Why must finance complicate things so much?

  • By Rishi Mehta
  • 28 Jun, 2017

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:

  1. Developments in solar cells/panels (including Thin Film, 3rd Gen. PV, Concentrated PV, etc.)
  2. Developments in solar energy peripherals (including storage batteries, smart monitors, etc.)
  3. Utility-scale long distance solar energy exporting (including desert-based solar farms, High Voltage Direct Current transmission, Supergrids, etc.)
  4. Measures for increasing Residential and Commercial solar adoption (including government policies & incentives, education & consultancy, supply chain & market conditions, etc.)
  5. 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:


Utility-scale

  • 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.

Commercial

  • 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).

Residential

  • 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/

Thoughts from Solarisers

By Rishi Mehta 30 Aug, 2017
The UK solar market is now considered mature, and despite not being considered “a sunny country” it is ranked 7th globally in terms of installed capacity, having overtaken France and Spain in 2015[1].

Previous governments have supported initiatives that encouraged solar panel uptake among homes, schools and at utility-scale through subsidy schemes including the Renewable Obligation Certificate (ROC) and Feed-in-Tariff (FIT). UK’s solar panels produced more electricity than coal in both the summers of 2016 and 2017. Whilst the current government may have all but killed subsidies for any new solar deployments, this has not deterred developers from taking advantage of falling prices and battery storage to plan post-subsidy solar farms that are still economically viable.

In fact, since existing developments benefit from inflation-linked subsidy payments over 20 years, these conditions have created a thriving secondary market and a handful of firms are driving market consolidation. Through Special Purpose Vehicles and listings on the London Stock Exchange, the likes of NextEnergy Solar Fund (NESF) , Foresight Solar (FSFL) and Bluefield Solar Income (BSIF) are attracting significant sums of money, mostly from institutional investors like asset management firms and pension funds. However, these funds are also available to individual investors through ordinary share trading platforms.

Their investment prospectuses make for great reading as to why utility-scale solar farms in the UK still make compelling financial sense! Below is an extract from Foresight. As the other funds are quite similar, in both prospectus and investment strategy, I have altered the final point to make the extract generic. Please note, this is purely informational and does not constitute investment advice[2].


Investment opportunity

The Directors believe that the UK solar market remains attractive, particularly given the recent recovery in wholesale power prices. There is uncertainty regarding the UK Government’s future support for providing subsidies to new solar power projects on the basis of the Renewable Obligations Scheme being withdrawn with effect from 31 March 2017. However, the Directors believe that solar energy infrastructure assets continue to provide an attractive, risk-adjusted return for the following reasons.


1. Expected steady growth in demand

In its 2015 projections, the DECC forecasted that the UK’s electricity demand would increase by between 14% and 25 % by 2035. Despite increasing energy demand, the UK’s electricity supply is decreasing. Existing nuclear and coal-fired power stations are reaching the end of their technical lives and European environmental legislation has resulted in the closure of approximately 12Mtoe of coal capacity since 2012.

Furthermore, in 2008 the UK passed the Climate Change Act requiring an 80% reduction in greenhouse gas emissions by 2050 (and at least a 26% reduction by 2020) against the level of greenhouse gas emissions recorded in 1990. In October 2016 the UK’s Committee on Climate Change (the “CCC”) noted that the vote, passed by the UK electorate on 23 June 2016 to leave the European Union, did not change the UK’s legal commitments to reduce its greenhouse gas emissions under the Climate Change Act. The Board believes that this increasing demand, decreasing supply and required reduction in greenhouse gasses highlights the importance of the move towards renewable and low carbon technologies in electricity generation.


2. Regulated revenues linked to RPI

The UK Government has provided regulatory support for renewable energy and included solar as a “key technology” to meet its 2020 carbon targets. The UK’s Renewable Obligation Certificate regime provides a stable 20 year subsidised revenue stream for accredited solar assets which is linked to RPI inflationary increases applied by Ofgem in April of each year. It is estimated that, for the year ending 31 December 2016, approximately 60% of the Company’s revenues were derived from regulated revenues (ROCs and embedded benefits, both of which are linked to RPI) and 40% were derived from selling electricity on the wholesale market.


3. High degree of contracted revenues

Approximately 59% of the revenues derived from the Company’s portfolio are fixed and index-linked and received in the form of regulated revenues. The remaining 41% are received through the sale of electricity through PPAs, entered into on a bi-lateral basis between the individual solar power plant SPVs and creditworthy offtakers in the UK. Exposure to merchant power prices can be mitigated further through fixed price PPAs.


4. Active secondary market providing further pipeline

The growth and scale of UK installed solar capacity over the past five years has created an active market in large-scale secondary assets. The Board believes that a large proportion of UK solar assets are currently held by short-term investors, including construction companies, solar developers or panel manufacturers, that are not intending to hold the assets for the entirety of the anticipated asset life. Notwithstanding the announcement by the UK Government to withdraw the RO scheme to all new renewable energy projects with effect from 31 March 2017, the UK solar sector is expected to remain attractive given its size and the opportunities to acquire operating assets as an active secondary market emerges in the UK.


5. Low volatility of solar irradiation

Irradiation is the key determinant of solar power production and it is dependent on the hours of daylight available as opposed to direct sunlight. This means that there is less variability in the generation of the electricity by solar power plants as they are still able to generate electricity even on days without clear skies. It has been demonstrated that levels of solar irradiation exhibit lower variability than wind. The standard deviation of annual irradiation across the existing utility scale solar power plants operated by the Foresight Group in the UK is relatively low at only approximately 4%, over the past 21 years.

In addition, the levels of solar irradiance in the southern parts of the UK compare favourably with other established European solar markets such as Germany, making the UK a similarly viable location for solar investment. Regions in the south west of England experience irradiance up to approximately 1,200 kWh per M2 per annum. The majority of solar power plants in the UK tend to be located in the southern parts of England and Wales to maximise levels of production.


6. Mature technology

Solar PV systems rely on well proven technology that has a demonstrated lifespan in excess of its guaranteed life of 25 years along with low technical degradation over time. The initial application of PV technology took place in the 1960’s with one of the first UK grid connected systems in the UK being installed for 22 years, presenting a performance above the expected technical degradation.


7. Managed by [a large, well established investment management firm]

[The firm] has an experienced management team in the solar and renewable infrastructure sectors. Founded in [x], with [£y billion] assets under management, [the firm] has a global presence with operations in [z] countries.


There are of course other ways to invest in solar without putting any panels on your own roof, e.g. Community Solar and/or Renewable Energy Supply Tariffs, which I will cover in later blogs.

Disclosure: the author does not currently hold shares in any of the aforementioned funds, but is considering buying into one or more of them.


[2] The Site has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this Site do not constitute investment advice and independent advice should be sought where appropriate. Solarise has no affiliation with any of the aforementioned companies.

By Rishi Mehta 07 Aug, 2017
Time for some positive news stories. In our quest to improve the situation and not accept the status quo, it is easy to seem negative and not celebrate the observable successes that we can see in solar adoption globally (and within the UK) everyday. I'm currently reading Jeremy Leggett's book, The Winning of the Carbon War [1] , and am impressed by his amazing journey, but also his habit of chronicling his day-by-day participation in major events in the manner of a humble historian. These activities include the run up to the Paris Agreement, and convincing the market and even fossil-fuel CEOs of their 'stranded assets'. In the span of only 2-4 years, we're already seeing resultant divestment from coal, oil and gas and increasing investment into renewables by institutional investors. Clearly, it is only by looking back that we're able to appreciate the rapid and accelerating transition to low carbon energy sources like solar PV.  So, here are 4 reasons to be hopeful...


Reason 1: UK is on track for 20GW solar PV capacity by 2020

Back in 2012-13, when the UK Government had both a Department of Energy & Climate Change and a UK Solar PV Strategy, the UK had ~2.4GW of solar PV capacity generating ~1.4TWh from July 2012 to June 2013. They estimated, “At the upper limit, by 2020 solar PV could reach up to 20GW and with a potential for 7GW at the lower end (including both large and small-scale).”


Technical deployment potential to 2020 for solar PV: [2]

By Rishi Mehta 25 Jul, 2017
I've been looking at the UK electricity market over the last couple of weeks, seeking to understand how the economics of the energy sector works. I've previously criticised Financialization and its role in both complicating and impeding climate change mitigation efforts, including solar energy. This time, I looked into the electricity wholesale market and how it functions behind the scenes of the retail market offered to consumers, dynamically pricing and trading energy between market participants based on supply and demand.


The interesting thing I found about the wholesale market was the inclusion of “Non Physical Traders” 1 .

By Rishi Mehta 01 Jul, 2017
This blog is a collection of choice extracts from a detailed scientific paper/article published by Science Advances. I've decided to create this summary version, selecting only key lines and stripping out the references, as I found this paper elaborates nicely on some of the points I made in my last blog titled, " Why must finance complicate things so much? ". If this topic interests you, I urge you to read the full paper (URL below).

Source URL: http://advances.sciencemag.org/content/3/3/e1601861.full
Author: Max Jerneck et al
Science Advances 29 Mar 2017:
Vol. 3, no. 3, e1601861
DOI: 10.1126/sciadv.1601861


As long as hoarding and speculation are available as options to financiers, their willingness to invest in innovation is limited. It is safer to live off the income streams of past investments, as “rentiers.”

A fully production-oriented economy is only possible if the financial component of capitalism is entirely subordinated to the entrepreneurial function, in which case it might no longer be recognizable as capitalism at all, but rather a centrally planned economy where decentralized financial decisions are curtailed. [Solarise notes, for example, China and to a lesser extent India now]

...investments in innovation must be based on more elaborate “fictional constructions” of future states.
Creative destruction is a power struggle between incumbents and challengers, which devise strategies by taking each other’s presumed actions into account. The power balance is observed by financiers, who restrict finance to what they perceive to be the winning side. As Weber argued, finance is a weapon in the struggle for economic existence.

Investment decisions have signaling effects.

As Kenney and Hargadon demonstrate, private venture capital is not a viable model for most low-carbon technologies, which are capital-intensive and in direct competition with existing alternatives.

The goal of the entrepreneur is to expand production, and money is a mean to this end. The goal of the financier is to make money, and production is one, but not the only, mean to this end. If the financier could, he would rather skip the production phase altogether and turn money directly into more money.

In Japan, (male) blue collar workers were integrated into the innovation process. Iwata argues that the elimination of shareholder control after the Asia-Pacific War turned the Japanese enterprise into a “unified body of employees.” Lifetime employment turned the worker from “an external seller of his labor” to a “corporatist who shares the responsibilities of management”.

Separation of ownership and control can lead to concern about excessive autonomy of managers to pursue growth strategies that do not necessarily make economic sense or only do so on a long-time horizon.

The function of finance, it may be argued, is to keep this from happening. During the 1980s “shareholder revolution,” financiers reasserted control.

Financialization is caused by nothing more than the removal of political constraints on finance. By deregulating finance and letting markets decide where finance should flow, politicians freed themselves from the responsibility of choice. Decision-making was moved from the realm of politics, where policy makers bear responsibility, to the realm of impersonal decision-making, either through technocratic control or to market forces.

In the early 1970s, when the American solar energy industry did not yet exist, there were two competing visions of where it should head. One camp consisted of a small number of entrepreneurs who had been involved in producing solar cells for the space program or pioneered their application on Earth. They envisioned an industry of small-scale energy production off the grid. Solar energy was too expensive to compete with conventional sources but had the advantage of being usable in remote locations or at sea.

The other camp consisted of the energy policy bureaucracy and closely affiliated large manufacturing and energy corporations along with utilities. This camp was wedded to the idea of utility-scale PV generation, competing directly with conventional sources of energy.

The first American PV firm to focus on the terrestrial market was Solar Power Corporation (SPC), founded in 1973 by Elliot Berman. He originally took his idea to a number of venture capitalists, but they “weren’t very venturesome” and declined the offer. Instead, he turned to the oil company Exxon, which made SPC a subsidiary after Berman had convinced executives that solar panels were cost-effective for offshore oil platform lighting, pipeline corrosion protection, and surveying equipment. Others took notice and the oil industry soon became one of the most important markets for solar cells. However, the involvement of oil companies would prove a mixed blessing.

The initial involvement of large financial conglomerates was ambiguous because they provided needed financial support but steered the industry away from existing markets toward a large-scale utility market that never emerged. By focusing almost exclusively on creating a future market for centralized energy generation, American firms missed the opportunity to develop the small off-grid and consumer electronics markets that were already available. There was an alternative path that was not taken toward decentralized solar energy, which would not have to compete with conventional sources. We know this because that is how the industry developed in Japan, where solar cells were applied mainly for off-grid use and consumer electronics, allowing the technology to mature gradually without much reliance on subsidies or record-level energy prices. This article demonstrates that the main reason this path was not taken in the United States was a disconnect between industry and finance.

Keynes noted that the ever-present tendency toward financialization calls for a substantial share of public investment. This is particularly true of extra-market goals, such as the mitigation of climate. Perhaps, the recently expanded role of central banks in economic governance could play a role in developing low-carbon technology, a topic worthy of future investigation.

A political strategy to bring productive and financial capital together is needed. It is necessary to close off easy ways of making money off money, such as speculation and stock buybacks. This article has examined ways in which financialization impedes the development of low-carbon industries. It has not examined ways in which financialization may aid it. This interesting issue needs to be addressed in further studies.
By Rishi Mehta 28 Jun, 2017

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:

  1. Developments in solar cells/panels (including Thin Film, 3rd Gen. PV, Concentrated PV, etc.)
  2. Developments in solar energy peripherals (including storage batteries, smart monitors, etc.)
  3. Utility-scale long distance solar energy exporting (including desert-based solar farms, High Voltage Direct Current transmission, Supergrids, etc.)
  4. Measures for increasing Residential and Commercial solar adoption (including government policies & incentives, education & consultancy, supply chain & market conditions, etc.)
  5. 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:


Utility-scale

  • 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.

Commercial

  • 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).

Residential

  • 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/

By Rishi Mehta 20 Jun, 2017
Having decided that renewable energy, and solar in particular, has the potential to completely change the fate of our planet over our lifetimes and for future generations, we started Solarise.

Our mission : "Raising solar energy adoption globally"

We live in very exciting times, where we are seeing daily breakthroughs and records being set - where clean, green solar energy (and other renewable energy sources) are rapidly displacing dirty, non-renewable fossil fuels (coal in particular). And due to rising efficiencies and reducing costs, solar energy is winning the economic argument too, even without subsidies in many cases.

But we know that the transformation is not happening fast enough! (our friends at 350.org make the case clearly enough: https://350.org/science/ )

So I've been studiously analysing the market to understand where we can make the biggest impact. I don't intend for the summary below to be exhaustive, but I think it represents the main avenues being pursued globally at the moment.

I would really appreciate comments from those in the industry to validate, challenge or expand on my thoughts and to help prioritise where you think we should focus our efforts as we begin this noble mission ...

In no particular order:

1. Solar cell and panel product R&D/ bring to market – including Third-generation photovoltaic cells 1

  • Thin film solar cells – cheaper, more potential use cases (e.g. building-integrated/ within windows), rising efficiencies
  • Multi-junction/layered solar cells – much higher efficiencies by harnessing different wavelengths of the light spectrum (e.g. visible and IR) through multiple layered cells each using different band-gap semiconductors 2
  • Concentrated PhotoVoltaics (CPV) - sunlight can be concentrated about 500 times using inexpensive lenses
  • Temperature tolerance 3 – cooling of solar cells (e.g. water-based), heat utilisation by combining PV cells with heat based technologies
  • Sun tracking – adjusting tilt of solar panels according to Sun's position, tilt depends on latitude of location and time of year (adjust in March and September)

2. Peripheral product R&D/ bring to market - Storage batteries, inverters, monitors, BOS (Balance of System)

3. Utility Solar energy long distance electricity export using HVDC transmission grid – projects considering solar electricity generation in deserts for long distance transmission (e.g. Sahara to Europe 4 )

4. Increasing Residential and Commercial solar adoption

  • Government policy/incentives, micro-generation schemes/accreditation
  • Education, aggregator/comparison sites, business case development
  • Product/system go-to-market and supply chain (including distribution/wholesale/retail)
5. Financing of Residential, Commercial and Utility solar power generation


1 Solar cells that are potentially able to overcome the Shockley–Queisser (efficiency) limit.

2 The semiconductor chosen for a solar cell has to absorb as much of the solar spectrum as possible, therefore a low band gap is desireable. However, this is counter balanced by the desire to also have as large a built-in voltage as possible which requires a larger band gap. Therefore as a compromise, a band gap between 1.0 and 1.7 eV makes an effective solar semiconductor. In this range, electrons can be freed without creating too much heat.

The photon energy of light varies according to the different wavelengths of light. The entire spectrum of sunlight, from infrared to ultraviolet, covers a range of about 0.5 eV to about 2.9 eV. The primary reason why solar cells are not 100% efficient is because semiconductors do not respond to the entire spectrum of sunlight. Photons with energy less than silicon's bandgap pass through the cell and are not absorbed, which wastes about 18% of incoming energy. The energy content of photons above the bandgap will be wasted surplus re-emitted as heat or light. This accounts for an additional loss of about 49%. Thus about 67% of energy from the original sunlight is lost, or only 33% is usable for electricity in an ideal solar cell.

http://solarcellcentral.com/junction_page.html

3 All energy from photons greater than the band gap is converted to heat (~47%).

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