3 November 2017


Feed-in Tariff PPAs solar market parity Europe

Overview of European PV capacity running out of feed-in tariffs & alternative revenue streams

Author: Mina Mesbahi, Solarplaza

Feed-in Tariffs: A brief history

Feed-in tariffs were created as an economic policy in order to encourage power production through, and investment in, renewable energy sources. FITs tend to utilize long-term agreements, which relatively protects the producers from inherent risks associated with energy production. The very first feed-in tariff was implemented in the United States and since then FITs have been largely used throughout the rest of the world including European countries.This article is concerned with examining the ending of feed-in tariffs and the respective available capacity across 8 European countries, and alternative solutions for when these tariffs come to the end of their cycle.

An alternative approach to securing long-term revenue streams is not only beneficial due to the limited nature of feed-in tariff agreements, but also due to continuous reduction and changes in the structure of the FIT schemes.

Feed-in tariffs across Europe

Feed-in tariffs were separately introduced across European countries encompassing different term durations ranging from 15 to 25 years. Germany was amongst one of the very first countries in Europe to adopt a feed-in tariff policy. Since then these FIT schemes became widely popular and were implemented by countries like Spain and Italy. Figure 1 illustrates the ending of feed-in tariffs for 8 European countries and their respective available added capacity in MW. Evidently, Germany and Italy will account for a significant amount of installed capacity by the year 2031 with more than 7000 MW in PV capacity.

Figure 1: Installed Capacity in (MW) post- FIT per country

The gap between the duration of feed-in tariff policies and the solar plants’ lifespan

Despite any amount of effort invested towards maintaining the robustness of solar panels, they will inevitably deteriorate in performance over time. A meta-analysis of studies examining the degradation rates of various PV panel, conducted by the National Renewable Energy Laboratory (NREL) shows that the degradation rate is less than 4% (per year) for panels manufactured after 2000. All in all, solar plants have a life expectancy of 25 to 30 years depending on the manufacturer and type of solar panels utilised. Therefore, it would be highly interesting to discover how the investors will navigate the last uncharted 5-10 years of a plant’s lifespan post-FIT.

Post-FIT: Alternative Revenue Streams

The finite nature of feed-in tariff policies, as well as the lack of long-term indexes in the solar industry in terms of demand, propose the need for alternative methods to procure revenue streams, which are scalable and bankable.

Based on a recent presentation conducted by Danske Commodities in Milan regarding this topic, a plausible approach would be to make use of forward market hedge contracts, the costs and and risks of which are considered to fall on the trader. These risks entail high costs of collateral, balancing and market-to-market risks. However, an advantage of these contracts for the producer is the high share of risk delivered to the market. Nevertheless, the producer is required to provide bank guarantee. Another disadvantage of forward market hedge contracts is that they work well merely for a duration of up to 5 years.

Danske Commodities also suggest that relying on corporate PPAs can be another effective tool to attain sustainable income. Corporate PPAs have been gaining more popularity as they provide access to long-term secured prices and involve lower energy costs in comparison with the retail energy prices. Corporate renewable PPAs are substantially beneficial to power generators as well as off-takers but there are a few unique risks and disadvantages associated with them. On the other hand and more importantly, they provide power generators with access to long-term security of power prices.
Another important risk - from the producer’s perspective - is counterparty risk. For corporate PPAs, you have to find consumers that have a big enough consumption volume and that are likely to still be around in 10 years. You need to have a solid legal framework in place, which prevents the consumer from exiting the contract whenever they desire. All in all, corporate PPAs bear challenges beyond price level, especially in a country like Italy, which is characterized by of Small-to-Medium Enterprises (SMEs) and approaches to “supervening unconscionability”.

In addition, from the generator’s stance, corporates tend to offer higher prices in comparison with utilities in markets with low commodity prices. Another advantage is that PPAs provide the generators with a fixed price and consequently a guarantee that the revenue will be realised. This certainty shelters the generators from exposure to volatile prices in wholesale electricity markets. Moreover, from a corporate buyer’s perspective, investing in renewables is not only good business but also a lucrative one enabling corporations reach their sustainability goals without committing to major upfront investments.

Learn more about energy trading, corporate PPAs and market parity plants in the different sessions that we organize on these topics at our Solar Asset Management Europe conference.

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