What is driving the resurgent interest in the solar sector from the investment community?
The UK solar industry first prospered under the government subsidy Renewable Obligations (ROCs) scheme. This ended in March 2017. Now the industry is experiencing a resurgence for a number of reasons.
As the impacts of climate change are increasingly tangible, there is a growing global movement calling for a rapid transition to clean energy. Many companies are already feeling the effects of climate change through their supply chains and balance sheets. The general public has become informed and vocal on energy supply and are calling for further renewable’s to be introduced. With the increased closure of traditional fossil fuel plants and a capacity gap looming in the UK, solar is in the best position to fill this gap.
Solar PV is now recognised as the fastest deployable, scalable and democratic energy technology in the world. Every homeowner, farm and business can install solar PV and take part in the clean energy revolution. Solar PV is also the most cost-competitive low carbon energy technology. Due to continued cost reductions, solar PV has now reached a point where it does not require a government subsidy. For this reason, the UK solar market is experiencing a second wave of activity and leading pension and insurance companies are trying to identify ways in which they can invest in the solar industry.
When the Renewable Obligations (ROCs) scheme ended in March 2017, many developers moved to other markets. Elgin Energy remained and reinvested initial project returns to continue development. Unlike our competitors’ quick development model, we are committed to long term solar development and believed our development and investment thesis that the market will reach an inflexion point (Grid Parity) in 2020/2021. This success has ensured staff and expertise retention throughout the economic downturn whilst many competitors disbanded. For this reason, we have amassed the largest late stage development pipeline in the UK.
How has Elgin Energy developed its solar business and how does the business operate?
Elgin Energy was founded in 2009 to deliver utility scale solar farms in the UK market. While researching business opportunities in Germany, the four founders started to examine solar PV. They quickly understood the clear business logic, relevance and adaptability of the technology and were convinced of the merits and potential of solar PV.
The team has grown organically from four to twenty-three and the business is now the leading independent solar developer in the UK. In the past two years, they branched into America through a local partnership and have established an office in Sydney. These markets were a natural choice because of their established solar markets, English being the first language and their comparable legal systems to the UK.
Solar development is similar across all our active markets. Our development model consists of four key elements; grid, legals, planning and route to market. The sequence can change depending on the market.
In the UK market, our development is focusing on projects of 20 – 100MW and the process is grid-led. Our development team identifies capacity on the grid and obtains a cost-effective grid connection from the relevant District Network Operator (“DNO”). We then identify a suitable site near the point of connection. The site is secured through an option and lease agreement, generally for a minimum of 30 years with options to extend past 40 years. We work with landowners from initial handshake through to energisation of the project. Once the option to lease agreement is in place, we apply for planning permission. We work closely with several planning consultants in the UK and have a 98% success rate in achieving planning permission.
The final part of the development model is route to market. Previously, the ROCs support scheme was the route to market. Now we are seeing the growth of Corporate Power Purchase Agreements (“PPAs”) in the UK and financial institutions are getting comfortable with PPAs in order to start financing renewable projects. Site design is also now a key driver of our business to ensure projects stand up cost-wise for both CAPEX and OPEX.
Our main technology partners are top tier Chinese manufacturers. China is the largest solar market in the world and also the largest investors in solar technology globally. Due to Chinese R&D over the past decade, the learning curve for solar PV has accelerated rapidly meaning the technology has improved and the cost has reduced. For this reason, solar PV is now cost competitive with all other technologies.
To put this into perspective, in 2009 we were developing 5MW (25 acres) of solar in the UK and it cost close to £25 million to install. Now in 2019, we are developing projects that are 10 times larger, requiring 40% less space and cost 90% less to deliver to energisation.
How do you plan to deliver your pipeline?
To date Elgin Energy has delivered 230MW across 21 projects in the UK & NI. The company was founded on the belief that solar PV would become the pre-eminent and cost competitive energy technology by 2020. In 2015, we advanced our strategy to position ourselves as the leading developer in the UK for the post-subsidy era – “SOLAR 2.0.” We achieved this by continuing to develop in the UK when others left the market. In 2019, our late stage pipeline stands at 2GW+ across 100 projects.
Since 2018, we have experienced an increase in market activity and are currently working on a delivery project “PATHFINDER” to see our first portfolio of projects energised in 2020/2021.
In Ireland, we deployed a very specific development approach focusing on delivering a large number of medium scale (4MW / c.25 acres) sites around regional towns with grid capacity. We are exploring a number of routes to market in Ireland. In July 2018, the government published the High-Level Design of the Renewable Electricity Support Scheme (RESS) making history in announcing a subsidy for solar PV. The final design is expected in Q3 2019. Following recent announcements by government committing to 70% renewable penetration by 2030, we are optimistic that RESS auctions will begin over the next 12 – 18 months.
We are also engaged in a number of corporate PPA tender processes and have seen significant uptake in the last 12 months.
Elgin Energy has learned a huge amount over the past 10 years in solar development and business. As a team we continue to learn and evolve and develop the best solutions for the market and ultimately the end investor.
What is the inflexion/grid parity point that analysts and commentators are focusing on when evaluating solar investment opportunities?
Disruption takes place in a market when a new technology enters and undercuts or out-performs the existing incumbents by 20+%. Solar PV has reached this point in most markets globally and as forecasted, the UK market is on track to reach this goal in 2020/21.
Why is solar now the energy source of choice for large energy providers?
Solar is the ideal renewable energy choice for large energy users because of its low cost, quick installation time and ability to locate close to demand. A solar farm can be installed next to a manufacturing facility when there is available land. Rooftop solar PV can easily be installed with little to no upgrade to existing electrical infrastructure.
Security of supply and power prices are major concerns for large energy users. With solar on site, the energy supply is secure and the energy cost is fixed.
As the ageing coal fleet in the UK continues to wind down (with all coal generators scheduled to close by 2025) energy prices are becoming increasingly volatile and the capacity gap is widening.
Can the solar sector prosper and develop without reliance on subsidies which the renewable sector has relied on in the past?
The UK solar industry is fast approaching grid parity due to the dramatic drop in development costs, particularly panels, and significantly increased efficiency factors. Conventional generation cannot compete with the powerful economies of scale of solar PV. We have seen this disruption already occurring across Europe in Spain, Italy & France.
Ultimately, a combination of renewables will be required to deliver the transition to a zero-carbon network.
We forecast that the UK solar industry will start installing subsidy free solar farms in 2020/21.
How is Elgin Energy poised to take advantage of the current opportunities in solar?
As the transition to a low carbon economy advances, Elgin Energy is poised to be a leader in our field in our selected markets. We believe that we can scale our business and pipeline as solar will continue to dominate all forms of energy from a delivery and cost perspective into the 2020s. We believe solar will be central to this transition over the next 10-15 years and will enable this transition without any additional cost or change to our lifestyles. The technology is available, we just need to scale deployment across the economy.
The leading fuel of the future is electricity. Our view is that solar will deliver 50% of all new demand over the next two decades. This transition will not happen overnight, it will require huge investment from businesses and teams working together across the world.
We are very excited to be working with the Cantor team to support the acceleration of our UK pipeline. They have shared their experience and knowledge with our team and we believe we are well positioned together to tell the solar story and support the transition to a low carbon future.
To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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