisions whereby a 3% reduction is implemented for every 3,500MW installed up to a
reduction. It is important to note that while tariffs in Germany are lower than the UK, there is no additional export payment
► Tariff reductions across Europe, particularly in Germany which has traditionally dominated the global solar market, have resu
demand for solar panels leading to a situation of oversupply and a sharp decrease in the cost of panels as shown in the graph
Germany and other markets are likely to be less aggressive from 2012 onwards.
► Oversupply has been enhanced by an increasing number of vertically integrated manufacturers who are well positioned to cut co
production from manufacturers particularly in China, albeit with varying degrees of quality and track record.
► The number of quality inverter manufactures is far lower, due to higher barriers to entry as well as higher sophistication of
a bottle neck in supply last year resulting in short term price hikes for inverters. Reduced demand has however resulted in a
Recent cost reductions
► While prices for poly silicon have fluctuated greatly, increased efficiency
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
30.0
40.0
50.0
60.0
70.0
80.0
90.0
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Jun 10Jul 10Aug 10Sep 10Oct 10Nov 10Dec 10Jan 11Feb 11Mar 11Apr 11May 11
Po
lis
ilic
on
($
/kg
)
Mo
du
le
pri
ce
s (
$/W
p)
Module prices PolySilicon
of manufacturing and improvements in non poly silicon costs has lead to
cost reductions overall. Additionally manufacturers continue to make
steady reductions in silicon usage (g/W).
► These factors combined with erosions in margins have lead to average
selling prices (ASP) of both cells, and modules to have decreased as shown
in the chart below.
Source: PVInsight
are expected to
-17%
andSpain, and the over supply
maximum of a 15% tariff
nor tariff inflation.
lted in a global reduction in
below. Tariff reductions in
sts, and the escalating
manufacturing required. There was
slight decrease in prices.
Module price evolution
► Analysis of broker reports shows range of expectations of module average
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2009 2010 2011 2012 2013
Mo
du
le
pr
ice
s (
$/
W)
High / low Average module prices
selling price (ASP) to 2013.
► Average year on year percentage reductions are also shown.
► We note that modules are priced in US dollars and we have not included the
impact of future foreign exchange movements in our analysis.
17% 15% 17% 13%
Source: HSBC, Numora, Morgan Stanley, Rolf, JP Morgan, EY analysis
11
Cost reductions in module prices are the key cost driver for solar
installations
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pro
po
rtio
n o
f in
sta
lled
sy
ste
m c
ost
Capexcost drivers
► For fully installed systems, respondents indicated a range in the proportion of costs that comprise the turn
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
0%
Domestic 50-100 150-250 250-5000
Modules Inverters Other
Cost drivers methodology
► A number of respondents provided a full breakdown of turn-key EPC prices. We have analysed the proportion of costs relating to modules, inverters and other
costs which include balance of system costs including mounting systems, cabling, development costs as well as installation co
► We have applied this breakdown to total capex figures provided under each tariff category and have applied rates of cost reduction to each of these
components of capital expenditure based on expected learning rates or real cost reductions.
► Learning rates or progress ratios would typically be applied in proportion to doubling of global deployment. However, the rel
market and necessary convergence of costs to those in mature markets, as well as relatively well understood roadmaps for cost
wafer manufacturers means that theoretical learning rates are not applicable in this case. We
forecasting cost reductions.
► Reductions in projected costs of solar PV in the UK market that have been applied in this analysis are based on global bench
from broker notes.
Source: Survey respondents
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pro
po
rtio
n o
f m
od
ule
co
sts
Module cost
components
-key price as follows:
0%
Silicon Non silicon costs Margin
sts.
atively immature status of the UK
reductions in module, cell and
have instead used a pricing convergence methodology to
marks as well as compiled data
Source: Rolf, Trina Solar
12
Capex costs in the UK are currently up to 35% above global
benchmarks
Forecast capexapproach
► Our analysis of current module prices provided by developers shows that
costs in the UK were approximately 30-35% above global prices.
► We recognise that due to necessary lead times in the supply chain, module
price reductions will likely take a few months to be reflected in EPCprices.
This has been amplified in recent months with global supply and demand
factors resulting in a sharp decline in module prices. Recognition in the
global supply chain of the relative importance of the UK market will help
drive down costs achievablein the UK.
► We have therefore assumed in this analysis that UK prices will align with
global module prices over a period of two years. Realising this assumption
will depend on the market’s view on the relative attractiveness of the UK
market, for which consistency and stability of regulatory support is critical
in the global context.
► In addition, balance of system costs and installation costs are still above
global benchmarks; and learning in the UK market has been assumed as
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2011 2012 2013 2014 2015
Co
st
£/W
p
Capex Module
costs align with mature markets such as Germany. Margins and labour costs
have been assumed to remain constant in real terms.
Forecast module and installation price
► The graph below illustrates implied module and capexprices per Wp.
Source: Survey respondents, EY analysis, broker reports, global benchmarks
IRR
► The FiTfor solar PV in the UK targets a 5% return for well located
installations. This is at the low end of the 5-8% return targeted under the
FiT, reflecting the relative maturity of this technology.
► Analysis in this report assumes that returns are on a pre-tax, real basis.
► We note that the target rate of return for the German FiTis 5-7% and 5-11%
in Spain.
► For individuals investing in solar PV alternative investments rates of return
offered by the FiTcompare favourably to current low yield savings. FiTis a
very different investment class, particularly in terms of liquidity.
Corporate and institutional investors
► While we acknowledge the Government’s current lack of appetite to attract
institutional investment to the FiTregime, community and social housing
schemes principally rely on institutional investment.
► Solar PV are reasonably passive assets with relatively well understood
energy output. This combined with support of an RPIlinked FiThas resulted
in the potential for access to new sources of capital to finance renewable
energy in the UK, such as annuity and fixed income investors, who are
critical for the wider UK energy market.
► Low cost capital is a fundamental driver of long term cost.
► Scale of deployment, blue chip project sponsors and a stable regulatory
regime are all required to facilitate this capital transformation.
13
10
–
14
%
6-
8%
Entry / exit route
Portfolio
size 20MW
10MW
5MW
50MW+
>1
5 % 7–1
0%
Indicative return
requirements
(range)
Early stage investors
(e.g. host)
Infrastructure
funds
Secondary funds
(e.g. pension)
Retail investors (via
IPO / bond finance)
Source: Ernst & Young analysis
Section 5
Projected levels of support
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0
5
10
15
20
25
30
35
2010 2011 2012
Ge
ne
rat
ion
tar
iff (
p/k
Wh
)
>50 - 150kW >150 - 250kW >250kW - 5MW Ground Mounted
Implied required levels of generation tariff support
Estimated generation tariff under constant export tariff scenario of 3p/kWh
► The chart below illustrates the level of generation tariff in addition to an export tariff required to deliver 5% real
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
0
5
10
15
20
25
30
35
2010 2011 2012
Ge
ne
rat
ion
tar
iff (
p/k
Wh
)
>50 -150kW >150 -250kW >250kW -5MW Ground Mounted
Estimated generation tariff under Ofgem wholesale price scenario
► We illustrate below the impact of including potential upside from export tariff levels
assumes the average wholesale power price as forecasted under Ofgem’s Project Discovery projections.
► We have assumed that project revenues are limited to export and generation tariff. We note that there is potential for additi
is demand for electricity on site. The value of the electricity generated may be up to the price paid by the occupant, or the
discussed in further detail on the following page.
2013 2014 2015
Original tariff >10 -100kW Original tariff>100kW and standalone
pre-tax returns.
2013 2014 2015
Original tariff >10 -100kW Original tariff>100kW and standalone
15
if linked to forecast increases in the whole sale power price. The graph below
onal benefit for projects where there
prevailing retail price. This is
Section 6
Grid parity and deployment
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Parity to retail grid Industrial and Commercial prices may be reached
by 2016
Approach
► The chart below shows the levelised cost calculated in this analysis. Taking cost projections, we have forecast the likely timing of returns being affordable (at
5% pre-tax real discount rate) in the event of 2 ROCs.
► We have also shown on the graph high and low estimates of retail electricity prices as calculated by
► Given the importance of affordability of renewable energy deployment, as well as the
levels of deployment under the ROC we have shown the value of retail electricity and two ROCs and therefore the point at whic
under ROC support.
► The uncertainty of revenue under the ROC buy out and recycle price, would typically result in a higher discount rate assumed
note that the impact of transition to a FiT scheme under the Electricity Market Reform (
removing the comparative uncertainty of this regime.
► The graph below shows grid parity estimations for average irradiation levels .
► We have included analysis of this dynamic grid parity for projects sited in high and low resource areas in Appendix
the range of irridation levels, there are other factors, including exchange rate movements,
Retail grid parity at average irradiation levels At a 5% pre
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
Le
ve
lise
d c
os
t p
en
ce
/kW
h
I&C retail and 2 ROC support I&C retail
Parity to retail and 2 ROC support
►
and export tariffs at a discount rate of 5%, would be equal to project costs at some
time between 2012 and 2015, as shown in the graph below.
Source: Sample of UK solar industry data May 2011, Ernst & Young Analysis
the
Ofgemin their Project Discovery.
challengingbudget available for the FiTregime and in the context of lower
h solar PV may become economic
under this regime. However, we
EMR) means projects under the ROC are likely to become indexed linked,
C of this report. We note that in addition to
capexreductions that will also impact on this range.
-tax real required return, the levelised cost of revenues from 2 ROCs
2016 2017 2018 2019 2020
>50 -150kW >150 -250kW >250kW -5MW Ground Mounted
Retail grid parity (Ofgemhigh –low I&C
scenarios)
17
Estimates for deployment in 2013 in
330MW per annum
► Respondents were asked for projected levels of deployment prior to the fast track review and revised projections since the fa
► In preparing ‘bottom up’ deployment projections from our survey, we have also included expected levels of deployment for othe
market.
► Our base case deployment scenario is based on an annual doubling in solar PV capacity until 2014. This deployment rate has been achieved in the early
years of other solar PV markets such as Germany.
► Pre fast track review, estimates for deployment of the same sample were 270MW in 2012, however deployment expectations were c
2014.
► These range of deployment projections for the UK are illustrated on the graph below.
Estimated UK solar PV deployment per annum
500
600
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Source: Deutsche Bank, Sample of UK solar industry data May 2011, Department of Energy and Climate
0
100
200
300
400
2010 2011
An
nu
al P
V d
ep
loy
ed
M
W
Deutche Bank March 2011 March forecast German PV market growth rates (early years)
DECCforecasts Survey post fast track review
the UK range from 145MW to
st track review.
r key players in the UK solar
onstant in 2013 and
18
Change, Ernst & Young analysis
2012 2013 2014
Survey pre fast track review
The fast track review may result in an increased deployment of small
scale systems leading to a higher uptake of the sub 50kW tariff
Impact of fast track review on deployment
Data provided by developers, in addition to Ernst & Young’s experience as
financial advisors in the UK solar sector, demonstrates the following trends
since the publication of the fast track review:
► A number of developers have put on hold or cancelled planned ground
mounted and commercial rooftop projects in the UK. Deployment of larger
systems has been a key driver for large scale solar deployment over short
time periods and thus resulted in price reductions in the market.
► Given the uneconomic returns generated under the new proposed tariff, a
large proportion of developers are shifting proposed deployment to systems
unaffected by the fast track review ie, below 50kW, which will result in a
higher average cost for solar kWh produced.
► The chart below illustrates this trend for the sample of larger developers
included in this study. The chart presents the proportion of proposed
deployments under each tariff category before and after the fast track
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
0%
10%
20%
30%
40%
50%
60%
70%
?4 kW >4-10kW >10 -50kW >50
Pro
po
rtio
n in
sta
lled
un
de
r ta
riff
ca
teg
ory
Prior to fast track review
review was announced.
Source: Sample of UK solar industry data May 2011, Ernst & Young Analysis
Beyond 2012
► Larger scale developers and installers who have financed PV projects
through institutional investors are now unable to secure funding beyond
April 2012 due to the regulatory uncertainty in the FiTregime.
► Funds raised under VCT and EIS schemes which will be ineligible to invest in
FiTprojects beyond April 2012 are either seeking investment in aggregated
sub 50kW tariff categories or returning funds to investors. The fast track
review has undermined investor confidence not just in relation to FiT
investments, but also wider UK energy investments.
► Setting tariff levels, which generate a uniform rate of return across all tariff
categories, is vital for generating sustainable and consistent growth in UK
deployment.
-150kW >150 -250kW >250kW -5MW Ground Mounted
Post fast track review
19
Section 7
Wider impact of Solar PV
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Levels of generation tariff support calculated in this analysis deliver
spending within budgeted tariff cap
Recognising the budgetary constraints necessarily enforced by all government
departments, and the 10% cut in budget for DECC, we have undertaken some
analysis on the estimated real annual cost of support of the FiTunder a number
of solar PV tariff assumptions.
In preparing our analysis we have made the following assumptions:
► We have used the actual deployment data for the first year of the FiTs–April
2010 to April 2011.
► We illustrate costs under our base case. Constant deployment is assumed in
other technologies.
► We have applied industry benchmark load factors for all technologies to
calculate the expected annual output. Output for solar is calculated on a
regional basis, applying expected levels of irradiation.
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
£14m £44m£22m
£53m78MW
122MW
£-
£50m
£100m
£150m
£200m
£250m
£300m
£350m
2010 2011
To
tal
re
al a
nn
ua
l co
st o
f
su
po
rt (
all
tec
hn
olo
gie
s)
Annual solar payment EY scenario Annual non solar payment EY scenario
Source: Ofgem, Ernst & Young Analysis, BSW solar, Communities and Local Government
Average annual cost per household
of FiTfor all technologies
£0.34 £0.98 £1.68
Tariff
► The tariff for AD is increased as proposed in the fast track review, other tariff levels
are assumed to be consistent with original tariff legislation.
► Tariff levels are in line with revised levels at a 5% discount rate illustrated on page 8.
► Full export tariff remaining constant in real terms is assumed on all technologies.
► Other technologies assume full tariff rates as published in Feed-in Tariffs
Government’s Response to the Summer 2009 Consultation
Observations
The cost for 2010 is calculated on a fully annualised basis for actual data calculated on
expected yield by region and taking into account timing of deployment levels during the
year. However, we note that actual FiTpayments as recorded by Ofgemfor this year
are only £8m (data for Q4 is unaudited).
This trend suggests that estimates are therefore likely to be significantly higher than
£78m £126m £195m
£68m
£84m
£100m
192MW
305MW
491MW
-
100MW
200MW
300MW
400MW
500MW
600MW
2012 2013 2014
So
lar
PV
de
plo
ym
en
t (M
W)
Solar PV deployment
actual FiTlevelisationpayments, suggesting that under the first year of the FiTregime,
actual payments were less than half those forecast under standard yield expectations
for that region. Costs under these tariff levels are below the Government
comprehensivespending review cap and are not exceededfor these tariff levels under
any of the deployment projections outlined on the previous page.
21
£2.65 £4.05
How does solar PV address wider UK energy policy objectives?
Energy policy objective Contribution of commercial scale PV to objective
Security of supply
- Secure, reliable supply to homes and businesses
- Replacement of life expired capacity (mix of baseload
and flexible plant)
- Reduced reliance on importation of oil and gas
- Strong response from potential new investors to the RE sector
- Ensure flexibility of conventional power generation portfolio to balance/ backup PV
- Commercial scale PV under
RE. FiT was then reduced in line with cost reductions (for example through a pre
regression formula), but only after the sector has had opportunity to develop
- Reduced reliance on imported energy sources provided
solar industry
Decarbonisation
- Meeting 2020 emission reduction targets
- Low carbon economy contribution
- Demand side responses / energy efficiency
- Community engagement
- Contributes to 2020 RE targets
- PV as enabler for decarbonising the built environment. PV
maintain, which acts
renewable energy
feedstock issues, or demand reduction with more complex monetisation
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
- Engagement of large
agenda
Affordability
- Minimising cost increases to consumers
- Maximising economic benefits
- Value for money
- Cost effective investment in generating capacity
- Provide low cost energy to social housing
- Solar PV is a low risk passive RE asset with
capital. For example, decreased pricing volatility
projects, and reduces risk. Financing cost to decrease as financiers become more familiar with
RE market – solar PV is lower risk compared to many other technologies (technology risk,
lower construction risk, understandable)
- Solar PV FiT is an enabler for the introduction of new entrants to the market
corporate, financial investors, pension funds, international investors to enter RE sector, with
potential to invest in other lower cost technologies as risk appetite and familiarity with sector
increases. Introduces
- Investment in supply chain R&D, develop UK as centre of excellence for engineering and
technology
Other policy objectives
- Attracting international investment
- Fostering entrepreneurship in UK
- Attracts international solar PV players across supply chain and financiers to UK market
- Having invested
to taking more risk
fostering entrepreneurship due to successes elsewhere in Europe
FiTin Germany, Italy has contributed to strong rollout growth in
-agreed
time is given for the UK to build up its
is a low risk, passive asset, easy to
as an attractive entry technology for investors and new entrants into
compared to other, higher risk low carbon energy technologies, egRHIwith
and financing models
corporates, entrepreneurs, communities, capital providers in low carbon
FiT, and attracts investors with a low cost of
enablescapital to be deployed for other
–platform for
competition to incumbent utilitysuppliers
in relatively low risk solar PV, entrepreneurs may be more willing to graduate
for other,less proven RE technologies. Solar is likely to be a first step to
22
Appendices
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Appendix A
Purpose of our report and
restrictions on its use
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Private and confidential
Barry Marsh
Solar Trade Association
Capital Tower
91 Waterloo Road
London
SE1 8RT
Dear Barry,
Assessment of UK solar PV
We enclose our UK solar report which we understand will be used to respond
to the fast track review of the feed in tariff. This report has been prepared in
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
accordance with our engagement agreement dated 04 May 2010.
Purpose of our report and restrictions on its use
Thisreportwaspreparedonyourinstructionssolelyforthepurposeofthe
SolarTradeAssociation(STA)andshouldnotberelieduponforanyother
purpose.Incarryingoutourworkandpreparingourreport,wehaveworked
solelyontheinstructionsoftheSTAandfortheSolarTradeAssociation’s
purposesonly.Assuch,EYowesnodutyofcaretoanypartiesotherthan
theSTA.
Ourreportmaynothaveconsideredissuesrelevanttoanythirdparties.Any
usesuchthirdpartiesmaychoosetomakeofourreportisentirelyattheir
ownriskandweshallhavenoresponsibilitywhatsoeverinrelationtoany
suchuse.Thisreportshouldnotbeprovidedtoanythirdpartieswithoutour
priorapprovalandwithoutthemrecognisinginwritingthatweassumeno
responsibilityorliabilitywhatsoevertotheminrespectofthecontentsofour
deliverables.
Our work in connection with this assignment is of a different nature to that of
an audit. Our report to you is based on publicly available information, project
information provided by solar industry stakeholders, Ernst & Young
proprietary data (where it has been legally possible to share it) and
Ernst & Young LLP
1 More London Place
London SE1 2AF
Tel: +44 (0)20 7951 2000
Fax: +44 (0)20 7951 1345
www.ey.com/uk
9 June 2011
discussions with the Solar Trade Association. We have not sought to verify
the accuracy of the data or the information and explanations provided by any
such sources.
The indicative results presented in the report have been calculated from
information collected and analysed in a limited time frame. If you would like
to clarify any aspect of this review, including the results and methodology, or
discuss other related matters then please do not hesitate to contact us.
Yours sincerely
Ben Warren
Partner
Ernst & Young LLP
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001and
is a member firm of Ernst & Young Global Limited. A list of members’ names is available for inspection at 1 More London Place, London
SE1 2AF, the firm’s principal place of business and registered office.
25
Appendix B
Methodology
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Methodology
Project Assumptions
Cost database
► Capexincluding
module prices (thin
film, poly and mono
crystaline, inverters,
installation cost, grid
connection.
► Opexincluding
remote monitoring,
Cost drivers
► Commodity prices
► Silicon prices
► Labour
► Learning rates
Inputs
► 50–100kWp
► 100–250kWp
► 250–5,000kWp
► Stand alone system
Business model and investor types
for each tariff category
Project type including modules
Project location and irridation
assumptions
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Rates of return
► Profiling for different types of
investors and business models
► Hurdle rates
Taxation
► All analysis assumed on a pre-tax
basis
Capacity build out
► Global
► UK
General assumptions
► Valuation date –
annual calculations
2010 to 2015
► Discount rate
► Asset life
Revenue assumptions
► UK retail and
wholesale power
price forecasts
► Export tariff
assumptions
Financing and tax assumptions
Outputs
► Annual levelisedcost for
each tariff category
► Required level of
generation tariff for each
solar PV tariff category
► Comparison of levelised
cost to forecast UK
wholesale and retail
power price forecasts
► Apply cost drivers and
progress ratios to obtain
annual capital and
operational cost forecasts
for 2010-2015.
► Levelisedcost calculation
for each tariff category and
investor type
Discounted total capex+
opex/discounted output
over project life.
► Goal seek required level of
FITto generate IRR to meet
hurdle rates of identified
investor types.
Calculations
27
Appendix C
High and low resource levelised
cost
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Projects at high irradiation locations may become economic with 2
ROCs by 2012, and reach parity with retail power
Levelisedcost for high yield 1032kWh/kWp(1323kWh/m2)
The chart below shows the impact on levelisedcost and grid parity for high irradiation sites, illustrating the impact of irradiation on our analysis.
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
Le
vel
ise
d c
ost
pe
nce
/kW
h
I&C retail and 2 ROC support
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS
Levelisedcost for low yield 861kWh/kWp(1104kWh/m2)
The chart below shows the impact on levelisedcost and grid parity for low irradiation
>50 - 150kW >150 - 250kW
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
Le
vel
ise
d c
ost
pe
nce
/kW
h
I&C retail and 2 ROC support
>50 - 150kW >150 - 250kW
by 2017
2016 2017 2018 2019 2020
I&C retail
sites, illustrating the impact of irradiation on our analysis.
29
>250kW - 5MW Ground Mounted
2016 2017 2018 2019 2020
I&C retail
>250kW - 5MW Ground Mounted
Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
www.ey.com/uk
The UK firm Ernst & Young LLP is a limited liability
partnership registered in England and Wales
with registered number OC300001 and is a member firm
of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London SE1 2AF.
© Ernst & Young LLP 2011. Published in the UK.
All rights reserved.
All Rights Reserved – Ernst & Young 2011 -Ref STA/BW/LS