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The European solar PV market is one of the most mature markets in the world. Maturity, however, does not mean dullness. Plant and portfolio owners constantly adjust their operations to market dynamics in a way that maximizes returns. This update on the European solar market comes in preparation of Solarplaza’s two-day, asset-management-focused conference, set to take place on the 7-8th of November 2017 in Milan, Italy. The fifth edition of Solar Asset Management Europe will feature in depth discussions on the optimization of the operational phase of PV plants and portfolios. For more information regarding the conference, please visit the event website by clicking here.
The story begins in Italy, home to one of the most prolific solar markets on the continent with its 19.3 GW of operational solar PV capacity. Although not nearly as much as during its peak, the primary solar market is still expanding. In 2016, 369 MW of new solar capacity of was added, which represents a 24% increase from the previous year. This expansion will likely continue, as large companies like ENI and Terna/Ferrovie Italiane have announced large-scale grid parity projects as large as 200 MW.
Even so, developing new projects does not resemble past times any more. Not only is there a negative energy price trend in the country, which troubles investors significantly, but the Italian constitutional court has also recently repealed the appeal regarding the allegedly unconstitutional decision of the Italian government to cut the Feed-in-Tariff (FiT) rates applicable for PV installations. These mechanisms have triggered owners of current projects to increase plant efficiency in order to sustain adequate returns.
The market that deserves the most attention, however, is the secondary one, where assets are traded and portfolios are developed. A strong indicator of the growth in the secondary market is the fact that, while the total value of transactions in 2014 still amounted to €470 million (involving 212 MW of assets), these values have surged to €900-1,400 (involving 472 MW) two years later. As a result of the astounding acceleration in consolidation, the landscape of this market has changed drastically over the past 3 years. While the top 10 portfolio owners collectively possessed a capacity slightly shy of a gigawatt in 2014, this capacity increased to nearly 1.6 GW in 2017 (Table 1). According to Alessandro Cohen, the managing partner and renewable energy director at Milan-based corporate finance and financial advisory boutique Armon Capital, the solar ownership landscape will further consolidate as less prominent players are looking to exit.
Table 1. Total solar capacity of Top 10 Italian portfolio owners in 2014 and 2017.
“The reasons for the increased rate of sector consolidation are manifold” stresses Mr. Cohen. Besides the cut in the FiT rate, funds continuously entering and exiting, provide a steady supply of assets awaiting liquidation, as well as a steady supply of buyers looking to establish or increase their portfolio. Furthermore, the existing financial, legal and political environment also favor consolidation. Low interest rates, political and economic stability and more aggressive portfolio development are among the main underlying causes of this phenomenon.
Another widespread value-creating activity among project owners is the refinancing of the current debt obligations. Since many projects were financed during the peak of the market in 2010-2011, the established terms are often inferior to the terms available now. Interest rates, for example, have been as low as 2.5-3.5%, which stands in stark contrast to past rates that could go as high as 9%. New debt-financing means, such as short-term and vendor financing, along with increasing presence of infrastructure debt investors have also contributed to the attractiveness of refinancing.
The last market shaping factor present in the Italian solar sector is the increased ‘Ground Support Equipment’ (GSE) inspection activity that has been specifically targeting solar projects. According to Mr. Cohen, 60% of the inspected plants showed irregularities and 31% suffered partial or total cut from the FiT. As an indication of the magnitude of these inspections, between 2010 and 2016 the GSE confiscated €142 million of net cash on all renewable sources, which is slightly higher than 1% of the total incentive cost.
Another important consideration regarding solar asset management, is what the future is expected to look like. Gianluca Boccanera, the Italian managing director of London-based, renewable-focused merchant bank NextEnergy Capital, provides some predictions as to how the future may unfold based on current political and legislative trends.
The main driver behind the increase in renewable energy applications, and more specifically solar energy, in Italy is the CO2 emission target outlined by the European Commission. According to Mr. Boccanera’s estimations, the targets will require a reduction of carbon-intensive energy sources between 81% and 95% of the current capacity by 2050. Simultaneously, the focus of strategic directives will not only turn to increasing the share of carbon-free energy sources, but will also prioritize energy efficiency as well as the sustainability of the transportation sector.
The action plan in accordance will the strategic directives will, firstly, promote the increase of the renewable energy generation capacity by 125 GW. Subsequently, there will be a reduction in the thermoelectric capacity by 40 GWs and the phase-out of coal energy. The likely development of the energy sector based on different energy sources can be seen in Figure 1.
Figure 1. The projected energy demand and installed capacity evolution of Italy between 2015 and 2050.
These targets, however, will require legislative and financial backing in order to be realized.
It is estimated that a total investment of €220-335 bn into the energy sector and its supporting activities is necessary, which translates into €9 bn/year up to 2050. The size of this investment is of such a spectacular scale that there need to be institutional supporting measures facilitating it.
These supporting measures include that all renewable sources will have to be eligible for the sale of electricity through open auction under PPAs; the regulation regarding the SEU (Efficient User Systems) will have to be re-defined in order to extend to groups of users; the closure of the spot market will have to be postponed to allow all renewables to participate; and dispatching priority of renewable sources will have to be maintained as well as their unobstructed participation in the capacity market and in the market for dispatching services.
In conclusion, the Italian solar market has shown to have shifted the increased activity from the primary market to the secondary market as most mature markets have. Besides the substantial consolidation that can be observed, refinancing and GSE inspection also keep portfolio owners on their feet. However, despite the maturity of the market copious amounts of investment is needed as well as renewable-friendly policy for Italy to achieve its targets. Even in light of the sizable financial and institutional hurdles that have to be overcome, Mr. Boccanera has a very positive outlook on the matter and believes that the energy sector will see this transition through without major complications.