IRISH SOLAR ENERGY ASSOCIATION. Response to the Renewable Electricity Support Scheme, Technology Review, DCENR

Transcription

1 IRISH SOLAR ENERGY ASSOCIATION Response to the Renewable Electricity Support Scheme, Technology Review, DCENR

2 Table of Contents Executive Summary Introduction Utility- scale Solar Projects Domestic Rooftop (< 10 kw) Solar Installations Commercial Rooftop Solar Projects Benefits of Solar Climate Change and Energy Security Job Creation Agriculture and Biodiversity Complement to Wind Economic and Social Benefits Costs of Solar Cost Summary for Utility- scale Solar Projects Utility- scale EPC Costs Funding Costs Case Study: 5 MW Solar Farm in Kildare Operating Costs Valuation Model Forecast of Competitively Outcome from Auction Cost summary for Domestic and Commercial Rooftop solar PV projects Domestic Rooftop PV Cost Summary Commercial Rooftop Scale EPC Costs Deployment Costs of Deployment Utility Scale Costs of Deployment Rooftop Support Scheme Subsidy Utility- scale Solar Projects Auction Mechanism Structure of Support Market Premium and Market Reference Prices, Including Balancing Costs Duration of Support Support Counterparties REFIT R- Factor Reconciliation, Setting of PSO Levy Separate Competition and Budget Case Study: Contracts for Difference (CfD) in the UK Commercial Rooftop and Domestic Rooftop (< 6 kw) Feed- In- Tariff Mechanism Structure of Support Rooftop Duration of Support Case Study: FiT in Germany Conclusion

3 Appendix: Answers to Consultation Questions Process Layout and Approach Policy Context Technology related Eligibility Support mechanism Allocation Scheme Limits / Cost controls Tariffs Tariff from Auction Utility Scale Generation tariff - Roof top Appendix I: Solar PV Jobs in Ireland Employment Generated Potential Employment Projections for Ireland: Appendix II: ISEA Members

4 Executive Summary In July 2014, the Irish Solar Energy Association ( ISEA ), through its submission for the Green Paper on Energy Policy in Ireland, made the case for solar energy in Ireland. A combination of falling costs, improved technology levels and increased availability of finance means that, with the right level of government support, solar PV could be rapidly deployed in Ireland with the potential to provide between 10% and 20% of Ireland s renewable energy requirements by Combined with the ongoing rollout of onshore wind, this would ensure that the Ireland would easily exceed the projected target of 4,000 Megawatts ( MW ) of renewable energy capacity by The purpose of this submission by ISEA to the Department of Communications, Energy and Natural Resources ( DCENR ) Renewable Energy Support Scheme, Technology Review Consultation is to refresh the recommendations made in the Green Paper submission based on a greater understanding of the opportunities in the Irish market built up by ISEA members over the last 12 months, and to provide supporting data to support the principal policy recommendations. The key points in this submission are as follows: 1) The projected deployment rate for solar is faster than originally estimated. ISEA now believes that between 800 MW and 1,150 MW of installed capacity is realistic by 2020 and 1,900 MW by the end of ) The average cost over 25 years to provide a support mechanism for the deployment of 1,900 MW of solar by 2023 is estimated to be 24m per annum, or 0.023/kwh, representing 1% of a typical consumer s electricity bill. 3) Installation costs for solar farms will fall by 21% between 2015 and 2018, assuming the lifting of the Minimum Import Price on Chinese solar modules that was introduced by the European Commission in ) Utility scale (>1 MW) ground- mounted solar farms deployed in 2017 will require revenue/kwh of , reflecting a level of support equivalent to /kwh. Lower levels of support will be required for projects deployed in subsequent years as costs decline, with solar energy expected to be grid- competitive by ) To ensure that the level of support provided to solar accurately reflects conditions in the market, and to avoid the boom and bust scenarios experienced in other European countries such as Spain, Italy and the UK, a competitive auction for utility- scale solar is recommended from day one. 6) A Contracts for Difference based support mechanism is recommended with a dedicated budget reserved for Solar until This will allow the solar industry to build the necessary scale to be able to compete in a technology- neutral auction from that date. 7) Roof- mounted schemes should be eligible for a generation tariff based support mechanism (ReFiT or equivalent). The required generation tariff ranges from 0.095/kwh for large commercial rooftops to 0.15/kwh for domestic rooftop schemes for an installation in 2017, declining over time for installations in subsequent years. Section 1 of this submission will focus on the different applications of solar and demonstrate that a mix of utility scale and rooftop is required in order to maximise the benefits of developing a solar industry. Section 2 will explore the benefits of solar beyond those related to achieving Ireland s renewable energy targets. Section 3 will go into detail on the current and projected costs of deploying solar schemes to justify the recommended support levels, while Section 4 analyses the total projected cost of the support mechanism over 20 years. Finally section 5 goes into detail on the recommended support mechanism for utility scale and rooftop solar schemes. 3

5 Figure 1. Cumulative installed capacity Mega Wags Cumulaive Installed Capacity Year Ground mount - Cumulaive Roojop - Cumulaive 4

6 1. Introduction Solar energy is a rapidly developing technology that has minimal impact on the environment with maximum benefits. With the correct support it has the potential to become one of the most economically viable renewable energy source in the world. To date, solar energy has been overlooked in Ireland with the focus on other renewable energy sources, particularly wind. However, as many other Northern European countries have recognised, solar is an important component of the renewable energy mix and provides a significant opportunity for Ireland to accelerate the rollout of renewable energy at an affordable cost, while creating new employment opportunities. The Irish Solar Energy Association (ISEA) represents over 50 companies that constitute a dynamic and growing solar sector in this country. We recognise the potential for solar in Ireland, not only as a means for meeting Ireland s renewable energy and electricity targets, but as a long- term sustainable and clean option with numerous benefits for Ireland economically, socially and environmentally. We believe that, with the right policy framework, solar energy could account for between 10% and 20% of renewable energy generation capacity by 2020, representing 800MW 1,150 MW of installed generation capacity. This will make a significant contribution to Ireland s 2020 carbon reduction targets, create a minimum of 4,000 direct jobs and solidify Ireland s position as a Centre of Excellence for Renewable Energy, which has recently been reinforced by the selection of Dublin as the location for the 2014 Renewable Energy Finance Forum. The Department of Energy, Communication and Natural Resource s (DCENR) technology review consultation on the Renewable Electricity Support Scheme ( the Consultation ) therefore represents an important opportunity to maximise renewable energy delivery through further diversification of renewable energy sources in Ireland. The Irish Solar Energy Association (ISEA) argues in this paper that solar photovoltaic (PV) projects can and should be a part of that renewable energy mix. ISEA, through this submission, outlines 3 elements for the deployment of solar in Ireland: Utility- scale ground mounted solar. Commercial rooftop. Domestic rooftop (< 6kW) solar installations. A mixture of different incentives is needed for each of the elements due to their scale, cost- base and ability as individual projects to interact with the wholesale market. Through this submission ISEA will present: the benefits of solar in Ireland, an evaluation of the costs of solar (providing a detailed review of capital expenditure), potential deployment scenarios, and a support scheme mechanism for solar in the form of an auction. Estimates will also be made on what a suitable potential is for the deployment of commercial rooftop, domestic and ground mounted solar in Ireland by 2023 to achieve appropriate economies of scale. 1.1 Utility- scale Solar Projects Utility- scale solar projects are defined as those projects that are >1MW in capacity and are typically installed on greenfield or brownfield sites. Generated electricity is exported directly to the grid with revenue being received through a bilateral Purchase Power Agreement (PPA) that comprises a market component, based on the wholesale price of electricity and a subsidy component. The principal advantages of utility scale projects are that deployment costs are cheaper, due to economies of scale and there are ready sources of finance in the form of infrastructure funds and project debt. Experience in other European countries has shown that deployment of utility scale solar can be extremely rapid, with the UK deploying over 7,000 MW between

7 and As such, utility- scale solar is a useful tool for governments that need to rapidly address a shortfall in achieving renewable energy targets. While the deployment costs of solar continue to fall, the rate of decline has slowed since 2013 due to the introduction by the European Commission of the Minimum Import Price on imported solar modules and the impact of the weaker euro. Nevertheless, ISEA projects that installation costs will fall by 21% between 2015 and 2018, making solar projects viable at a tariff of between 0.14 and 0.16/kwh. This will decline over time to 0.14/kwh in 2018 and 0.13 in Grid parity is projected by Assuming a deployment of 1,350MW of utility- scale solar between 2017 and 2022, the average annual cost to the PSO customer over a 25 1 year subsidy timeframe is 24 million. Deployment at this level will contribute significantly towards Ireland s 2020 and 2030 targets, and will cost 0.023/kwh over the lifetime of the subsidy scheme. Support calculations for these figures are provided in the main body of our response. Consistent with State Aid Guidelines, this document will recommend an auction process for utility- scale solar projects and address why a specific budget should be ring fenced for solar until This will be based on a two- way contract for difference mechanism. 1.2 Domestic Rooftop (< 10 kw) Solar Installations Domestic Rooftop refers to solar PV on homes. The benefit of domestic rooftop solar is that it facilitates the Irish consumer to offset costly retail electricity with energy generated from the roof of their home. The move towards domestic solar will reduce the risk of electricity price volatility and enhance energy security for consumers. As the cost of solar PV at a domestic scale continues to fall, ultimately towards grid parity, the benefits to consumers will be proportionately greater. It is proposed that a domestic generation tariff for rooftop should be introduced, in addition to the consumer receiving revenue from the estimated 50% of electricity that is exported to the grid. This will ensure greater deployment of solar PV at a domestic scale, which will provide homeowners with the opportunity to reduce their electricity bills and recoup the costs of installation. Energy storage solutions are also an important factor, with large scale adoption expected by 2020 as costs fall. This will increase the amount of self- generated power consumed domestically, further improving the attractiveness of solar PV systems. 1.3 Commercial Rooftop Solar Projects Commercial rooftop solar PV refers to rooftop PV installations on retail, industrial, agricultural buildings, state and semi- state organizations. Solar PV systems for commercial and industrial use have similar benefits to those of domestic systems lower electricity bills, protection against future electricity price rises, and a smaller carbon footprint - but with the added advantage of generating larger amounts of electricity and generally being able to better match on- site generation with on- site demand. This decentralised application of solar PV technology is particularly promising for the Irish businesses as it generates renewable electricity during the day, at the time when the building owner is consuming it (when brown electricity is often at its peak prices) and, unlike centralised generation, it avoids grid transmission and distribution costs by supplying directly into the distribution board of the business under the roof. It is often during daylight hours when these businesses have a demand for that electricity and rooftop solar PV 1 While each individual project is recommended to receive government support for 20 years, projects deployed between 2017 and 2022 will be eligible for support, making the total duration of the support programme 25 years. 6

8 encourages business owners and developers to size systems to their base load to minimise export to the grid and maximise savings from offsetting day time brown electricity. The Department of Energy and Climate Change (DECC) in the UK recognised the potential of this solar PV application, arguing that deployment in the commercial and industrial sector needed to be much stronger if it was to match what has been seen in others parts of Europe (DECC, 2014). DECC have also worked at removing barriers to adoption such as, increasing permitted development rights for rooftop installations up to 1MWp. 7

9 2. Benefits of Solar The benefits of solar extend beyond the provision of clean energy and electricity. In the context of Ireland s renewable energy mix, solar PV is a complementary source of energy to wind, and other renewable technologies. Thus it contributes to the creation of a diverse, resilient and secure electricity supply. This in turn creates additional benefits for Ireland such as: enabling Ireland to achieve its EU targets for climate and energy in 2020, and the EU 2030 Climate and Energy Framework, creating jobs, generating income for farmers, and supporting economic and social growth. Further with constant innovations, stemming from decreasing costs of technology and increasing interest, the applications of solar are constantly expanding, ranging from solar panels in electric vehicles, to solar walls on buildings. Solar PV will only continue add value to economic, environmental and social policy objectives of the Irish Government. 2.1 Climate Change and Energy Security Addressing the impacts of climate change is intertwined with energy security. It is well documented that fossil fuels contribute to greenhouse gas (GHG) emissions, leading to increased air pollution, rising temperatures and rising sea levels, key climate change impacts facing Ireland. Mitigating these impacts and reducing fossil fuel consumption while stimulating economic growth and creating energy security is an immediate and long- term policy challenge. Energy security has been highlighted by the SEAI, ESRI and IEA as a critical energy policy issue. Ensuring that Ireland has a secure energy supply now and in the future is critical to the growth of the Irish economy. Currently Ireland is heavily dependent on fossil fuels, to meet energy demand. Critically Ireland supports 100% of its oil demand through imports, while its natural gas demand import dependency is at 95.3% 2. Local production of natural gas is anticipated to be increased with the development of the Corrib project, which is, however, expected to peak within 6 years. As such, Ireland is heavily dependent on energy imports to meet its energy demands and, with the volatility of oil prices energy costs will rise thereby creating multiple threats to energy security and economic security. Solar PV can be quickly deployed and has the potential to comprise between 10% and 20% of Ireland s renewable energy generation by It can therefore, contribute to the security of supply by providing predictable and reliable indigenous electricity generation thereby, increasing the resilience of Ireland s energy supply. 2.2 Job Creation 3 Beyond EU policies and targets, solar PV contributes additional benefits to Ireland s economy and society. The International Renewable Energy Agency (IRENA) estimates that 11.3 direct jobs are created for every MW of solar capacity installed, 11 in construction and 0.3 in operations and management. Therefore, the rollout of 1,350MW of solar capacity will create approximately 4,500 direct jobs in Ireland supporting utility- scale solar alone. As we expect the rollout of solar to continue after grid parity is achieved in 2023, the construction jobs can be considered sustainable in the long term. Figure 3, presents the number of jobs that potentially could be created annually, based on ISEA s projections for the solar market. The number of indirect jobs and induced 2 IEA (2014). Energy Supply Security The creation of employment and education opportunities is a significant benefit that is discussed in detail in Appendix 2 of this submission. 8

10 employment generated from the solar market is approximately 14,000 jobs 4. Based on the projected costs of the proposed solar support outlined in section 4, table 11, the projected annual cost per job is 4,000 in This increases to 12,000 per job between 2017 and 2023 as more solar capacity is deployed, then begins to decrease as the overall cost of the support mechanism decreases, reaching zero in 2038 It should be noted that this analysis focuses purely on jobs created to directly service the domestic Irish market. It is likely that further jobs will be created as international solar companies, seeing the opportunities in the Irish market, choose to establish their European operations here. In particular, given the current wave of EU protectionism, it is believed that a number of Chinese solar module manufacturers are considering setting up a base in Ireland. Further jobs will be created indirectly, particularly in sectors that support solar such as financial services. Lastly, there will be induced employment stemming from the increased purchasing power of people involved in the sector and cost savings that trickle down to Irish citizens. Figure 2. Annual cost per job created 14, Annual Cost Per Job 12, , , Axis Title 6, , , , , Indirect jobs is calculated assuming a multiplier of 3.4 9

11 Figure 3. Number of jobs created per year 5 Number of jobs Jobs in Solar PV Year 4525 Construcion Operaions & Management Total Direct/yr 2.3 Agriculture and Biodiversity As utility scale Solar PV farms require large land area, the most common source of land to be used is barren/degraded agricultural land in rural locations. The costs of using land for activity other than agricultural activities is often cited in the arguments against the installation of solar PV farms. However, research has demonstrated that there are benefits. During the lifetime or a solar PV farm, the land can be used simultaneously for a range of profitable activities such as sheep grazing, bee- keeping, and the production of high value crops such as pumpkins, asparagus and cut- flowers. Solar farms also Solar PV projects provide an increased, diversified and stable source of income for landowners, encouraging the next generation to keep farming the land: Rental payments over 25 years (RPI indexed) Cheaper electricity Effective hedge against variability in annual farm income and energy price Solar PV has the potential to benefit and enhance biodiversity, in the context of agricultural land regeneration (and in peat- land regeneration). Simple measures, and an appropriate ecological or biodiversity plan, can ensure that the biodiversity of a site is enhanced over the lifetime of the project. Planned and constructed correctly, solar has a very light touch on the land with little or no concrete being used. Mounting systems are friction piled using a simple process that is 100% reversible. With correct system design around 95% of the land used remains under grass sward and is available for agricultural production or biodiversity management. This sward can be managed in a manner that permits differing heights, and benefits from microclimate conditions that enhances biodiversity. Solar farms provide an opportunity for ground nesting birds, as within sites wildflowers meadow and grasslands can provide valuable nesting sites for species like the curlew and corncrake, two species who s nesting habitats have been degraded due to land changes. These ground nesting birds are protected from predation within a solar farm as the site is likely to be fenced. 5 Direct jobs employment factor 11 for construction for 1 year, 0.3 for operations and management life time of project, indirect jobs multiplier of 3.4 (Rutovitz and Harris (2012). Calculating Global Energy Sector Jobs: 2012 Methodology. Institute for Sustainable Futures. 10

12 Lastly, studies of the benefits land regeneration have shown knock- on effects in the tourism and recreation sector due to the increased biodiversity. As such there is potential for rural economies to experience growth and new opportunities with the installation of solar PV farms. 2.4 Complement to Wind A challenge with renewable energy technologies is the dependence on the source from which energy is derived. Generation of wind energy is dependent on the presence of wind, and solar is dependent on radiation from the sun. As stand- alone technologies, their reliability is not a guarantee. However, as a basket of goods renewable energy technologies complement each other and increase overall predictability. In the case of Ireland, with rapidly changing weather patterns, solar is highly complementary to wind. As the output of a solar plant is seasonal, it can be predicted very accurately on a monthly basis. Additionally, by its nature, its output is predictable on an intraday basis, with peak output occurring during the middle of the day, when demand is relatively high. As the figures below show, wind output picks up at the end of the day, as solar output declines and electricity demand peaks. Given the complementarities, a balanced mix of solar and wind technologies, will facilitate a reduction in the amount of baseload generation required from fossil fuel sources. Figure 4. Intraday Solar and Wind Generation Intraday Solar Generation Intraday Wind Generation Figure 5. Intraday Demand for Electricity 11

13 2.5 Economic and Social Benefits The economic benefits of solar extend beyond job creation. There is a growing demand, especially by and for multinational companies (MNC), to engage in green practices. The use of clean energy is a key factor in this. MNCs, such as Google and Apple, have demonstrated that clean energy is a key corporate goal and therefore have shifted towards using renewables for their data centres. Critically, MNCs are also demanding that the cities in which they locate consistently provide high quality living environments. There are social benefits associated with solar PV as well. For example, in the UK the Department of Energy and Climate Change (2014) note that some landlords that have installed solar PV on their housing stock already and have passed on the energy cost savings to the tenants. This has social benefits in helping to alleviate fuel poverty and spreads the benefits of solar PV across the social spectrum. Domestic rooftop solar PV empowers consumers to take control of and influence their energy security, which would be welcomed by the wider public 6. For Ireland, solar PV can be applied in a similar manner, and enable the government to sustainably meet the energy and heating demands of vulnerable populations. Further, community ownership of solar PV projects not only provides energy but income; as well as a profitable means of incorporating and promoting the solar PV that not only benefits individuals, but communities and government, by reducing costs and equitably sharing the benefits. Moreover, the shift to solar PV for electricity generation is strengthened by the strong public acceptance of solar, which has been shown to have 80% of public support in the UK due to its minimal negative impact. 6 DECC (2014) UK Solar PV Strategy Part 2: Delivering a Brighter Future gy_part_2.pdf 12

14 3. Costs of Solar 3.1 Cost Summary for Utility- scale Solar Projects ISEA is providing this information to show overall estimated costs for the inclusion of solar PV as a technology in the next renewable scheme in Ireland. The resulting Levelised Cost of Electricity ( LCOE ) presented here is based on a set of assumptions, which may or may not represent the commercial realities on the ground when it comes to a competitive auction. We therefore suggest using this LCOE analysis, updating as needed, to provide for a cap in the allowable cleared price for any competitive auction. This is discussed further in the section discussing the proposed renewable scheme design. Table 1 provides a summary of the total costs of developing and constructing a 5MW solar farm in 2015 and 2017 respectively. Engineering Procurement and Construction (EPC) costs are based on the construction costs for a similar project in the UK, while grid connection and development costs reflect the higher cost base in Ireland. A development margin of 100,000 per Megawatt, representing less than 10% of the total cost, has been included. This is a reasonable level for most developers given the higher risks involved with developing solar projects in Ireland and is significantly lower than the margins enjoyed by wind developers in recent years. Table 1. Cost summary for a 5MW solar farm Cost/MW Total (5MW) Cost/MW Total (5MW) EPC Costs 1,084,759 5,423, ,000 4,580, Grid Connection Costs 80, ,000 80, , Development/Finance Costs 91, ,000 91, , TOTAL CONSTRUCTION COSTS 1,256,359 6,281,797 1,087,600 5,438,000 Development Margin 100, , , , TOTAL PROJECT COSTS 1,356,359 6,781,797 1,187,600 5,948, Utility- scale EPC Costs Table 2 presents a detailed breakdown of the EPC costs in 2015 and includes projections through to Key points are as follows: Modules: The cost of modules is being kept artificially high by the Minimum Import Price and the Anti- dumping Duties that the European Commission has placed on solar PV products imported from China, an action that lacks the support from 18 of the 28 EU member states and the solar industry in Europe. As of September 2015, the Minimum Import Price is 0.56 per watt, approximately 20% above the global market price. Consequently, the majority of utility scale solar farms currently being constructed use non- Chinese modules, for which the costs have been driven up by a limited supply and the weakening euro. The Minimum Import Price is expected to extend into 2016, and therefore only a 5% drop in module prices is expected for that year. In 2017 and 2018, prices are anticipated to fall by 20% and 10% respectively as the Minimum Import Price and the Anti- dumping Duties are removed and the cost of modules in Europe returns to global norms, thus eliminating the burden on European energy consumer. Balance of Systems Costs: Balance of Systems costs comprising other components, labour and project management costs are expected to fall by approximately 2.5% per annum. Improved design requiring less core materials and the arrivals of new entrants to the market will continue to drive the cost of 13

15 other solar specific components down, while increased competition and improved efficiency will reduce the cost of services. Certain costs such as Civil Works and security will track the overall construction market and are expected to increase over time. Table 2. Utility scale EPC cost projections. Cost per kilowatt peak (kwp) of installed capacity Assumptions Modules % 2016; - 20% 2017; - 10% 2018 Balance of Systems % per annum EPC Margin % reduction per annum Total EPC (cost/wp) % decrease over three years 3.12 Funding Costs The valuation of Solar projects is based on a target Internal Rate of Return (IRR) for the end buyer. In the UK, earlier projects were valued based on a target IRR of 8.5% - 9.5%. This has fallen, with the valuation basis being closer to 7.5% and projected to fall further. A reasonable basis, therefore, for the valuation for Irish solar farms in 2017 is 7%, although some more sophisticated developers may be able to secure a lower blended cost of funds in the range of 6% - 6.5% Case Study: 5 MW Solar Farm in Kildare Table 3 shows the breakdown of revenues and costs for a 5 Megawatt solar farm in Kildare, with solar radiation levels at 1,050 kilowatt hours per kilowatt peak of installed capacity 7. Kildare, rather than Wexford or Cork, was chosen as the case study to provide a more representative view of the viability of solar projects over a larger portion of the country. Assuming revenue per kilowatt hour of 0.15, the solar farm will generate a gross revenue of 666,698 in the first year. This gross revenue is based on a Performance Ratio of 83%, which is the percentage of electricity exported by the system after accounting for technical losses. The resulting annualised load factor for a solar PV panel is of the order of 11% of installed capacity. 7 Solar irradiance for panels at a 25 degree angle facing due South. 14

16 Table 3. Net revenues for a 5MW solar Farm YEAR Installed capacity (kwp) 5,000 5,000 5,000 5,000 5,000 radiation (source; SolarGis; optimised angle) 1,050 1,050 1,050 1,050 1,050 Performance Ratio 83.0% 82.7% 82.4% 82.1% 81.8% Unit price /kwh Gross Revenue 653, , , , ,072 Distribution Upside 13,073 13,222 13,374 13,527 13,681 Revenue Total Revenue 666, , , , ,754 Rent - 26,145-26,537-26,935-27,339-27,749 O&M - 60,000-60,900-61,814-62,741-63,682 Insurance - 16,250-16,494-16,741-16,992-17,247 Business Rates - 35,000-35,525-36,058-36,599-37,148 Distribution and Grid Fees - 10,250-10,404-10,560-10,718-10,879 Other - 7,800-7,917-8,036-8,156-8,279 Operating Expenses Total OpEx - 155, , , , ,984 NET PROFIT 511, , , , , Operating Costs Operating costs are 148,690 and account for 21% of the gross revenues. This is a higher percentage than for an equivalent project in the UK due to the following factors: Rent: Rent varies across the country and is approximately 950 per acre in the areas with the highest solar resource. This is higher than the original estimates due to competition in the market for suitable solar sites. Business rates: Business rates have increased significantly for wind in the last year to 21,000 per MW. This will be reduced once it has been taken into account that solar yields less revenue per MW than wind. Therefore the assumption for Ireland is 7,000 per MW, which is still significantly higher than the UK Distribution and grid fees: This represents 1.5% of gross revenue and is a cost specific to Ireland. Operations & Maintenance, Insurance, Other: These costs are assumed to be similar to the UK Valuation Model Solar projects are valued using a Discounted Cashflow model which assumes that revenue will be generated over a 25 year period. The key variables that affect the valuation are the revenue/kwh and the discount rate used (internal rate of return, IRR). Table 4 shows how the valuation can vary based on different combinations of the revenue/kwh and the discount rate. Based on the example of the 5MW project described above, a revenue/kwh of 0.15 and a discount rate of 6.5% would give a valuation of 5,571,

17 Table 4. Valuation of a 5MW utility scale solar project Target IRR Rate/kwh 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% ,069,957 7,727,154 7,407,295 7,108,409 6,828,724 6,566,645 6,320,736 6,089,700 5,872,366 5,667, ,767,637 7,439,001 7,132,266 6,845,559 6,577,192 6,325,650 6,089,565 5,867,702 5,658,945 5,462, ,465,316 7,150,847 6,857,238 6,582,708 6,325,661 6,084,655 5,858,394 5,645,704 5,445,525 5,256, ,162,996 6,862,694 6,582,209 6,319,858 6,074,129 5,843,660 5,627,223 5,423,706 5,232,105 5,051, ,860,676 6,574,541 6,307,180 6,057,007 5,822,597 5,602,665 5,396,052 5,201,708 5,018,685 4,846, ,558,355 6,286,388 6,032,151 5,794,156 5,571,065 5,361,670 5,164,881 4,979,710 4,805,264 4,640, ,256,035 5,998,235 5,757,122 5,531,306 5,319,534 5,120,675 4,933,709 4,757,712 4,591,844 4,435, ,953,715 5,710,082 5,482,093 5,268,455 5,068,002 4,879,680 4,702,538 4,535,714 4,378,424 4,229, ,651,394 5,421,929 5,207,064 5,005,605 4,816,470 4,638,685 4,471,367 4,313,715 4,165,003 4,024, ,349,074 5,133,776 4,932,036 4,742,754 4,564,938 4,397,690 4,240,196 4,091,717 3,951,583 3,819, ,046,754 4,845,623 4,657,007 4,479,904 4,313,407 4,156,695 4,009,025 3,869,719 3,738,163 3,613, ,744,434 4,557,470 4,381,978 4,217,053 4,061,875 3,915,700 3,777,854 3,647,721 3,524,743 3,408,408 Assuming the project was constructed in 2017 at a cost of 5,438,000, as outlined in table 1 above, this would result in a total developer s profit of 133,000 representing a margin of 2.5%, while a tariff of 0.16/kwh, would generate a margin of 636,000. Extending this analysis, the developer s margin/mw can be calculated based on the different valuation scenarios outlined above. These are summarised in table 5, assuming a construction date of 2017 and an EPC cost of 916,000/MW. Given the level of risk involved with entering a new solar market such as Ireland, a target margin per MW of 100,000 is appropriate. With discount rates for solar projects at 7%, then the minimum viable price in 2017 is 0.16/kwh, with marginal. Below this rate, only the larger developers, with access to lower cost of funds and greater economies of scale scale which the Irish market might not be able to facilitate would be able to participate in the market. Table 5. Margin/MW for 5MW plant constructed in (EPC Cost: 916,000/MW) Rate/kwh 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% , , , , , , , ,543 87,076 46, , , , , , , ,516 86,143 44,392 5, , , , , , ,534 84,282 41,744 1,708-36, , , , , ,429 81,335 38,047-2,656-40,976-77, , , , ,004 77,122 33,136-8,187-47,056-83, , , , ,033 71,434 26,816-15,063-54,421-91, , , , ,250 64,027 18,864-23,491-63, , , , , ,346 54,619 9,021-33,706-73, , , , , , ,882-3,011-45,984-86, , , , , , , ,582-60, , , , , , , , , , , , , , , , , , , , , , , , , , , , , Forecast of Competitively Outcome from Auction The above analysis is based on a number of assumptions in relation to module costs and the lifting of the Minimum Import Price, discount rates and the USD/EUR exchange rate. These variables may change, resulting in a different outcome. To address these uncertainties, ISEA recommends an auction process is followed to determine the prevailing tariff for a particular year. Based on the table above, a tariff cap of /kwh should be set for 2017 and adjusted for future years based on the outcome of the first auction. This will ensure that the rollout of utility- scale solar is successful, while ensuring that savings realised by the industry are passed onto consumers in the form of lower tariffs. Based on the above, and the assumption that EPC costs continue to fall as per table 2, a tariff of 0.16/kwh would be sufficient for projects commissioned in 2017, decreasing by 0.01/kwh for projects commissioned in 16

18 each subsequent year. Lower tariffs of may be possible for projects located in the sunniers parts of Ireland. Following these assumptions, solar will achieve grid parity in Ireland by 2023 (see next section). These figures differ from the original projections put forth in ISEA s submission to the Green Paper on Energy Policy in Ireland in August This is primarily due to the increased strength of the US dollar against the Euro, driving up component costs and the increase in the Minimum Import Price for solar modules made in China. 3.2 Cost summary for Domestic and Commercial Rooftop solar PV projects Commercial rooftop solar projects are valued using a discounted cashflow model which assumes that revenue will be generated over a 20 year period. The gross revenue variables that affect the valuation are the generation tariff/kwh and Power Purchase Agreement (PPA) between the developer and the business consuming the electricity generated on their roof. The other key variable is the discount rate used (internal rate of return, IRR). From researching the UK, German and US markets, the longest payback, or lowest return on investment, which would be viable for commercial rooftop solar is where projects are developed on behalf of an infrastructure fund at no upfront capital cost to building owners/occupiers. In return, occupiers receive savings through a discounted PPA. The income from the building occupier via the PPA combined with the generation tariffs proposed herein creates a 20 year gross revenue stream. Deducting the operational expenses from this gross revenue stream and applying the discounted cash flow methodology, combined with the addition of development and capital costs derives an internal rate of return. In the case of commercial rooftop solar projects, valuation is based on a target Internal Rate of Return (IRR) for the developer. While 7% is a reasonable basis for the valuation for utility scale solar in 2017, rooftop projects are be perceived as higher risk due to the reliance on the financial covenant strength of the building occupier as the PPA forms a substantial element of the revenue stream. It is suggested an IRR of 7.5% is more reflective of the associated expected returns for commercial rooftop in Ireland in 2017 (0.5% higher than what has been proposed for utility scale solar). Table 6 illustrates the minimum level of tariff required for varying sizes of system which is designed to give a 7.5% fixed rate of return to investors while providing a reasonable power price to businesses to adopt this renewable electricity source. Table 6 also includes the level of support for proposed for domestic rooftop PV which is provides a typical homeowner in Dublin a 7.5 year payback and where the consumers benefits from decentralised generation. Table 6. Cost summary for rooftop solar 17

19 Based on the example of the 1MWp project, a generation tariff/kwh of 0.095/kWh and an IRR of 7.5% would give a valuation of 1,306,390/MWp which covers the EPC costs, development costs and developer margin. This example project will also derive 1.5m in electricity savings for the business or occupier under that commercial roof over the lifetime of the system. This figure is supported by the calculations and assumptions in Table 7 and it points towards the benefits of rooftop solar making Irish businesses more competitive by lowering their operational expenses through cheaper greener energy which is generated where it is being consumed Domestic Rooftop PV Cost Summary Financial payback is a key determining factor associated with the decision to invest in PV. Market consensus strongly suggests that anything over a 7.5 year payback would not be considered for the discerning consumer. The financial model for a typical domestic home in Dublin with a 30 degree pitch roof facing 25 degrees from south is illustrated in Table 7. A generation tariff of 15c/kWh is required to make domestic rooftop solar PV viable. Table 8 shows the cost for domestic. Table 7. Benefit to business of a developer funded commercial rooftop project 18

20 Tables 8. Costs for domestic 3.22 Commercial Rooftop Scale EPC Costs Table 9 presents a detailed breakdown of the EPC costs in 2015 and includes projections through to Key points are as follows: Modules: The cost of modules is being kept artificially high by the Minimum Import Price and the anti- dumping duties that the European Commission has placed on solar PV products imported from China, an action that lacks the support from 18 of the 28 EU member states and the solar industry in Europe. In 2017 and 2018, prices are anticipated to fall by 20% and 10% respectively as the Minimum Import Price and the Anti- dumping Duties are removed EPC Margin: In 2015 margins are expected to be 15% and are anticipated to fall by 5% per annum despite being based on a lower revenue due to increase competitiveness and economies of scale as the industry develops Balance of Systems Costs: Balance of Systems costs comprising other components, scaffolding, labour and project management costs are expected to fall by approximately 2.5% per annum. 19

21 Table 9. Commercial rooftop EPC cost projections. Cost per kilowatt peak (kwp) of installed capacity for a 1MWp system Assumptions Modules % 2016; - 20% 2017; - 10% 2018 Balance of Systems % per annum EPC Margin % reduction per annum EPC Margin (%) 15% 14.3% 13.5% 12.9% 5% reduction per annum Total EPC (cost/wp) % decrease over three years 20

22 4. Deployment Figure 6, presents a probable deployment scenario for Ireland beginning in 2017 through to 2022, with grid parity expected in Assuming the introduction of a sustainable support mechanism, ISEA expect the rollout of solar projects to commence in earnest in mid 2017, with a total of 100 MW of utility scale projects expected to connect that year. As the industry matures, the pace of deployment will increase with 250 MW of installed projects per annum from MW of installed capacity on rooftops is expected by 2020, with 550 MW by Figure 6. Deployment of installed capacity Solar PV Installed Capacity MW Year Groundmount Uility (AIC) Roojop Domesic (AIC) Roojop Commercial (AIC) Cumulaive Installed Capacity 4.1 Costs of Deployment Utility Scale This section provides an analysis of the projected cost to the Irish taxpayer to roll out 1,350MW of installed utility- scale solar capacity between 2017 and Cost estimates are based on the assumption that rollout will follow a stable schedule, thereby guaranteeing investors a fair rate of return based on the assumed competitive auction outcomes levels modelled above. The estimates have been updated from ISEA s submission to the Green Paper on Energy Policy in Ireland to reflect revised cost projections and a more aggressive rollout schedule for utility- scale solar PV up to The projected roll- out is based on a number of factors and represents a scenario delivering a median view of the costs to the Irish consumer. It features a steady pipeline of development, leading to longer- term sustainable jobs in the industry and the modelled economies of scale. Given our understanding of the number of projected volume and quality of projects which will be shovel ready by 2017, we believe that this deployment schedule is consistent with the projects which will be ready at the time of auction. 21

23 Table 10 shows the total cost per annum to the taxpayer for supporting the rollout of utility- scale solar between 2017 and 2022 (after which grid parity for new installations is achieved and the scheme in its current form is assumed to end). The total required subsidy subsequently falls for new installations over time as wholesale energy prices inflation, modelled at 4%, outpaces the cleared auction price indexation modelled at 2%. By 2037 under the above assumptions, the annual net cost of the scheme begins to return money to the PSO customer. Unlike REFIT, ISEA is assuming that under the new scheme upside will be returned to the PSO customer. Over a 20 year support period for successful bidders in each auction, with auctions expected to be run for five years, the total cost of the programme averages 23m per annum, or roughly 0.023/kWh on average. Support peaks at 49m per annum in 2022, or 9.50 per residential customer declining to 3m in From , assuming the introduction of a two- way Contracts for Difference mechanism, costs begin to be recovered as wholesale electricity prices exceed the guaranteed strike price (figure 8). Table 10. Projected costs of solar Figure 8. Annual cost of solar subsidies 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 Annual Cost of Subsidy ,000, ,000,000 22

24 4.2 Costs of Deployment Rooftop This section provides an analysis of the projected cost to the Irish taxpayer to roll out 650MW of installed rooftop solar capacity between 2017 and Cost estimates are based on the assumption that rollout will follow a stable schedule; thereby guaranteeing investors a fair rate of return based on the assumed competitive auction outcomes levels modelled above. It is forecasted that with new commercial and domestic buildings and general refurbishment that there will still be a market for solar PV in Ireland when it reaches grid parity and costs fall below grid costs. Annual deployment beyond 2023 is relatively stable until 2030 when it is consistent at 50MWp/annum between By 2024 a substantial sustainable solar industry will have been created due to the responsible incentivisation it will have received between Table 11 shows the total cost per annum to the taxpayer for supporting the rollout of 650MW of rooftop solar between 2017 and 2023, the benefits of which have an impact until As grid parity has been reached beyond 2023 it is assumed no incentives are required to continue deployment for new installations as a sustainable industry has been established. Table 11. Projected costs of 650MWp of Commercial Rooftop solar projects (assuming 250kWp average) 8 It is likely that the support mechanism for rooftop solar will need to extend beyond 2022, the proposed cut- off date for utility- scale due to the higher cost base. 23

25 Figure 9 shows the total cost per annum to the taxpayer for supporting the rollout of 650MW of rooftop solar. A unique aspect to Rooftop PV is that the building owner benefits directly from the electricity being produced from the roof. The savings for businesses who adopt cumulatively outweigh the costs to the tax payer by Over the life- span of the systems the average subsidy per kwh produced from rooftop in this period is 4c/kWh. The average saving to adopters of this model (even using a non- capital investor funded model) is 8.9c/kWh. This saving is going to reduce operational costs to run Irish industrial, retail, agricultural and state buildings and improve our competitiveness internationally. Figure 9. Annual cost of rooftop solar subsidies (average 250kWp size projects) 24

26 5. Support Scheme Subsidy ISEA recognises that not all renewable technologies are created the same. The inputs required to produce electricity vary significantly. Within solar PV technology there are different modes for deployment, which lead to different technology and construction considerations. Given this, ISEA acknowledges that a one- size- fits all support mechanism is not ideal. Support mechanisms should give consideration to the costs of technology, costs of development, and costs of operation and management of projects. Discussed here is a proposed, auction mechanism, which can be added to the basket of support mechanisms to be employed by the Irish Government. In this section we will look at how the subsidy should be designed for the three individual areas: 5.1 Utility- scale solar projects 5.2 Commercial rooftop and domestic rooftop (< 6 kw) 5.1 Utility- scale Solar Projects 5.11 Auction Mechanism The above forecasted auction clearing prices reflect the assumptions made in relation to construction and funding costs made in this paper. A number of factors may influence the overall profitability of solar. In particular, the Euro may strengthen from its 10- year lows against the US dollar, while interest rates could rise. To reflect these uncertainties, and to take into account the experience of other European countries where solar tariffs were initially set too high, creating a solar gold rush, an auction mechanism is proposed for utility scale projects (>1MW). This will ensure that the support provided for solar PV projects reflects current market conditions. The auction mechanism should include the following features: A strike cap price established at a slightly higher level than the projected levelised cost of energy outlined in table 6 e.g in 2017; 0.16 in 2018; 0.15 in Eligibility to participate in the auction requires the bidder to have: o a land option in place, o a valid grid offer, and o planning permission to construct the project; A bid bond of 10,000/MW to limit participation; A dedicated budget for solar for the first five years in order to allow the solar industry to develop an efficient supply chain in Ireland; o The combination of the cap on the unit rate and the auction budget acts as double- lock on customer exposure to potential costs, and ensures greatest value for money. o Note that the degressive cap proposed above is dependent on a developing a local economy of scale in the industry, in line with our EPC cost submission. If the budget does not allow for such local economy of scale to develop, the cap may need to be higher. Auctions held every six months, in line with the faster development timetable for solar projects. 25