Monday 16 March 2015

The Commercial Solar Rooftop Market - Fitting A Quart into a Pint Pot

The solarblogger examines the opportunities and challenges for PV on commercial rooftops.

Commercial Rooftop Solar was only 8% of the Market in 2014

It seems to be accepted wisdom that the commercial rooftop sector is set to be the next big thing in solar. In recent weeks companies more commonly associated with the solar farm sector such as Lightsource, Conergy and Lark have announced their intention to develop commercial rooftop divisions.

Indeed, there are good reasons to expect the commercial rooftop segment to take off.  As feed in tariff support has been gradually withdrawn, the savings on electricity bills become a greater and greater proportion of the financial justification for solar PV.  Unlike the domestic sector the daytime energy use in office buildings and factories is well matched to solar energy production.  

Unlike ground mounted solar farms, the aesthetics of solar on factory, warehouse and barn roofs isn’t the least bit controversial.  Even the most virulent strain of Daily Mail journalist couldn’t really complain about the ‘industrialisation’ of an industrial estate, could they?  Actually, don’t answer that question, but you get the point.

Commercial rooftops offer installations at a scale to drive low installation costs. Industrial estates often already have chunky electricity supplies.

This combination of scale, self-consumption, and relaxed attitude to aesthetics has created a real sweet spot for solar.  Commercial rooftop seems to be the sector that’s closest to a subsidy-free market. 

Despite this, mid-size commercial rooftops (which I've taken as >50kWp FIT non-standalone) represented only 8% of the PV capacity installed in 2014, far behind solar farms (assumed to be RO funded) with 64% and domestic scale FIT with 19% of the market. Given all this, it’s hardly surprising that many people have identified this sector as providing a real opportunity for growth.

The Challenges

For sure, the sector faces challenges.  Demanding hurdle rates or payback times are common for investment decisions in commercial businesses.  Making an offer that works for both a landlord and their tenants and the limitations of our creaky electricity grid could all be potential barriers to deployment.  

However, these challenges are as nothing compared to the emerging risk to the Feed in Tariff (FIT). 

The level of quarterly deployment that triggers a 3.5% degression to the FIT has been set at 50MWp for systems above 50kWp.  This band was recently split into standalone systems and systems supplying buildings.  The trigger level for systems supplying buildings has reduced to 32.5 MWp going forward, an annual deployment level of 130MWp.

The graph shows deployment for the combined segment, which has risen from 2012 to breach the degression trigger twice in the last four quarters.

The FIT depression cap has already been breached in 2 of the last 4 quarters

The companies piling into the commercial rooftop sector are refugees from a solar farm sector brutally cut back by the government.  In 2014 solar farms accounted for nearly two thirds of all solar PV installed in the UK.  1,100 MWp was installed in farms larger than 5MWp and a further 200MWp in farms smaller than 5MWp.  

In October 2014, the government shut down the RO subsidy scheme for solar farms larger than 5MWp, citing reasons of affordability due to the high levels of deployment.  The funds provided by city institutions to invest in solar farms quickly needed to find a new home.

Expect lots of 4.99MWp solar farm projects to immediately put pressure on the RO budget and don’t be surprised if these also lose RO support relatively quickly.

But imagine what the entry of these businesses could mean for the commercial rooftop sector.  It’s like Shane MacGowan, Gerard Depardieu and George Best crashing a genteel party where the host has already been struggling to keep the punch bowl topped up.

Lightsource alone has allocated £125m fund to the rooftop sector, perhaps 150MWp of anticipated deployment, and on its own sufficient to trigger a FIT tariff degression every quarter.  Without changes to its structure of the FIT, this sector could become victim of its own success.  The graph shows what would happen to the level of the FIT if deployment regularly exceeded the different degression bands.

If deployment exceeds 130MWp per quarter (a fraction of the hole left in solar farm deployment), the FIT for this tariff band could have reduced by 80% before the end of 2016, so called 'hyper-degression'.

Government promised to 'put rocket boosters' under the mid-scale commercial rooftop sector.  Industry has responded, but changes are urgently required to the Feed in Tariff structure to increase the degression limits for the >50kWp band.  If we can't get this fixed, then we risk yet another cycle of boom-bust for the industry.