Navigant Research Blog

New Technologies and Systems Widening the Solar Market

— September 30, 2016

Rooftop SolarUntil recently, most solar installations have been set up to generate the maximum kilowatt-hours per day/year possible. This was because the incentive programs in place only took into account the overall production of a plant. This is not an issue in regions with low solar PV penetration in their energy mix, but it’s becoming a problem in areas with high solar penetration relative to the peak demand, such as in California, south Germany, northern Chile, and southwestern United Kingdom. As I have argued before, all kilowatt-hours are not equal, but since the two most common policy incentives (feed-in tariffs and net metering) treat them as equal, installers choose to maximize generation.

There are some signs that this is changing. Chile has introduced a tender system that divides the market by delivery time, and there are efforts to introduce solar-based time-of-use (TOU) tariffs in some markets. But perhaps the strongest force pushing the industry away from equal kilowatt-hour values is corporate power purchase agreements (PPAs).

Unlike in traditional PPAs, in which a utility (or the government in the case of feed-in tariffs) buys electricity and then sells it to their customer base (which has different load requirements), corporate PPAs are signed with single entities that have a specific daily load demand curve. In this scenario, the offtaker corporation might prefer to match the PPA agreement (and hence generation profile of the project) as closely as possible to its demand curve, even if that means the project will produce less than its full potential.

New Technologies Widen the Opportunity

In a world that only looks at maximizing output at the lowest cost possible, the premium that innovative solar technologies that tackled the TOU mismatch was almost nothing; the modules that were sold at the lowest price per watt were king. Once TOU enters the equation, installations will favor technologies that maximize revenue (or avoid cost from the corporate view). It is possible to use technologies like energy storage systems or implement demand response systems to match generation and demand, but it can also be tackled from the solar system design, including new technologies like bifacial solar modules based on n-type PERT (passivated emitter, rear totally-diffused) module designs, which allow vertical installations that flatten the daily generation profile of an installation, producing more electricity in the morning and in the late afternoon and less at midday.

 

Has Hitachi Zeroed In On the Most Viable Microgrid Business Model Today?

— September 22, 2016

Energy CloudI had the pleasure of participating in an afternoon workshop at the VERGE conference in Santa Clara, California this week. The workshop covered a lot of ground, including offering two different perspectives on microgrids from two leading players: Spirae, a controls and software innovator, and Hitachi, the only company in the world that has declared it has a 100-year-plan for  “social innovation businesses,” a broad category of solutions that includes microgrids in North America and Asia.

While the workshop covered a lot of ground, perhaps the most noteworthy portion of the program was a presentation by Urs Gisiger, director of project finance for Hitachi Energy Solutions. Gisiger directly addressed questions that seem to be a hot topic of conversation at nearly every event focusing on the hype and promise surrounding microgrids and a distributed energy future: How do we finance such projects at a time of great market uncertainty? In other words, what is the best microgrid business model?

Gisiger set the stage by referring to some recent research performed by Navigant Research, looking at which business models have been deployed in systems in North America in 2015 and 2016. Note from the chart below that if we exclude both remote microgrids and military microgrids—systems with unique investment needs—the overall favorite in terms of business model structure is the power purchase agreement (PPA), representing 45% of total capacity.

Grid-Tied Non-Military Microgrids by Business Model Capacity, North America: 2015-2016

Microgrids Blog

 (Source: Navigant Research)

Of course, a PPA can be financed in several different ways, and this is where Hitachi has really done its homework. In the process, it is shedding light on the part of the microgrid finance supply chain that up until this point in time has largely been in the shadows.

Project Financing

For example, Gisiger revealed 20 banks that will do project finance for energy infrastructure today, including microgrids. In addition, he provided a much longer list of 60 banks, the majority of which are selective in their power project financing, that conceivably also loan money for microgrid projects in North America. “In addition, debt funds and insurance companies are also entering the microgrid market,” he said. He also noted that unregulated arms of utilities are also entering the microgrid financing space in North America, a small group creeping up toward 10 at present.

Despite this good news, Gisiger also offered a sobering portrait of financing options, with the majority—including individual project finance and corporate loans—not leading to satisfactory results for either project developer or project owner (or both) today due to high transaction costs. A revolving line of credit for a fleet of projects looks much more promising, since it allows for greater scale.

As an intermediate step to move forward as financiers become more comfortable with the risk profile of microgrids, Gisiger singled out a lease facility arrangement based on full recourse financing on a corporate balance sheet; a line of credit is taken out so no upfront equity is required. The bundling of projects into a portfolio is key to achieve critical mass. This approach results in better overall project economics since portfolio sale proceeds stay with the developer, while significantly trimming overall bank, legal, and advisor fees.

Needless to say, microgrids will never be a one-size-fits-all solution. While utility deployments of microgrids are increasing, it is still third-party microgrids that are plowing new ground, especially in terms of financial innovation, with Hitachi among the leaders.

 

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