Where do you see the future cost reductions coming from for commercial-scale solar?
It’s very important to deploy large-scale solar locally, because you’re not going to realise those cost reductions until you actually deploy locally. More and more, the technology piece is less and less a contributor to that overall economic equation. As the technology gets cheaper and you get to new markets, the inefficiencies are around the financing, the local construction, and the local engineering – these are the things that will have a greater impact on the overall cost of electricity equation.
Are there lessons we can take across from other large-scale infrastructure projects?
Yes – at the end of the day, solar is so much simpler than any other infrastructure project that you can imagine, and once people get over that initial technology risk perception – once they feel comfortable that the technology itself; the solar panel performance – the actual execution of the project itself is almost trivial. It’s a very simple process of construction.Article continues below…
What kind of lifespan do these large-scale projects have?
Generally, the financial profile assumes 25 years, and that is mirrored in the warranty of the panels, but generally people assume a useful life of 30 years.
The need for re-powering a plant may occur even before 25 years, if you get to the point where the technology continues to come down in cost – so that 10 years in, you can actually see the economic benefit of the cost of replacing the current modules with new modules that are have a higher power output.
In this way, you can potentially see an endless re-powering approach, which is very effective because you’re using the same infrastructure, and you already have sunk development costs.
If re-powering isn’t an option, the most obvious option is decommissioning – in that case we recycle all the panels at the end of their useful life, and turn about 90 per cent of the material into new panels.
Can you elaborate on the grid constraints that these larger projects encounter?
Generally, you find better land availability where there’s not as useful transmission availability. As a result, a lot of the plants that have been constructed in North America have been massive. I don’t think you’re going to see a lot of these going forward – largely because it is difficult to find that optimum balance between land availability and transmission availability – but more importantly you’re really not leveraging the modularity of photovoltaic (PV) solar as much as you could.
Solar PV essentially realises all economic economies of scales at about 20 megawatts (MW), so if it doesn’t cost you any more on a unit basis to build 20 MW as opposed to 500 MW, then what you should be doing is leveraging more strategic places on the grid where you don’t have those grid constraints, where it’s easy to find a site, where it’s closer to distribution load, or it’s not as much of a pain to connect, or it doesn’t have the same line loss impact.
We see the sweet spot in the 10–50 MW range predominantly, and then in some scenarios at 50–100 MW.
I think the important point is that when a policy mechanism is looking to support additional projects, it shouldn’t be prescriptive about the size of the plant. It really should be left to the developers, the sponsors and the owners of those plants to determine what is the optimum size, location, transmission interconnection to optimise the cents per kilowatt hour figure – that’s what everything should be designed for: the cheapest way to deliver solar electricity.
Can you share your thoughts preferred funding mechanisms for solar?
We’ve delivered plants under a variety of mechanisms. Mechanisms we like are ones that can be absorbed into a typical capital structure – so, a feed-in tariff doesn’t qualify for that. Even though feed-in tariffs are good from a pricing point of view and from a certainty of revenue point of view, it doesn’t encourage participation from utilities, from network providers – it leaves them out of the equation, which defeats the purpose of trying to build the industry.
Grants are very effective in that they can be easily absorbed – a typical power market transaction can look exactly the same except having some of the upfront cost offset. However, they are not the most efficient use of capital.
Tax credits have been very effective in the United States, but that’s a little bit more complicated in Australia given the broader tax landscape.
For longer-term support mechanisms, we like a low market or subsidised debt or equity funding – you just need to do it in a way where it’s not supplanting having the banks involved.
You’ve advocated for more engagement from the solar industry with utilities – what are some specific ways the industry can do this?
Firstly, often there’s some frustration expressed at how the market structure has allowed there to be a concentration of players, but that’s really what happens in any de-regulated free capital market context. While that does place constraints on more entrepreneurial activity, it’s the way it is – it’s not going to change. I don’t think the government has any interest in re-regulating the power markets.
Instead of trying to fight it, our view is that it’s better to work with utilities to better understand what they are focused on, what they care about, and what they’re interested in.
Spend time understanding what the buying drivers are and what the concerns are of those that have been buying power for 100 years, and will still be here buying power 100 years from how. The sooner you start on that the better.
The people we’ve been doing projects with today, we’ve been talking to for four years. AGL Energy, for example – the first MW we installed for them will be six years since our first conversation. That’s what it takes – it’s a long lead-time industry.
What we’ve found is that banks and utilities really wanted to invest in solar, but they want to do it on terms that are economically attractive to them.
Secondly, it’s wise to make sure that if we’re promoting policies, there is utility buy-in for them; for most utilities the only real hurdle is an economic hurdle. For example, most utilities don’t really like feed-in tariffs, because it cuts them out of their role. Going forward, when the feed-in tariff markets fall away, if these guys haven’t been involved in projects, you’re starting from step one again five years from now.
Thirdly, understanding the entire power equation is important. Often utilities report that a solar manufacturer will talk to them about the characteristics of their solar panel and how well it performs. That’s great, but that’s five per cent of the conversation. You need to understand how it fits into their generation profile, how it fits into their load profile, how it fits into their broader generation mix, and be able to answer questions that are agnostic to any generation source – you need to understand how they think about power assets generally. It’s not their job to understand solar – it’s our job to educate them about it.