How to benefit from the sun? Solar market overview
Solar energy has become a hot topic these days among many. Often referred to as the energy of the future, it attracts considerable investments in a construction of solar stations. In this article, we are breaking down the commercial prospects of companies operating on the market and measure the size of investments and rate of return (ROR).
Modern solar panels need no additional investments for dozens of years and, in our opinion, can become super‑lucrative in a long-term.
Inside the grand scheme of renewable energy
Renewable energy is a power generated by means of solar, water, wind, and biomass. These power generation sources show positive dynamics increasing their share on the global energy market.
Such an increase is warranted by the following circumstances:
- actions to counter the global warming become more systematic. The Paris Agreement on climate change envisages specific measures to reduce the greenhouse gas emissions;
- the development of renewable energy has a directed support from many governments, which provide tariffs and tax incentives to compete with the traditional energy;
- the cost of photovoltaic (PV, a core technology for solar power generation) panels is declining at 10% yearly.
Solar generation is considered to be the most promising type of power in the energy sector. For the last few years, the market prices for solar modules decreased dramatically in contrast to their enhanced efficiency.
According to the statistical report by British Petroleum, the installed generating capacity of solar plants operating globally totaled 303 GW in 2016. These electrical gigawatts are powered by 301.5 thousand PV stations. It is noteworthy that 48% of that number fell on Asia. The installed generating capacity shows a strong upward pattern for a long period now. According to Energytrend, this figure will increase by 100 GW in 2017.
According to the International Energy Agency, in 2016, the PV generation accounted for nearly 1.8% of the global consumption and 4% of the European consumption. The Energytrend forecasts China, USA, Japan, and India to cover 75% of the new global solar generation in 2017.
The rocketing growth of PV stations and the increased share of PV energy generation in the total energy balance is a task to be solved by means of government policies. As a rule, the cost of renewable energy exceeds the cost of traditional sources, and bringing new players on the market is only possible if backed by the governments. Over the last 10 years, the leaders in renewable power generation were Germany and Italy. However, with the large-scale programs to stimulate the PV power generation, China, USA, and Japan made their entrance to the leaders’ list.
The pro-renewable policy is exercised in 85 countries. Moreover, such programs are designed both at the national level and in regions/territories. These measures may be subsidized tariffs or loans for training specialists.
At the global level, there are multiple approaches to drive the PV generation development. As a rule, advanced economies, having reached their solar energy targets, are gradually abandoning the support of photovoltaics through direct incentive measures for the following reasons:
- the cost of PV power generation has dramatically declined over the last years. Lazard’s latest annual Levelized Cost of Energy analysis for solar and wind showed a decline of LCOE values in 2010-2017 by 66% and 85% respectively, which is equivalent to the decline of gas and coal. As a result, the cost of generation allows such projects to refuse from the governmental support and compete with conventional fuels.
- The tariff-pegged selling price of renewable energy is higher compared to the conventional sources. As a rule, the current policy binds the European distribution network operators to enter long-term contracts (10 years and more) to supply renewable energy at fixed rates. In Germany, for instance, the contracts concluded 10 years ago are bought at 45-50 cents/kW, while the current market price for a kW of solar power accounts for 12 cents.
In many respects, these circumstances have slightly decreased the pace of photovoltaic development in the EU and the US. Against this background, the power generation in China shows the highest growth being the most government-backed on all fronts. That said, the production of parts for solar stations, including the photovoltaics, is flourishing in China. The support from the state allows Chinese suppliers to retain their price leadership on the global market being driven by the minimized cost of products.
International structures have a relatively minor impact on solar energy globally. The most notable organizations in this area are the International Energy Agency and International Renewable Energy Agency whose duties involve analytical activities, information exchange, and development of international cooperation.
The power rating is considered to be the key to proper assessment of the market, but the size of investments is no less important. According to Bloomberg New Energy Finance, it accounted for US$ 242 billion in 2016, which is 23% less than the previous one. Of that amount, US$ 114 billion fell for the solar power with a 34% decline against the previous year caused by the aforementioned cut of the project costs. According to Frost & Sullivan, the investments in renewable energy generation will account for US$ 243 billion in 2017, and US$ 142 billion will pertain to the solar.
The location of Ukraine is conducive to solar projects. Its climate is common to have a great number of sunny days: Ukraine’s insolation is far better than Germany’s – Europe’s leader in solar power generation. Such basic factors allow speaking for the Ukrainian solar potential. The State also declares a comprehensive support to all renewable energy projects. In practice, however, one has to capture certain nuances for these projects to be implemented. Otherwise, a project initiator can encounter serious restrictions and fall short of the targeted indicators.
Over the last 5 years, the Ukrainian solar power market has transformed from a small segment represented by few pilot projects into one of the largest and skyrocketing areas. According to IB Centre Inc., the Ukrainian solar market capitalization reached over US$1.4 billion in 2016.
At the same time, the political instability, which peaked in 2014, devaluation of the national currency, continuous exposure to the military conflict in the East has a negative impact on investment projects. As a result of the Crimean annexation, which had many different solar projects implemented before 2014, Ukraine lost its best-placed region as far as the sun exposure is concerned.
In 2014, the National Commission for State Regulation of Energy and Public Utilities (NCSREPU) did not compensate alternative energy representatives for translation losses, and the green tariffs were reduced on a legislative basis. This significantly decreased the commissioning of new PV stations.
2016 marked a recovery back to the positive pattern, whilst the PV-related projects showed the highest growth. In 2015, the Law No. 514‑VIII “On Introduction of Changes to Certain Laws of Ukraine with respect to Securing Competitive Conditions for Production of Electricity from Alternative Energy Sources”. As a result, a legal framework was designed to attract investments since the Law No, 514‑VIII pegged the green tariff to euro.
According to the State Agency on Energy Efficiency and Energy Saving of Ukraine, the country had 359 operating renewable-based facilities with a total output of 1,320 MW as at 1 October 2017.
To that note, 15 out of 183 PV power stations account for 20% of their total output. The largest PV stations are located in the following regions: Kirovohrad (125 MW); Nova Kakhovka, Kherson Oblast (120 MW); Kamenka, Cherkasy Oblast (100 MW); Yavoriv, Lviv Oblast (57 MW), the village of Priozerne, Odesa Oblast (55 MW).
See the picture below for an insolation map of Ukraine.
Despite the positive investment activity in the “green” energy, the State Agency on Energy Efficiency and Energy Saving of Ukraine reports that alternative sources still cover a small share in the total output with 1% for the 11 months of 2017. At the same time, the potential for market growth is very promising: by entering the EU Energy Community and committing to drive the share of renewable energy to 11% by 2020.
As in most countries, the Ukrainian policy as such is the key driver of renewable energy, and the key incentive is the so-called “green” tariff – a special tariff scale allowing the state to acquire renewable electricity from commercial organizations and individuals.
Once the industrial solar station is built and commissioned in 2018, the energy can be sold at €0.15 per 1 kW.
The investment appeal of solar projects in Ukraine
Factors affecting the return on solar stations:
- panel type. The most common and price-wise panels today are those based on mono- and polycrystalline cells, so the choice is usually made between these two types;
- region’s dependence on the insolation level (Ukraine’s most popular – Odesa Oblast, Dnipropetrovsk Oblast, Kherson Oblast, Mykolaiv Oblast);
- panel orientation to the light side (South, North, West, East). Rotation capability combined with a sun tracking system that allows generating 28%–35% more energy compared to the stationary installations with identical output;
- tilt angle of panels to the horizon. It is critical that sun rays land on solar panels at a right angle. This angle is recommended to be 30-35° in summer, 45° – spring and autumn, and 70° – in winters;
- supplying country. Most users buy Chinese solar panels (in 2015, China produced 73% of the entire global output), which decreases the cost of solar stations;
- impairment of equipment. In 25 years, monocrystalline cells lose 20% of their capacity, and polycrystalline cells lose 30%; and the warranty period can have a huge range from 5 to 25 years;
- own electricity consumption and other expenditures;
- selling price of the electricity.
With the initial investments of €0.75 million – solar station is built with Tier 1 materials of Chinese origin, – the station will hit breakeven in 7 years and the revenue onwards will average €180 thousand a year. The green tariff for industrial solar stations commissioned before 2019 will account for 15 euro cents. The model includes a discount rate of 12.6%. Over the 10 years, the internal rate of return will account for 19.1%.
The project hits breakeven only if the green tariff remains. If abolished, then the energy will be purchased at an average wholesale price, which accounted for ₴1001.23/MWh (3 euro cents/kW) at the end of 2017. This average price includes a green tariff. Without it, the value will be much lower. Under such circumstances, the station will not hit breakeven within the period stipulated by law.
The projects to build solar stations trust the government’s commitment to the “Energy Strategy of Ukraine until 2035”, which prescribes the renewable energy to reach 11% in the gross final consumption by 2020 and 20% by 2035. For that reason, it is highly unlikely that the green tariff becomes abolished.
Example rate of return calculation
An onshore solar station with an output of 1 MW (for central regions of Ukraine)
Market and trends
- In 2018, many construction projects in Ukraine will be brought to completion by Canadian, Lithuanian, Indian, Slovenian, Chinese companies.
- Oschadbank plans to allocate €27.5 million to construct solar stations with an output of 35 MW in Dnipropetrovsk Region.
- Rodina Energy Group Ltd (Rodina) and Enerparc AG plan to construct the first 1 MW solar project in the exclusion zone of Chornobyl.
- Chornobyl Solar is a project in progress being developed by the State Agency of Ukraine on Exclusion Zone Management.
On top of the competitive opportunities offered by solar stations, they are also highly mobile. As opposed to the conventional power stations confined to a particular site, solar stations are relatively fast to dismantle and can be installed some other location with the appropriate infrastructure. However, at this moment, this advantage is not relevant anymore due to a lack of direct contact with consumers.
This post is also available in: Russian