Rooftop Solar Outside the US
There is enormous potential for rooftop solar outside the United States in markets with high insolation levels or favorable governmental policies. However, growth in such markets has been decidedly mixed.
In contrast, residential solar remains the fastest-growing segment of the electricity market in the US with over 50% annual growth in each of the past three years. In 2014 alone, the US installed more than 1,200 megawatts of residential capacity. Major drivers of this growth include the falling cost of solar installations, the investment tax credit and new financing mechanisms, in particular the third-party ownership model. Progress in other countries can be divided into three categories based on the degree of market maturity.
Mature Rooftop Markets
Australia has a robust rooftop solar market that was initially focused on direct sales, but that is turning lately toward third-party ownership.
After the introduction of a state-wide feed-in tariff program in 2008, rooftop installations soared as customers capitalized on falling solar equipment costs in order to save money on high retail electricity rates. A feed-in tariff model incentivized direct ownership because rooftop systems had short, two- to three-year payback periods and customers could earn money over the lifetime of the installation through renewable energy credits.
Recently, third-party financing has gained traction as the government cut feed-in tariffs and international developers entered the market with offers of more financing options that allow households to install solar without the upfront capital cost. The Australian government is helping to promote third-party financing. Last summer, the Clean Energy Finance Corporation, a government entity, announced an investment of US$113 million in three solar leasing and PPA programs run by SunEdison, Tindo Solar and Kudos Energy. The market is expected to turn increasingly towards solar leases and PPAs to sustain growth.
Western Europe boasts a large installed base of rooftop solar. Growth has been fueled by government incentives and high electricity prices. Third-party financing models only recently began making inroads due to historically high levels of government subsidies that encouraged ownership rather than third-party financing arrangements.
The Netherlands is increasingly seen as a testing ground for the new financing models. Several downstream solar companies have recently announced partnerships with utilities, including E.ON and Trianel GmbH, in the Netherlands to introduce a leasing option for residential customers. In contrast with the third-party model that has gained traction in the US, leases are being offered in partnership with a utility to the utility’s existing customer base rather than to all customers directly.
A similar model has gained strength in Germany in which the utility giant RWE is collaborating with Conergy to provide a solar leasing option to RWE’s customers with RWE having ultimate ownership of the system and revenues.
Rooftop solar has not benefited in other regions from the generous and continued support of a government feed-in tariff or tax subsidies, but markets are starting to develop.
There is a strong potential for commercial rooftop solar development in Mexico, the Middle East and Africa. These regions have high insolation levels. Recent changes to the regulatory landscape in combination with persistently high electricity prices for the industrial sector create a strong business case for rooftop solar through direct ownership. The outlook for residential rooftop is more mixed.
In Mexico, the government subsidizes residential electricity prices, thus eliminating one of the primary drivers for rooftop solar. However, the government is preparing to launch a new, wholesale competitive electricity market by the end of 2015 and will release final electricity market guidelines in July 2015. (See Project Finance NewsWire July 2015 article, “Mexico: Prepare to Launch”) Private power producers will be able to make retail sales directly to customers with on-site loads of at least two megawatts as of August 2015, and the threshold will fall to one megawatt starting in January 2016. As part of the transition from a market dominated by the national utility, Comisión Federal de Electricidad (CFE), the Mexican government has also created an auction system for electric generating capacity and introduced tradeable clean energy certificates called “CELs” to encourage renewable energy generation. Projects smaller than 500 kilowatts will not qualify for CELs, but are also exempted from many of the permitting requirements and regulatory costs associated with participating in the wholesale market. Even though Mexico’s new regulations do not directly support rooftop solar, the changing marketplace will drive investment in renewables across the country and may incentivize small-scale installations by reducing the administrative burden for these systems.
There are still critical barriers to developing rooftop solar in Mexico. Political manipulation of tariffs for electricity creates uncertainty that has inhibited both utility-scale and rooftop solar development. For example, the government reduced residential tariffs by 30% in advance of the most recent elections as a political ploy, thus making potential customers more cautious to enter into a PPA. It remains to be seen whether the government will continue subsidies at these levels when the wholesale market is launched later this year. In addition, Mexico lacks a uniform system of measurements for solar construction. At the residential level, there is not a clean construction policy or a standardized system of components for solar installations. This barrier is less of an obstacle in the commercial market.
The availability of financing options for residential solar remains an issue in Mexico as well. The national banks cannot extend credit to homeowners for solar installations. As a result, there must be an intermediate bank that will then lend directly to homeowners for solar installations. Only two such banks offer loans currently. Given that the majority of the population does not have an established credit history, many banks, especially international banks, are wary of being involved with such lending.
Commercial installations provide the greatest opportunity in Mexico. Electricity prices for industrial customers are high. However, customer education will be key to realizing this potential. Many companies are resistant to investing in a solar system that has a payback period of 15 years or longer when they could expand their operations instead. Third-party financing has helped to overcome these barriers in the US by enabling companies to see immediate savings in what they are paying for electricity. Certain multinationals, such as Walmart and Home Depot, have already embraced rooftop solar outside of their US operations. Once new wholesale market and interconnection regulations are in place, the contours of the rooftop market will become clear and developers can evaluate the potential.
Like Mexico, Dubai is also a solar market in the midst of a significant transformation. In January 2015, the Dubai government published an executive resolution allowing persons to connect solar photovoltaic systems to the grid. Dubai benefits from strong drivers for rooftop solar development, including high levels of solar insolation, economic and social goals to create a more diversified economy and the falling cost of solar equipment. Electricity prices are heavily subsidized for residential consumers. Commercial and industrial customers also benefit from subsidies but to a lesser degree. As a result, commercial and industrial installations have the greatest potential.
In contrast with Mexico, Dubai’s local banks are keen to participate in solar power financings, and its commercial market for rooftop solar benefits from lower credit risk. Even though the regulatory framework remains uncertain in some respects, local lenders in Dubai are more likely to take a risk on financing solar installations due to a higher tolerance for regulatory uncertainty in this market and a strong desire to support government policies. Some local lenders have already expressed support for commercial-scale solar development, and at least one international bank has expressed interest in financing a portfolio of local projects.
The local utility, the Dubai Electricity and Water Authority, has a monopoly on electricity sales, similar to Mexico’s CFE before the recent reforms. Therefore, the model of third-party ownership with a solar PPA would be hard to make work. The market is developing as a direct-sale market, but there is the opportunity to introduce new financing models for commercial development, such as leases. Owners who use solar equipment for self-consumption can offset any surplus electricity produced by the solar system against the amount of power they take from the grid.
Jordan, with the most advanced solar market in the Middle East, provides an interesting contrast with Dubai. While Dubai provides significant subsidies to residential customers, Jordan cannot afford to subsidize electricity to the same extent. Since Jordan relies on expensive diesel generation, solar has already reached grid parity in most of the country. Banks, telecommunications companies and other consumers with high electricity consumption are incentivized to install solar panels as a result of high tariffs for electricity. Owners of distributed generation facilities can sell surplus power to the national transmission company and any of Jordan’s three distribution companies.
Rooftop solar development in Jordan has overwhelmingly favored the ownership model thus far as a result of continued regulatory uncertainty as to whether a user needs to own the rooftop system, according to Ali Sharif Zu’bi Advocates & Legal Consultants CPSC. Since consumers rarely own off-grid systems, the potential for a third-party financing model would be subject to regulatory approval. In the agreement that a consumer signs with a distribution company for distributed generation, there is a clause governing the circumstances under which the company can disconnect the solar installation. However, the agreement does not specify whether the system should be owned by the user. The majority of consumers would prefer to lease rather than purchase solar installations due to the high upfront costs and issues surrounding creditworthiness. If the ownership issue is clarified, then this is expected to unlock a burgeoning commercial solar market in Jordan in which hospitals, mosques, schools and telecommunications companies are looking to install solar in order to reduce electricity costs.
South Africa is well positioned for growth in commercial rooftop solar as a result of concerns over energy security and its well-established base of solar developers and manufacturers.
In contrast with Mexico, Dubai and Jordan, overall electricity rates for industrial consumers in South Africa are fairly low. However, Eskom, the national utility, has recently proposed a 25% increase in electricity rates, which will help to support the case for distributed generation. Over the past year, the growing occurrence of load shedding has prompted many municipalities and companies to consider owning and installing rooftop solar. Since the regulatory framework does not allow owners of distributed generation to sell power into the grid, the third-party financing model is not expected to drive growth in the rooftop market. Rather, companies will purchase rooftop installations for self-consumption in order to go off the grid or to reduce reliance on the grid. For example, pension funds in South Africa own a series of shopping malls and are interested in adopting rooftop solar in order to increase energy security.
South Africa’s rooftop market will also benefit from the foundation of utility-scale solar in the country. In late 2011, the Department of Energy introduced a “Renewable Energy Independent Power Producer Procurement Program” (REIPPP) under which the government expects to procure 1,450 mega-watts of utility-scale solar installations. As a part of the REIPPP, solar developers, including SunPower, had to establish some element of local manufacturing and engineering, procurement and construction capacity. South Africa now has a domestic manufacturing and contracting base that is looking for new opportunities to expand and can support the growth of rooftop solar within the country.
In East Africa, Kenya and Tanzania present a similar opportunity for commercial solar development with a different set of drivers than in South Africa. While both regions have superb solar resources, the primary driver of rooftop development in East Africa is the high cost of diesel-based electricity. Similar to the situation in Jordan, businesses in East Africa, including lodges, banks, hotels and phone companies, pay an estimated 30% of capital expenditures on diesel-based generation and are eager to invest in rooftop solar in order to reduce costs. However, the commercial-scale market has been constrained by a lack of financing to support these transactions. There are few financing options for businesses to purchase solar equipment unless they have collateral. The high transaction costs of checking credit, local regulations for electricity generation and the fact that only 10% to 20% of property is owned through a mortgage are all barriers to widespread deployment. More recently, investment funds, such as CrossBoundary Energy, have been formed to bridge the gap between the enormous potential for commercial rooftop systems and the high upfront costs of capital. The mobile phone card model, where customers pay in advance for a quantity of electricity, is also gaining some traction.
The rooftop markets in Poland and Turkey remain in the earliest stages of development.
The Polish and Turkish governments have both created feed-in tariff programs that are specifically directed at residential rooftop projects under one megawatt in size. High electricity prices and growing energy demand create significant potential for the rooftop market in both countries. However, the potential remains largely unrealized due to regulatory uncertainty.
Poland has to reach a renewable energy share target of 20% by 2020 under European Union Directive 2009/28/EC. It implemented quota obligations for renewable energy with tradable certificates and is approximately halfway to reaching its target under the Directive 2009/28/EC. However, the solar market in Poland is virtually non-existent because its quota obligation system did not pay enough to incentivize the market for solar and the price of tradable certificates was highly unstable.
In February 2015, Poland enacted a renewable energy law that replaces the quota obligation system with an auction system and creates sub-markets based on project size. The Polish government will require local electricity companies to buy all surplus energy produced by projects below 40 kilowatts for 15 years, and will subsidize the local electricity company if the market does not pay enough for this power. The maximum price that can be paid to the local electricity companies under this guarantee system will be published this fall. If the price is set at a reasonable level, then this will spur creation of a rooftop solar market. However, there is significant uncertainty surrounding the guaranteed price the government is likely to offer. In addition, the Polish government has submitted several proposals to reduce the feed-in tariff for small-scale facilities and may limit the size of the rooftop sub-market.
Turkey’s nascent solar market illustrates what might happen to the Polish rooftop market if the regulatory framework for small-scale generation remains uncertain. Like Poland, Turkey exempted projects of up to one megawatt from the Energy Market Regulatory Authority’s licensing requirements for generation. Contrary to expectations, rooftop solar and other forms of small-scale generation have not grown substantially. A combination of continued administrative burdens and a delay in promulgating regulations have outweighed the incentives created by the feed-in tariff system and high demand for energy. For example, rooftop systems would still need to be approved by distribution companies in their regions as generation that does not require a license. Regulators in Turkey are considering amendments to this program in order to exempt certain segments of small generation from all administrative burdens. Currently, all projects under one megawatt are treated exactly the same, although a 10-kilowatt installation on a household differs significantly from a 900-kilowatt installation on a commercial enterprise. The market will remain underdeveloped as long as the regulators allow uncertainty to persist or create additional administrative burdens for rooftop solar compared to larger-scale solar installations.
by Taylor Lane, in New York