New research on investable opportunities equity investors and asset finance lenders
New research published today shows that hybrid solar power and battery storage systems are coming of age. Hybrid systems are quickly becoming investment opportunities in the GB power system for equity investors and asset finance lenders – without any public subsidy.
Subsidy-free solar has an important role to play in the decarbonisation of the GB power system. Unlike some other renewable technologies such as offshore wind, solar does not currently receive any form of public support or subsidy.
In spite of this, more than 5gw of solar capacity could be deployed without subsidies by 2030.
The costs of solar and battery technology have been falling rapidly, and the analysis shows that hybrid projects with leading technical characteristics and trading strategies could start to be more widely deployed as soon as next year.
The study was conducted by Aurora Energy Research and commissioned by Wyelands Bank, set up to help small and medium firms, and Anesco, a renewable energy company.
The study looks at the returns on investment for hybrid subsidy-free solar operations, in which solar power and battery storage are co-located on the same site.
Previously, uncertain returns have made it hard for solar and battery operators to raise debt finance. They have also relied heavily on government subsidies which have been phased out for solar. These two factors have combined in limiting the appeal to investors.
Looking forward, the report shows that co-locating solar power with battery storage can unlock additional revenue streams and accelerate deployment. Hybrid systems help investors mitigate the risks associated with subsidy-free projects, especially price cannibalisation. This is where wholesale electricity prices are depressed when solar energy output is high. The report also examines scenarios where low gas and carbon prices depress revenues from power markets.
The research finds that internal rates of return, or the measure of the likely profitability of an investment discounted over the life of the project, for hybrid projects deployed in 2020 are between 6.6% to 7.6% under Aurora’s base case assumptions. This is compared to an overall IRR of just 4% for standalone solar and battery projects.
This could increase a further 2%-3% if more aggressive but still feasible market assumptions are used. Higher potential returns should make it easier for co-located solar power and battery storage to attract funding.
The study also shows projects could achieve debt leverage of around 32% of initial CAPEX, which can increase equity returns by around 30 basis points.
In the past, regulatory and network barriers, such as compliance issues or access to the National Grid, have limited the deployment of co-located assets. The removal of Final Consumption Levies by Ofgem and National Grid’s work on wider access to the balancing mechanism will help solve many of these issues.
Benjamin Collie, principal at Aurora Energy Research and author of the report said: “Investing in either standalone solar or standalone storage assets carries technology and policy risks. If rapid innovation and supportive policy lead to fast deployment of solar, then that will tend to increase revenues for storage assets, but decrease revenues for existing solar assets. Conversely, slower deployment of solar would lead to lower revenues for storage but higher revenues for existing solar.
“Investing in a portfolio with both solar and storage can help mitigate these risks, and co-locating the assets allows for cost savings and more efficient use of grid connections.”
Jim Higginbotham, managing director, asset finance at Wyelands Bank, said: “The ability to utilise senior debt alongside equity is good news for the UK renewables industry and signifies that it is a step closer to maturity.
“Until now solar and battery hybrid investments have come with high risks and uncertain returns. Our research shows that the picture is changing and with that we may well see another surge of investment in solar power as subsidy-free solar comes of age.
Lily Coles, commercial director, Anesco, said: “This independent analysis is very welcome and supports our long-held belief that hybrid solar and storage sites are the optimum investment for renewables focussed finance. It is also great to see Anesco’s assets realising returns at a rate already capturing a significant portion of the upside Aurora have presented. This clearly demonstrates the benefits Anesco’s unique end to end proposition brings to investors.”
For more information, please see:
https://www.wyelandsbank.co.uk/renewable-energy/
