Creating a unique convergence of opportunities to network, learn and share knowledge, the 6th edition of Solar Asset Management Europe represented industry views across the entire asset management and O&M spectrum. Over the course of two days, the experts discussed a range of pressing topics including: optimizing value in solar investments and assets, the imminent changes in traditional O&M models and contracts, major trends i.e. PPAs, battery storage as well as key challenges facing asset owners, investment managers and O&M service providers in this new phase of solar. This brief report highlights some of the key fundamental topics discussed during the conference.
European solar market is back on track towards bountiful growth, primarily aided by two countries of Turkey and the Netherlands. The medium sustainable annual market growth is estimated at 10 GW for the coming few years. Currently, solar PV is the cheapest form of electricity and with the elimination of MIPs, the module prices will also continue to follow a downward trend. However, sooner or later, as the only point of compromise, the quality of the products will suffer. Another element transforming the European RE landscape is the expiration of FiT schemes. So what comes next for solar? In order to cope with this change and further accelerate the adoption of solar PV across Europe, the industry needs to speak in the same language as the traditional energy companies. One way to achieve that is through energy trading. All in all, the market has matured and has become truly global. Nonetheless, the solar PV market still remains in the ‘pioneer’ phase but will only grow bigger as major energy players such as Shell, BP, EDF continue to invest in solar, resulting in further consolidation.
One of the significant changes is the professionalization of the marketplace by means of: integrated systems with respect to asset management, creating opportunities to enhance value through performance improvement, reduction of operational costs, lease extensions. Particularly, in the case of lease extensions, there are not any economic or logical reasons to give up the plant at year 25 if it is still operating at its 95% capacity. This also raises the question of how to extract value from the European assets already reached maturity. It is of great importance to draw a distinction between asset maximization versus asset optimization. Asset optimization can increase the internal rate of return (IRR) of a project by 3-4% based on the studies presented during the conference. Three core pillars comprising optimization are revenue optimization, revenue protection and profit maximization. Optimization of the revenue is concerned with maximizing yield and financial value of administration-related activities to increase revenue. Revenue protection and profit maximization are influenced by all financial values associated with accounting & bookkeeping, administration as well as monitoring & engineering.
Traditional O&M models are also undergoing a shift and inevitably so, if the service wants to be able to cope with the imminent changes happening in the solar industry. The standard traditional O&M contracts tend to be limited to warranting PR and availability only. Today, an O&M contract is considered satisfactory if it regards the asset in its entirety and against that entirety implements changes in order to increase value. Automatic validation of data has been the anthem of the industry across the board and of course, O&M is not exception. Moreover, predictive maintenance will form the new voice of O&M more than ever and completely redefine the very notion of operations and maintenance.
Secondary Markets- M&A trends
By the end of 2018, Europe will have over 120 GW in solar capacity. All the new capacity being installed puts forth the question that whether the often-talked-about consolidation is actually happening. With the continuous growth, more and more new players are entering the space and taking on newly-formed portfolios. Therefore, the total market value and the size of the pie is increasing simultaneously as the size of the portfolios. Unsubsidized solar is imminent but what happens to projects that cannot run on merchant or power purchase agreements (PPAs). Numerous case studies presented during Solar Asset Management Europe 2018 identified Power Purchase Agreement (PPA) as a viable tool to achieve asset optimization. Although PPAs remain one of the main drivers of unsubsidized solar PV, auctions are becoming more and more prevalent. During the last year, Germany introduced ‘mix technology auctions (PV & wind), which were heavily dominated by PV. In fact, solar won the entire auction.
With respect to general M&A trends, 2016 marked the year with largest acquisitions. Whereas 2017 witnessed a lower amount, primarily driven by the UK market due to the ROC scheme coming to an end. A country gaining more momentum this year is Italy. Although Spain and Italy did not have as many transactions as the UK in the last year, they still capture approximately half of the value in the secondary market. Overall, investment fund managers form the largest buyers of operating solar PV assets and sellers also happen to be of the financial type.
The Path Ahead For European Solar Asset Owners
Looking outside and beyond the plant in order to help the grid will play a crucial role in shaping future opportunities and challenges for asset owners. This will require an increased level of responsibility from the asset owners regarding dispatching services and cooperating with TSOs and DSOs. The verdict is in; good and clean data as well improved automated analysis methods will remain of great importance for solar. Another factor will be the automation of processes in order to truly realize digital transformation. Revamping and repowering present an opportunity to improve the plant from a technical stance. Furthermore, this prepares the plant for new dispatching services, storage, etc. As consolidation chronicles continue across the European solar assets, the asset owners have to deal with issues such as a glut of different inverter types and existing O&M contracts on an asset, which have proven to be highly challenging to manage. In order to address these issues, the asset owner should move to two or three primary go-to players and opt for a regional local player when necessary. Additionally, having a good understanding of the optimum level of outsourcing and insourcing, appropriate for the desired business model, is and will be a key consideration for asset owners. Lastly, economic value added (EVA) will be the underlying driver of the decisions asset owners and corporate financiers make. Unless that decision is intended to protect an asset’s baseline, if it dampens the quality or riskiness of the IRR, it is the wrong decision. Economic value can manifest itself in a number of ways such as:
To increase costs to ensure safety
To reduce costs to improve IRR
To increase yield to prepare an asset for sale
The future of European solar will involve a myriad of new business models and changes in the value chain. The market is undergoing a significant transformation and the biggest shift is going to lie within asset owners focusing predominantly on their core competencies.