Navigant Research Blog

Is Distributed Generation in Spain Waking Up from Its Long Nap?

— March 8, 2018

For a long time, Spain’s intent to launch a clean energy industry was resolute despite the mishaps that occurred after the financial crisis of 2008 and the effect of European fiscal deficits in 2009/2010. In fact, my career in the sector began thanks to a job posting that required engineering and Spanish knowledge (to cover the growing Spanish renewables market).

With the financial crisis, Spain’s renewable energy ambitions not only collapsed, but the industry was thrown into the fire as part of the political and economic post-crisis fallout. The country stopped any new installations and slashed already signed feed-in tariffs (FITs) while the public opinion also turned against the industry.

Blocking the Sun

On the distributed side, the country passed from a FIT to a de facto veto on installations, then to a model that taxes auto-consumption on installations that maintain a connection to the grid, formally known as the Royal Decree on Auto Consumption, colloquially known as the Sun Tax.

The Sun Tax has a fixed component that, in reality, is a demand charge. Each year, 75% of it is paid per kilowatt of installed capacity, and the remaining 25% is a variable component that is paid for each kilowatt-hour consumed by the owner (coming from the grid or owner’s system). The fees are set by the government each year and vary depending on location and the customer’s type of grid connection.

The Sun Tax Does Not Always Shine

The Sun Tax came into effect in October 2015, just as Spain prepared for its December 2015 general election. With the election in sight, the government moved into other matters and did not pass the necessary regulation to make the Sun Tax applicable in practice.

When the government failed to win a majority in the parliament, any possibility of passing the regulation collapsed. It took a second election and almost 11 months to form a new working government. While the government is still led by the Partido Popular—proponents of the Sun Tax—it does not hold a majority; therefore, other parties can block any attempt to pass the tax’s secondary regulation.

This has put the Sun Tax and the future of distributed energy resources (DER) in limbo. Any financial analysis of distributed generation in Spain that considers the tax would reduce the competitiveness of DER solutions against grid electricity, but there is no process to pay this charge to the government or utility. This put the industry on hold, as potential customers could not estimate if and when an installation would be paid back by the savings. But this is starting to change. Even in the worst case scenario, DER installations are becoming economically attractive. DER opportunities in Spain will be presented in the second part of this blog.


China Seizing Leadership in Global Solar

— February 8, 2018

In November 2017, I wrote about the surging Chinese solar market. On January 2018, China’s National Energy Administration (NEA) confirmed this trend when it announced that 52.8 GW of solar were installed in 2017. To put this into perspective, this is more than the cumulative solar installed capacity in the US at the end of 2017. At the same time, PV became the technology of choice for the country—at least on installed capacity terms—as in the same period, China only installed 45.78 GW of conventional generation.

China As an Example for Solar Development

With a record year in 2017, China’s cumulative solar capacity reached 130.3 GW, or around 7.3% of the country’s national power generation capacity—3% of it coming from capacity installed in 2017. While this is still far from the levels of conventional generation, it does show the potential of PV to scale quickly and have an effect on a country’s electricity system. After all, China has the largest generating fleet in the world, with close to 1,800 GW of capacity.

Perhaps more surprising about the record installation figure was the take-off of the Chinese distributed solar generation sector. The country continues with the trend shown in 1H 2017 and is estimated to have closed the year at around 20 GW and a massive annual growth of 370% to reach 29.7 GW of cumulative capacity. As explained in November, this rise was caused by a rush to capitalize on highly attractive feed-in tariff (FIT) premiums that expired at the end of 2017.

Duration and Stability Expected

Despite the opportunistic nature of the surge in distributed solar, this sector is not expected to collapse in 2018 (although it might see a fall in new additions). There are several trends that still support the distributed sector. First, the new FIT, although not as attractive as the previous one, is still interesting enough to keep investment in the sector. In addition, the Solar Energy for Poverty Alleviation Program will also support new installations.

Distributed solar has also been beneficial for more fundamental changes in the Chinese electricity sector. The Chinese market is seeing increased competition thanks to China’s power sector reform, now nearly 3 years old, which has included a gradual effort to unbundle retail and distribution business from the large grid companies to varying degrees across provinces. On October 31, 2017, NEA and the National Development and Reform Commission jointly announced a new initiative for Market-oriented Distributed Power Generation as a new part of the power sector reform. The document calls for the creation of platforms that will facilitate electricity trading between distributed generation projects and end users across a local electricity distribution network, starting with large-scale pilots in yet-to-be decided locations. Although it will take time to implement, this initiative should help develop distributed solar installations as behind-the-meter installations will be able to trade their generated electricity freely, paying only distribution network costs, not transmission network costs.


When It Comes to New US Solar Tariffs, the Sky Is Not Falling

— January 25, 2018

On January 22, 2018, President Trump announced the rates applied to solar modules and cells that resulted from the Section 201 trade case. Modules and cells have a tariff rate of 30% in 2018, to decline 5% in each of the 3 subsequent years, then stay at 15% from 2021. These are just below what the US International Trade Commission (ITC) recommended in October 2017. As I explained at that time, tariffs at this level favor the status quo, keeping the solar industry intact but slowing its growth.

No Need to Panic

At current international prices of around $0.30/W-$0.35/W, the impact of this tariff would be around $0.10/W in 2018. For utility-scale projects, costs could increase by 10%-15% compared to a tariff-free scenario. This would add $0.02/kWh-$0.04/kWh to the record solar bids, like Xcel’s disclosed earlier in January or TEP-NextEra’s announcement on May 2017. This increase would hardly make these utilities reconsider their investments.

The impact of the new tariff on the C&I and residential markets will be limited. For a commercial project, the tariff could increase the cost by about 5%; for a residential installation, only 2%-3%.

Winner and Losers

Currently, this ruling seems to have only one company as its beneficiary: First Solar. First Solar is in the middle of a technology transition as it tries to catch up with the prices offered by manufacturers of Crystalline modules. It is the only PV manufacturer with significant capacity in the US. On November 16, 2016, it made the decision to scrap its Module 5 product, which had been expected to debut next year. The new plan is to instead accelerate the production schedule of its Module 6 and introduce it in 2018, a year earlier than previously planned. The tariff bought First Solar some time to implement its new technology without risking losing significant market share in its home market.

The other two backers of the tariff, Suniva and SolarWorld, are unlikely to capitalize from its introduction. Even with the introduction of the tariff, local US prices of important modules will be below the costs that pushed both Suniva and SolarWorld into administration as the global prices of solar have dropped by more than 30% in the last 2 years. SunPower and Tesla, the other two US PV manufacturers, rely on the global value chain for their module operations and therefore will be affected by the tariffs.

If Nothing Else, Clarity for the Next Few Years

All in all, most of the players in the US solar sector should be glad that the uncertainty that plagued the sector in 2017 is now gone. They will need some time to absorb the fiscal changes and to find ways to mitigate the impact of the tariffs, but at least they will have a stable policy outlook for the next few years.


DER Developments Challenge Incumbent Grid Operating Models

— December 27, 2017

Net metering has been a key driver for the deployment of solar PV distributed generation in the US. The simplicity of net metering—merely deducting the electricity generated during a year from the total electricity consumed, with no regard to the time when these two activities occurred—is easy for customers to understand. It simplifies the design process of installations, lowers the barriers to entry for distributed solar and wind, and has allowed the industry to develop.

But net metering creates an artificial barrier for the adoption of other flexibility-related distributed energy resources (DER) technologies like energy storage and demand response, as utilities are forced to provide balancing at no cost. Although net metering is still leading in the US, regulators in the main solar markets are tweaking it to pass some of the balancing costs to the end user. For example, California is moving toward time-of-use tariffs for all new distributed solar installations, opening the market to flexible technologies.

DER Deployments Increasing and Shifting

Navigant Research forecasts the deployment of all DER technologies in its Global DER Deployment Forecast Database report. We expect North America to install 31.5 GW of new DER capacity in 2017 and 98.1 GW in 2026. The technology mix for 2017 is led by distributed generation (DG), which accounts for 61.9% of the total DER capacity installed. However, by 2026, DG is expected to drive only 31.4% of new DER capacity additions, leaving a large market share to other technologies. These include flexibility, microgrids, energy efficiency, and (driven by the electrification of transport) EV charging, which is expected to lead DER new capacity in 2026 with a market share of 43.2%.

Despite the US leaving the Paris Agreement and its move away from the Clean Power Plan, DER capacity additions in the US are expected to be almost 8 times more than central generation deployments over the next decade. This includes central renewables like utility-scale solar and wind and significant amounts of natural gas power plants. Navigant Research forecasts the US will install 519 GW of DER capacity between 2017 and 2026, while the US Energy Information Administration’s International Outlook projects that the US will add just 66 GW of net new central generation capacity.

DER as Percentage of Annual Additional Capacity, US: 2017-2026

Source: Navigant Research

DER Developments Bringing Challenges and Improvements

DER developments are challenging incumbent grid operating models, requiring a more dynamic and flexible network with advanced communications and orchestration to ensure stability, efficiency, and equality among diverse resources. From a utility perspective, the overarching goal of DER deployments is to integrate these resources effectively to make the electricity grid more efficient, resilient, cost-effective, and sustainable. However, DER is usually deployed behind-the-meter, where customers are more concerned with securing cost-effective and reliable onsite power. This raises questions about who DER should be optimized for and the pace and scale of DER deployments.

Despite the disruption that DER is bringing, it is already possible to see the first sprouts of DER investments: a cleaner, cheaper, consumer-focused, and far more innovative power sector. For this reason, the transition to DER will not be easy for organizations used to the centralized energy model, but focusing on happy customers over electrons will help companies to thrive.


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