In 2023, global investment in solar energy exceeded investment in oil for the first time. In the story of the energy transition, investing capital in solar energy has never been more exciting: solar energy is booming while the cost of generating solar energy is falling. The script for developing solar projects is changing.
Many new characters have joined a phase previously dominated by government subsidies and feed-in bounties. Private investors – ranging from financial institutions to companies – are no longer merely ‘extras’, but play a prominent role. In the 2022 energy crisis landscape, electricity markets have shown extreme resilience, paving the way for solar projects to explore trade reward avenues. How has the background changed and what does the sector need to keep investments going?
The next generation support schemes
Although governments no longer solely determine the story of solar energy investments, their role remains crucial in achieving our implementation ambitions. Nevertheless, solar auctions in many EU countries are falling short of expectations, resulting in inefficient use of available public budgets and unnecessary delays in implementation. Furthermore, the bid caps proposed by auction regulators often do not accurately reflect solar leveled electricity costs (LCOE), especially given the challenges posed by inflation and a global high interest rate environment facing solar developers.
Some EU countries, such as France and Portugal, are proactively addressing this inflationary environment, by indexing support schemes to price developments during both construction and operation of projects. This adjustment will increase the resilience of the solar business case to future changes in the macroeconomic environment and is likely to be a good model to build on and for other countries to follow.
The recently completed EU legislation – the Net-Zero Industry Act and the Electricity Market Design Revision – will also set new rules for renewable energy auctions and public compensation mechanisms. One of these requirements is the integration of non-price criteria into the competitive auction processes of EU countries. Implementing these criteria clearly and consistently across the EU is crucial to avoid undersubscribed auction rounds, properly prepare the industry and support the acceleration of decarbonisation. The technical details of these rules will be included in an implementing law, drawn up by the European Commission and scheduled for early 2025.
According to the new design of the EU electricity market, so-called ‘contracts-for-difference’ – the main mechanism for public price support for renewables – should be non-distortive and responsive to market signals. While achieving this new objective, their ability to provide investors with certainty and long-term coverage should remain untouched, especially in the context of an increasing number of hours
for which electricity prices are below zero. A big part of the solution will be the rapid integration of flexibility assets into the solar business case, optimizing the delivery of cheap, clean electricity.
The rise of PPAs
Corporate Power Purchase Agreements (PPAs) are another important investment avenue, providing revenue security to solar developers and making long-term electricity prices visible to corporate energy buyers. The corporate PPA market has really taken off, with more than 10.4 GW of wind and solar power expected in 2023 alone, bringing the total in Europe to 36.2 GW. The RE-Source Platform notes that PPAs are spreading across the economy, starting in IT and now reaching a broader buyer base, including the automotive and fashion sectors. As a further boost, the new EU electricity market design identifies PPAs as an important tool for the industry to manage future volatility in electricity markets. However, remaining barriers need to be unlocked to accelerate corporate PPAs as a route to market for new wind and solar power plants.
For corporate buyers, it can be a challenge to prove that it is possible to sign a PPA with a term of ten to fifteen years. To mitigate this, countries such as France, Norway and Spain have introduced state-backed PPA guarantee schemes. The application of these schemes will help develop best practice for other governments and determine whether this instrument can open up PPAs at an accessible price to a wider group of corporate energy buyers.
Importantly, the Association of Issuing Bodies (AIB) will play a role in establishing a harmonized European regulatory framework for Guarantees of Origin (GOs). GOs are at the heart of PPAs: a renewable PPA is not renewable without proof that the energy was generated using renewable energy. Promoting industry acceptance of PPAs must be supported by a clear and reliable certification system.
Greening our monetary system
The business model for solar energy is almost the opposite of fossil energy production, making solar energy sensitive to fluctuations in interest rates compared to their fossil fuel counterparts.
Solar energy, like many other clean technologies, requires significant initial investment before breaking even due to its very low operating costs. Unlike solar energy, fossil fuels tend to exhibit a more balanced split between capital and operating expenses, due to their dependence on fluctuating fuel prices over the life of the asset. Restrictive monetary policies are not appropriately adapting to new energy business models and are giving fading technologies an unfair advantage that misrepresents the future of fossil energy.
During the recent energy crisis, our economy’s profound interdependence on fossil fuel prices has been difficult to ignore. The term ‘fossilflation’ aptly captures this phenomenon, given the almost flawless correlation observed between global price indices and fossil fuel prices. Strengthening the European Central Bank’s core mission of stabilizing global prices could be significantly facilitated by a substantial expansion of alternative, cost-effective electricity sources. Encouragingly, solar stands out as one of the most competitive LCOEs, as well as offering the technical advantage of rapid deployment.
In this context, one proposal is gaining momentum: the introduction of a green interest rate by the European Central Bank (ECB). This concept, which has already been implemented in Japan and China, already has many supporters in the European political landscape.
In its new operational framework for monetary policy, the ECB has stated that it will take climate considerations into account when rolling out its future ‘longer-term structural credit operations’. Like its previous expanded Targeted Longer-Term Refinancing Operations (TLTRO) program, the ECB could provide loans to banks at favorable rates, provided the banks focused sufficient lending on investments in renewable energy. If successful, the ECB could simply integrate this criterion into its overall operation, creating a dual interest rate mechanism where green investments would receive a lower interest rate and other investments would still rely on traditional refinancing rates. This approach could effectively accelerate the transition to a cleaner energy mix, supporting the Central Bank’s core mandate of price stability, but also mitigating the impact of imported fossil fuel price volatility on the EU economy.
The European Investment Bank (EIB) will also be able to play a role in relaxing financing conditions for solar energy. Guarantee and counter-guarantee instruments can take advantage of the EIB’s financial robustness to unlock access to low-cost financing for green projects with lower credit ratings. Furthermore, the EIB can reflect the success of the Resilience and Recovery Plan (RRF) in reducing financing barriers to investments in the green transition
Casting Solar in his leading role
By diversifying financing sources and options, solar energy is steadily emerging as the most attractive business case among all energy options. While industry and policymakers recognize the challenges ahead, they can also recognize the tangible solutions available to shape an investment landscape conducive to advancing the energy transition story. The crucial next step is to put these solutions into practice.
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