COST REDUCTION POTENTIAL OF LARGE SCALE SOLAR PVAN ANALySIS INTO ThE POTENTIAL COST REDUCTIONS ThAT ThE UK SOLAR INDUSTRy COULD DELIVER TO 2030 wITh STAbLE POLICy SUPPORT

November 2014

Cost Reduction Potential of Large Scale Solar PV2

ACKNOwLEDGEmENTSWe would like to thank the following for their contributions to this report:

Ben Cosh (TGC Renewables)Mike Landy (REA)1

Additionally, we would like to thank:STA members for providing cost dataSTA executive and STA Data Working Group

Lead Author: David Pickup

Contributors: Paul Barwell, Leonie Greene

Cover photo: © Daisies Tavells Duncan Bryson

1 Funded by the STA Solar Independence Campaign

Cost Reduction Potential of Large Scale Solar PV 3

TAbLE OF CONTENTSSummary 4Introduction 5Methodology 6DECC Data and Analysis

Levelised Cost of Electricity 7Administrative Strike Prices 8Wholesale Electricity Price 9

STA Data and Analysis Levelised Cost of Electricity 11LCOE comparison across technologies 12Strike Price Analysis 1425 year vs 40 year lifetime 15

Conclusions 17Appendices

Appendix 1: Costing data 18Appendix 2: Inputs and assumptions 19Appendix 3: Cost reductions coming from the UK supply chain 20Appendix 4: Quotes supporting rapid decrease in solar PV costs 22

Cost Reduction Potential of Large Scale Solar PV4

SUmmARyThe solar power market in the UK has grown to an estimated 5GW of capacity in a very short period of time. This achievement within a four year time span has been achieved through cost reductions both at global level, and just as importantly, in the UK supply chain. This has been most noticeable in the large-scale sector as the growth in the last two years is from projects which have become economic under the Renewables Obligation (RO). Companies have expanded significantly anticipating a stable market and stable support mechanisms under the RO and Feed-In Tariffs (FITs) and this has helped drive efficiencies which further reduce costs in the supply chain.

Historically, industry cost reductions have outperformed expectations from industry, consultants and Government. As the UK industry matures, providing more accurate forecasting becomes possible, and it is the intention of this report to provide up-to-date estimates of the industry’s forecast for changing costs between now and 2030.

Through the Solar Trade Association’s (STA) membership, the STA has undertaken detailed analysis to calculate Levelised Cost of Electricity (LCOE) values to compare to analysis by the Department of Energy and Climate Change (DECC) over the timescale 2014–2030. Additionally, strike prices have been modelled and compared to DECC’s Administrative Strike Prices.

The STA analysis shows that the cost reduction of large-scale solar will occur more rapidly than DECC’s costs have shown: a 33% drop in costs to 2020, with a further 11% reduction in the period 2020–2030. While individual technology cost is not the only consideration in developing efficient low-carbon electricity systems, this reduction would indicate that solar PV is cheaper than gas (Combined Cycle Gas Turbine or CCGT) by 2018, five years earlier than DECC suggest. It also implies that solar PV becomes cheaper than the wholesale electricity price between 2025 and 2028 – grid parity.

There is sometimes a misconception that being at parity with gas means that solar does not need a subsidy. This is not the case, as the production of electricity through CCGT costs £25/MWh more than the existing wholesale electricity price, meaning that even fossil fuels require a subsidy – hence the introduction of the capacity mechanism.

Importantly, CCGT plants are projected to increase in costs in real terms over the next 15 years, whilst large-scale solar is currently the only technology forecasted to become cheaper than wholesale electricity.

The report concludes that our more accurate data should be used by DECC to update its models so it can make informed decisions on the future energy mix for the UK. This will ensure Government makes the best strategic use of constrained public resources in the interests of UK energy consumers and for achieving its carbon targets cost-effectively. The analysis also highlights why it is in the medium and long-term interests of consumers for Government to retain a stable policy framework for the large-scale solar industry.

Cost Reduction Potential of Large Scale Solar PV 5

INTRODUCTIONThe debate about the role of solar PV in the UK’s energy mix is focusing increasingly on both cost competitiveness and the value that deployment brings to the UK economy. The STA has undertaken an exercise to obtain the industry’s view on the current and projected future costs of the technology, based on discussions with our members. This paper looks at the large-scale solar sector, based on a typical 10MW solar farm. It is anticipated that we will conduct a similar exercise across the domestic and commercial roof top sector in due course.

Levelised Cost of Electricity (LCOE) modelling is a widely known and accepted modelling technique to look at the overall cost of generating electricity. LCOE can be defined as the ratio of the total costs of building and running a plant to the total amount of electricity generated over the plant’s lifetime. Further details on LCOE can be found in a report for DECC by Mott Macdonald1; this 2010 paper provides the methodological basis for the 2013 DECC report ‘Electricity Generation Costs’2 (EGC).

In order to facilitate comparison with the published DECC data from EGC, updated costs were obtained. STA members undertook a detailed bottom-up analysis of the full capital and operating expenditures, as well as the UK content, and considered how these will change with time, as well as the factors that will influence the change. This includes trade restrictions imposed by the European Commission on solar modules, where our analysis assumes that these will be lifted from Jan 20163. LCOE values were then calculated with this cost data, using the same methodology as DECC in the EGC.

In addition to the LCOE modelling described above, a strike price model was developed to predict likely strike prices for solar PV projects. This was to facilitate a comparison with the DECC published Contracts for Difference (CfD) budget4 Administrative Strike Prices. The strike price model uses the same cost data gained from members as described above.

1 UK Electricity Generation Costs Update (June 2010), Mott Macdonald, www.gov.uk/government/publications/uk-electricity-generation-costs-mott-macdonald-update-2010

2 Electricity Generation Costs (December 2013), DECC, www.gov.uk/government/publications/electricity-generation-costs-december-2013

3 “[Duty] will apply for two years as of 6 December 2013” http://europa.eu/!yV67DC4 Budget notice for CFD allocation: round 1 (October 2014), DECC, www.gov.uk/government/

publications/cfd-budget-notice

Cost Reduction Potential of Large Scale Solar PV6

mEThODOLOGyA template breaking down capex and opex expenditure to a detailed level for the years 2014–2030 was developed to allow members to provide their best estimates for a typical 10MW solar farm project. All costs are in 2014 £ to ensure that any changes are shown in real terms (i.e. inflation is excluded). Responses from members were combined with discussions across the STA’s various Solar PV Working Groups over the last six months to reach consensus on central capex and opex figures. These were then used to calculate the LCOE. A summary of the cost data used is shown in Table 1. These values are based on the assumption that the EU/China Anti-dumping tariffs are removed in January 2016 and that solar financial support and policy stability is re-instated into the market. The template used and the full data set is displayed in Appendix 1.

To calculate the LCOE we used DECC’s pre-tax hurdle rate to ensure consistency. We have also used the same average yield based on the load factor figure suggested in EGC. The capex costs include grid connection but do not include the cost of any grid reinforcement that may be required. We have not included the costs or impact of storage in this analysis. The assumptions used are tabulated in Appendix 2.

As well as providing cost data, STA members were asked to provide their views on whether these cost reductions were possible without a steady growth of pipeline projects. This was intended to provide a qualitative view on the progression of the industry to supplement the quantitative analysis provided by the costing data and LCOE analysis, and aids our discussion of the results.

Cost Reduction Potential of Large Scale Solar PV 7

DECC DATA AND ANALySISIn this first section, we only consider the data that has been provided by DECC’s analysis. In the later section ‘STA Data and Analysis’ we provide up to date costs which result in a marked decline in the LCOE for solar.

LEVELISED COST OF ELECTRICITyTaking the LCOE values from the DECC Electricity Generation Costs (EGC) report and inflating them to 2014 £ using the factors from Appendix 2 provides a starting point to compare against our calculated LCOE values. In the below graph we compare EGC report data from various technologies, as well as DECC’s published wholesale electricity predictions5:

Figure 1:

LCOE values for various technologies in 2014 £.

Source: DECC Electricity Generation Costs (Table 13) and DECC Updated energy and emissions projections: 2014 (Annex M).

All values are central/reference scenarios.

By DECC’s analysis, adding new solar capacity will become cheaper than new gas capacity around 2023. Additionally, the percentage cost reduction suggested by DECC for solar is the largest of any technology by far, with a 45% reduction in the LCOE from 2014–2030. This is split by a 27% reduction to 2020 and a further 25% reduction from 2020–2030.

As well as the comparison with CCGT, we can also compare LCOE to wholesale electricity which is a useful comparator for parity for large-scale solar feeding into the national electricity grid6. Solar PV is the only technology that DECC predicts will be cheaper than wholesale electricity, crossing over at around 2029. This

5 Updated energy and emissions projections: 2014 (September 2014), DECC, www.gov.uk/government/publications/updated-energy-and-emissions-projections-2014

6 Large-scale solar feeding into the grid needs to compete with wholesale prices to reach competitiveness. Other sub-sectors of solar including commercial roof-tops and domestic solar compete with retail electricity prices for parity.

Cost Reduction Potential of Large Scale Solar PV8

Figure 2:

Administrative Strike Prices for various technologies in 2014 £.

Source: DECC CfD budget.

7 This is sometimes referred to as cannibalisation, although it is expected that storage will transform the economics of how the market functions.

8 CfDs are a subsidy mechanism to replace the existing Renewables Obligation (RO) subsidy mechanism for encouraging large-scale renewable energy deployment in the UK. CfDs work by allowing companies to bid for contracts for subsidy; projects of different technologies and in different years compete against each other. The contracts are awarded to the cheapest technology, regardless of delivery year, capacity or technology. There are multiple auctions, called rounds, which are planned to run annually starting in October 2014.

implies a decrease in the electricity price due to installation of solar PV after this point, potentially decreasing end consumer bills.

There are natural limitations with any LCOE analysis, since interaction within electricity markets is complex and varies by technology. For example, the system needs to incentivise greater flexibility from gas and other generators in future in order to respond to the variations in generation from larger volumes of ambient renewables. Furthermore renewables can depress electricity wholesale prices when they are generating at large volume – they will dispatch when conditions are right because they have zero marginal cost7. Nevertheless LCOE provides a useful tool for comparing the relative competitiveness of technologies. Furthermore the technical differences between ambient renewables and other generators will reduce with improvements in storage and intelligent grid management.

ADmINISTRATIVE STRIKE PRICESAdministrative Strike Prices are defined as the maximum strike price bid per technology for Contracts for Difference8 (CfDs). These Strike Prices were inflated into 2014 £ and are graphed below:

The graph above shows that the solar PV Administrative Strike Price drops more than any other technology, with a decrease of 17% over the four years to 2018. This matches with DECC’s conclusion above on LCOE that the costs of solar are coming down faster than any other renewable technology.

Cost Reduction Potential of Large Scale Solar PV 9

It is important to note that strike prices and LCOE values are not the same. DECC specifically points this out in EGC:

“The levelised cost estimates in this report are not the sole determinant of strike prices and therefore do not provide an indication of potential future strike prices for a particular technology or plant under the Feed-in Tariff with Contracts for Difference (CfD) being introduced as part of Electricity Market Reform.”

Despite this limitation, we believe that a lower LCOE in general will allow a specific project to bid at a lower strike price. As lower strike prices lead to a reduced budgetary impact, a logical extension of this assumption is that lower LCOE values lead to “cheaper” renewable energy deployment for the public, i.e. require less subsidy. In short, we can look at the general cost reduction trends of both LCOE and strike price to gain insights, without making specific comparisons of cost values.

whOLESALE ELECTRICITy PRICEIt is worth commentating on the wholesale electricity price, as this value is critical both in terms of theoretically estimating the grid parity year of large-scale solar (i.e. when the solar LCOE crosses the wholesale electricity price), and also more practically in terms of the amount of capacity that can be supported under the CfD mechanism. As the CfD subsidy works by topping up the wholesale price to the strike price, the forward prediction of the wholesale price is central to the auction process by deciding what projects can be afforded under the budget in any particular year.

Bearing in mind the importance of this price projection, it is important to see how DECC have changed their projection of the wholesale price in the last year. The wholesale price projection was updated on 29th October 2014 as part of the 2014 Updated Energy and Emissions Projections (UEP). A comparison of the wholesale price projections is graphed below, compared to the projections from a year ago.

Figure 3:

Comparison of different DECC projections of the wholesale electricity price in 2014 £.

Source: DECC Updated Energy and Emissions Projections 2013 (Annex F) and 2014 (Annex M).

Cost Reduction Potential of Large Scale Solar PV10

Whilst the latest projection shows the spot price for wholesale electricity has dropped by £8MWh in one year, it would not normally cause a parallel shift in the forward curve. The change in projection for the next five years is also striking. Instead of a steadily increasing trend, DECC is suggesting that the wholesale electricity price decreases from 2016, before recovering in 2020 to the 2016 value. This £6MWh drop from 2016 to 2018 needs further explanation from DECC. There is a similar pattern from 2025 to 2028 where the price falls followed by a spike to 2029.

The volatility in the electricity price is at odds with the predictability of the forecasted cost reductions in solar PV. The STA’s LCOE when compared with the 2013 electricity price shows the cross over in year 2024, but the updated curve shows the LCOE running in parallel from 2025–2029, suggesting grid parity would occur somewhere over this period (see figure 5). This further highlights the change that can happen within a year, and demonstrates the need to have up to date information for making forward-looking decisions.

Cost Reduction Potential of Large Scale Solar PV 11

Figure 4:

STA and DECC Projected LCOE for large scale Solar PV in 2014 £.

Source: DECC, STA.

STA DATA AND ANALySISLEVELISED COST OF ELECTRICITyUsing the modelling criteria provided by DECC, the STA calculated projected LCOE values based on the latest cost analysis from the STA membership to compare to the published figures. This input data was then used to calculate an LCOE for solar for both a 25 year lifetime and a 40 year lifetime.

A summary of the key cost data gained from our members for use in the STA’s LCOE calculations are shown below. Full yearly data is provided in Appendix 1.

Table 1:

Summary of cost data for a typical 10MW solar farm in 2014 £.

Source: STA membership.

£000s per MWp

2014 2016 2020 2025 2030

Capex £1,028k £848k £724k £682k £646k

Opex (over 25 years)

£640k £607k £526k £494k £469k

Total (project lifetime)

£1,668k £1,456k £1,249k £1,176k £1,115k

% UK content

62% 68% 70% 70% 71%

This cost data is an average, and therefore can be considered a central scenario. Low and High cost scenarios were not developed as these would have needed to be algorithmic and not necessarily indicative of the actual industry view.

The cost data was then used to calculate LCOE values. These LCOE values are compared with the DECC High cost, Central cost and Low cost Scenarios from EGC in the graph below:

Cost Reduction Potential of Large Scale Solar PV12

9 No new coal without carbon capture, UK government rules (April 2009), Guardian, http://gu.com/p/2759d/tw

The graph shows that levelised costs are lower than even the DECC low cost scenario in all years to 2030. Note that the drop in 2016 occurs because of the anticipated removal of the EU-China anti-dumping tariffs in January 2016, as discussed in the methodology. Additionally, our analysis suggests that the rate of cost reduction is steeper to 2020 and flatter from 2020–2030 when compared to the DECC scenarios. This can be represented by comparing the percentage drops from 2014–2020 and 2020–2030, as shown in the below table.

Table 2:

Comparison of LCOE Percentage Reduction suggested by DECC and STA analysis.

DECC STA

2014–2020 27% 33%

2020–2030 25% 11%

The STA input data is based on a stable political framework which allows both world pricing and the continued development of a strong UK supply chain to encourage stable growth and price competition through economies of scale. This is likely to result in costs falling more quickly than DECC’s projected reductions towards 2020. The path from 2020 to 2030 is more difficult for the STA membership to forecast, but the general consensus is the rate of reduction will reduce with time. This also reflects analysis by Bloomberg.

It has been noted by many of our members that cost reductions are not just based around overseas panel and inverter prices, but importantly on the growing impact of the UK supply chain. Further details on what could happen in the UK to drive down these costs are described in Appendix 3.

LCOE COmPARISON ACROSS TEChNOLOGIESCombined Cycle Gas Turbine (CCGT) plants are currently the cheapest conventional way of adding capacity to the electricity market within carbon constraints (coal stations are no longer permitted to be built without Carbon Capture and Storage9). As the marginal technology, CCGT is the technology that renewables need to compete with. We have graphed the LCOEs of solar PV (DECC plus STA) along with the CCGT line and wholesale electricity below.

Cost Reduction Potential of Large Scale Solar PV 13

Figure 5:

STA and DECC Projected LCOE for large-scale Solar PV and CCGT in 2014 £.

Source: DECC, STA.

The graph shows that the crossover point of solar PV and CCGT is much earlier under the STA input data (2018 as opposed to roughly 2023). Therefore, the STA analysis suggests solar PV could be cheaper than gas around 5 years earlier than DECC’s analysis suggests. The crossover point for solar PV and the wholesale electricity price is also predicted to be earlier. Whereas the DECC analysis suggests that solar PV will be cheaper than wholesale electricity by around 2029, the STA analysis suggests that solar PV will cross between 2025 and 2028 – the curves run in parallel within £1MWh for four years. This is a crucial point for understanding when solar is likely to reach parity with wholesale grid electricity prices although, as described previously, the interaction of ambient renewables with the electricity market is complex.

It is important to note that the LCOE for CCGT never crosses the wholesale electricity price. The cost steadily increases from now until 2030, following a smoother profile than the wholesale price. The stark contrast between the steady increase of the CCGT and wholesale price and the continually reducing LCOE for solar PV (both in the DECC and STA analysis) shows the impact Solar PV could have on the energy pricing. The potential for Solar PV to influence the energy market in the UK, not just worldwide, is reflected in a recent report by IPPR10.

STA’s Solar LCOE is not directly compared with other renewable technologies in this report as we would need updated cost reduction for those technologies. Discussion with other industries e.g. onshore wind developers suggested that their predicted costs would also be lower than DECC’s published costs, and therefore it is highly likely that their LCOE will be lower on that basis. As the CCGT technology is mature, we believe that these figures are more likely to be robust and therefore a good comparator to the solar LCOEs.

Solar’s rapid cost reduction going forward has been discussed by many other sources. Some example quotes are shown in Appendix 4.

Another interesting comparison on the graph is between the CCGT with the wholesale electricity price. The LCOE for CCGT is approximately £25/MWh

10 A New Approach to Electricity Markets: How New, Disruptive Technologies Change Everything (Sept 2014), IPPR, www.ippr.org/publications/a-new-approach-to-electricity-markets-how-new-disruptive-technologies-change-everything

Cost Reduction Potential of Large Scale Solar PV14

higher than the wholesale electricity price. It is a reflection on the problem the UK Government is facing trying to incentivise investment in traditional fossil fuel plants when the electricity they will generate is priced at such a high level above the market price. Without incentives, there will be no new CCGT plants built as no investor would wish to lock in losses for 15 years or more.

As a result of this lack of investment, the Capacity Mechanism (a form of subsidy) has been designed to financially incentivise new gas plants to be built in order to ensure that there is enough capacity to meet peak demand in the coming years. However, the costs of CCGT plants increase at roughly the same rate as the wholesale price, meaning that the LCOE for CCGT never crosses the wholesale electricity price. Consequently CCGT will not cause a decrease in the wholesale electricity price, unlike solar which is estimated using STA data to cross the wholesale price between 2025 and 2028.

Our analysis has not incorporated the financial impact of storage on the growth of solar. Storage is forecasted to drop in price in a similar way to that of solar, and will be a game changer in converting variable renewable technologies into potential base load technologies. Fundamentally, investing in solar now with its forecasted drop in costs plus the transitional effect of conversion to base load power makes both economic and political sense. Importantly, governments use these LCOE modelling forecasts to determine how to support their future energy infrastructure. This analysis shows that DECC need to reconsider the support offered to solar as it will become the marginal technology five years earlier than its own analysis has suggested.

STRIKE PRICE ANALySISIn addition to calculating the LCOE for large-scale solar, we used the same cost data to estimate strike prices that solar would need for competing in the CfD allocation process. Our model includes factors such as Power Purchase Agreement (PPA) agreements and charges, as well the CfD contract lifetime.

These strike prices are average estimates, and therefore should be compared carefully to the Administrative Strike Prices provided by DECC, which are a cap (i.e. a maximum) on the strike price bids. Our calculated values are graphed against the DECC Administrative Strike Prices in the graph below (note that all values are in 2014 £):

Figure 6:

Comparison of STA strike prices to DECC published Administrative Strike Prices in 2014 £.

Source: STA, DECC.

Cost Reduction Potential of Large Scale Solar PV 15

The STA analysis shows that the estimated strike price that generators need for CfDs drops sharply away from the cap provided for solar, and is also below the cap provided for onshore wind in 2018. As the STA values are average estimates, it is very likely that there will be individual projects that are above and below our strike price projection.

Each CfD auction is run over all years. This means that projects bidding for 2018 deployment will compete solely on strike price with projects in earlier years. This “future bidding” benefits large companies and technologies with long lead times, and disadvantages SMEs and short lead time technologies. Additionally, solar PV projects cannot commit for later years due to the EU-China trade dispute on solar panels: the result of this is a restricted ability to sign contracts for panels beyond January 2016. The STA’s concerns for solar and SMEs for CfDs are discussed in detail in a separate document11. However, in the context of the CfDs policy framework the STA is particularly concerned about the large-scale solar market over the next two years given the decision to remove the RO for >5MW projects, which could severely disrupt the cost reduction trajectory.

25 yEAR VS 40 yEAR LIFETImEOne limitation in revealing the true economic value of large-scale solar installations is the 25 year limit on planning permission (as well as the relatively short-term nature of policy support and investor requirements). After 25 years, projects need to be dismantled and the land returned to its former use. However, warranties on panels guarantee that they will be generating electricity at around 80% of their original capacity, depending on the manufacturer12. In many cases, this could be higher than 90% efficiency. A report by the National Renewable Energy Laboratory (NREL) showed a median degradation rate of 0.5%/year13. This would mean that a typical system would output 87.5% of the rated power after 25 years, or 80% after 40 years. Additionally, progress in panel manufacturing means that the degradation rates are likely to decrease in the future. Because of these reasons, planning permission could be given on a 40 year basis, rather than the current 25 years.

To investigate the benefits of switching to a 40 year planning cycle, the costs for a solar farm were extended based on a 40 year lifetime and the LCOE values calculated based on these updated costs. The graph of these results is shown below:

11 Key Concerns for CfDs (September 2014), STA, http://solar-trade.org.uk/media/Outstanding%20CfD%20Issues%20for%20Solar.pdf

12 Solar Panel Warranty Comparison (May 2013), Energy Informative, http://energyinformative.org/solar-panel-warranty-comparison

13 Photovoltaic Degradation Rates – An Analytical Review (June 2012), NREL, www.nrel.gov/docs/fy12osti/51664.pdf

Cost Reduction Potential of Large Scale Solar PV16

Figure 7:

Comparison of LCOE for large-scale solar PV with different lifetimes.

Source: DECC, STA.

As expected, the graph shows that the LCOE values are even lower for the 40 year lifetime than they are for 25 year lifetime. This demonstrates the benefit of allowing a longer planning permission lifetime, and indeed the wider benefits to society of Government and investors taking a longer-term perspective on infrastructure investment.

Note that a 40 year life cycle would not require any additional subsidy than that already provided: ROC’s and FIT’s for 20 years and CfD contracts for 15 years. Therefore, under the existing planning rules large-scale solar will not receive subsidy payments for a greater proportion of the lifetime of the project, so there is no economic reason why planning could not be granted for longer lifetimes.

Cost Reduction Potential of Large Scale Solar PV 17

CONCLUSIONSThis STA analysis shows that the costs of large-scale solar are dropping faster and sooner than DECC have predicted, with an LCOE drop of 33% from today to 2020. However, this remarkable cost reduction is dependent on steady deployment in the market supported by stable policy and a maturing UK supply chain.

It also illustrates the importance of using up-to-date data in Government analyses for solar PV, which is both a dynamic and disruptive technology. Using current data makes for the most well-informed decision-making and good strategic decisions. It is in the interests of value for money energy consumers whilst also meeting our 2020 renewable energy targets.

However whether you consider DECC’s inputs or the STA’s up-to-date analysis, there is one common theme: large-scale solar is currently the only technology forecasted to become cheaper than wholesale electricity.

We therefore urge the Government to maintain support for the large-scale solar PV sector. Zero subsidy, even at the large-scale sector, is just over the horizon but we need one final push from Government to get us there. A zero subsidy environment at grid parity will reduce consumer bills in the long term.

Cost Reduction Potential of Large Scale Solar PV18

APPENDIx 1: COSTING DATA

Typical 10MW solar PV farm. Capital expenditure (in £000s, 2014 money) per MWp For a project initiated in:Capex, £000s per MWp % UK

content2014 2015 2016 2017 2018 2019 2020 2025 2030

1. Panels 0% £450k £425k £314k £289k £269k £253k £243k £218k £197k2. Balance of System (complete table below) 70% £384k £363k £343k £325k £314k £305k £297k £283k £273k3. Developer fee (complete table below) 100% £89k £89k £88k £88k £88k £87k £87k £85k £84k4. Grid costs (contestable + non-contestable) 100% £53k £57k £61k £61k £61k £61k £61k £61k £61k5. Legal services (not in BOS or developer fee) 100% £20k £19k £18k £18k £17k £17k £16k £15k £13k6. Financial services 100% £32k £28k £24k £23k £22k £21k £21k £19k £18k7. Other costs (not covered elsewhere) – – – – – – – – – –Total Capex – £1,028k £980k £848k £803k £770k £744k £724k £682k £646k% UK content – 45.0% 47.2% 52.6% 53.7% 54.1% 54.7% 55.2% 55.9% 57.2%Breakdown of BOS – please specify (£k/MWp) % UK 2014 2015 2016 2017 2018 2019 2020 2025 20301. HV, LV & DC electrical works 100% £86k £81k £76k £71k £69k £67k £65k £65k £65k2. Inverter supply 0% £69k £62k £56k £50k £47k £44k £40k £34k £29k3. Transformer supply 0% £46k £45k £43k £42k £41k £40k £38k £38k £38k4. Other HV, LV & DC equipment supply 100% £35k £35k £35k £35k £35k £35k £35k £35k £35k5. Rack supply 100% £100k £92k £85k £78k £75k £73k £70k £64k £57k6. Rack installation 100% included N/A N/A N/A N/A N/A N/A N/A N/A7. Security supply & installation 100% £23k £23k £23k £23k £23k £23k £23k £23k £23k8. Project management, overhead & EPC profit 100% £15k £15k £15k £15k £15k £15k £15k £15k £15k9. Civils 100% £10k £10k £10k £10k £10k £10k £10k £10k £10k10. Legal services – – – – – – – – – –11. Other (please specify) – – – – – – – – – –Total Balance of System – £384k £363k £343k £325k £314k £305k £297k £283k £273k% UK content – 70.1% 70.6% 71.1% 71.6% 72.1% 72.8% 73.4% 74.5% 75.2%Breakdown of developer fee – £k/MWp % UK 2014 2015 2016 2017 2018 2019 2020 2025 20301. Grid Connection Deposits 100% £25k £25k £25k £25k £25k £25k £25k £25k £25k2. Data processing 100% £1k £1k £1k £1k £1k £1k £1k £1k £1k3. Engineering, technical & analysis services 100% £9k £9k £8k £8k £8k £8k £7k £7k £6k4. Other professional, scientific and technical services 100% £11k £11k £11k £11k £11k £10k £10k £9k £8k5. Payments to landowner 100% £4k £4k £4k £4k £4k £4k £4k £4k £4k6. Legal services 100% £11k £11k £11k £11k £11k £11k £11k £11k £11k7. Planning & land registry fees 100% £28k £28k £28k £28k £28k £28k £28k £28k £28kTotal development fees – £89k £89k £88k £88k £88k £87k £87k £85k £84k% UK content – 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Operating expenditure (in £000s, 2014 money) per MWp per year For a project initiated in:Opex, £000s per MWp per year % UK

content2014 2015 2016 2017 2018 2019 2020 2025 2030

1. Technical O&M contract (inc annualised inverter costs)

76% £11.5k £10.9k £10.4k £10.1k £9.8k £9.5k £9.3k £8.4k £7.6k

2. Land management – inc N/A N/A N/A N/A N/A N/A N/A N/A3. Site security 100% £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k4. Purchase of electricity 100% £0.5k £0.5k £0.5k £0.5k £0.6k £0.6k £0.6k £0.7k £0.8k5. Business rates 100% £3.8k £3.8k £3.8k £1.9k £1.9k £1.9k £1.9k £1.7k £1.6k6. Insurance 100% £1.8k £1.8k £1.7k £1.7k £1.6k £1.6k £1.5k £1.4k £1.2k7. Contingency – – – – – – – – – –8. Administration & contingency 100% £1.0k £1.0k £0.9k £0.9k £0.9k £0.9k £0.8k £0.7k £0.7k9. Land lease 100% £4.5k £4.5k £4.5k £4.5k £4.5k £4.5k £4.5k £4.5k £4.5k10. Community benefit 100% £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0k £1.0kMetering and communication 100% £0.5k £0.5k £0.5k £0.5k £0.4k £0.4k £0.4k £0.4k £0.4kTotal operating costs – £25.6k £24.9k £24.3k £22.0k £21.6k £21.3k £21.0k £19.8k £18.8k% UK content – 89% 89% 90% 89% 89% 89% 89% 90% 90%

Cost Reduction Potential of Large Scale Solar PV 19

Table 3:

Key inputs for STA LCOE modelling.

Table 4:

Inflation values to update from 2012 £ to 2014 £.

Source: ONS, www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=D7BT&dataset=mm23&table-id=1.1

Table 5:

Hurdle Rate Assumptions, pre-tax real, from DECC (EGC).

Key inputs for STA modelling

Value(s) Source/Method

Costs in 2014 £ See Appendix 1 STA cost modelling exercise

Lifetime 25 years Based on current project lifetime

Load Factor 11% Electricity Generation Costs (December 2013), DECC

Year Factor

2012 to 2013 1.0285

2013 to 2014 1.027

Period Hurdle Rate Notes

2014–2015 6.2% Rate based on RO, used for December Delivery Plan

2016–2019 5.3% Rate based on CfDs

2021–2030 5.0% Rate after CfD novelty premium expires14

APPENDIx 2: INPUTS AND ASSUmPTIONS

OThER ASSUmPTIONS• Policy stability and financial support is provided to the market.• EU/China Anti-dumping tariffs are removed in January 2016.• Grid connection costs are included but grid reinforcement is not.• The impact of storage is not taken into account.

14 See Table 4 from Annex H of the EMR Delivery Plan for further details www.gov.uk/government/uploads/system/uploads/attachment_data/file/267960/Annex_H_-_Modelling_Assumptions.pdf

Cost Reduction Potential of Large Scale Solar PV20

APPENDIx 3: COST REDUCTIONS COmING FROm ThE UK SUPPLy ChAINThere are sound reasons why the cost reductions of Solar PV shown here in this report are achievable. Some of the potential ways this could be achieved are listed below. Note that many of these efficiencies are based on a strong UK supply chain and project pipeline, instead of simply manufacturing efficiencies abroad.

POwER ELECTRONICS• Fundamental power electronics – solutions to problems at the component

level can be leveraged by advances across multiple industries.

• Advanced components – cost reductions in components such as silicon carbide and gallium nitride will reduce the size and cost of the magnetic materials (and other components) traditionally used in power electronic inverters and converters.

• Reliability – resolutions of failures due to the thermal cycling of materials with different coefficients of thermal expansion are being found.

• Complementary technologies – breakthroughs are expected in the development of technologies to allow high penetrations of solar technologies onto the grid such as reactive power, energy storage, and advanced functionalities.

• Indirect conversion efficiency – there are expected to be developments in technologies that harvest more energy from the sun such as maximum power point tracking and micro-inverters.

• Manufacturing and design – future improvements are expected in the integration of micro-inverters into modules, reduction in installation effort and efficiencies through mass production.

bALANCE OF SySTEm (bOS) COmPONENTS• Supply chain efficiencies – a growing supply chain for BOS components will

reduce costs.

• Development of high-voltage systems.

• Racking Systems – ongoing developments in racking systems could improve energy production or require less robust engineering.

• Integration of racking and mounting components in modules.

• Innovative materials – the development of specialised materials for applications such as steel or aluminium alloys designed specifically for solar industry applications can lead to lightweight, modular mounting frames.

• Standard packaged system designs.

• Building-integrated PV (BIPV) – innovative solutions can develop to replace traditional roofing and building facade materials.

Cost Reduction Potential of Large Scale Solar PV 21

OThER bALANCE OF SySTEm EFFICIENCIES• Streamlining processes – strategies can be identified for streamlining

permitting and interconnection processes and disseminating best practices to a broad set of jurisdictions.

• Development of improved software design tools and databases.

• Policyandregulations– overcoming a range of policy and regulatory barriers, as well as utility business and operational challenges, will encourage efficiencies.

• Installationpractices – Workforce development and training can streamline installation practices, including both installers and code officials.

• Finance access – access to a range of business models and financing approaches could allow more flexibility into the industry.

• Access practices – best practices for considering solar access and PV installations in height restrictions, subdivision regulations, new construction guidelines, and aesthetic and design requirements can reduce costs.

• Trimmingmargins– supply chain margins are likely to reduce as the PV industry becomes more mature, including profit and overhead charged by suppliers, manufacturers, distributors, and retailers.

• Costofcapital– experience from the full lifecycle reduces contingency, and competition can drive down margins and returns to owners of capital.15

• Supply chain investment – larger orders and stable policy environment enable the supply chain to invest in capital equipment which achieves process efficiency, working the supply chain overhead and assets harder.16

• Engineering, Procurement and Construction (EPC) nationalisation – In 2011 most EPCs brought in foreign project managers who had travel and accommodation costs and charged a layer of margin on top of British subcontractors for ground work, electrical work, fences and so on. Now, those British subcontractors are experienced enough and trusted by funds to do the EPC themselves, which removes all the foreign labour costs and takes out a layer of margin.17

• Improved designs – continuous improvement and feedback from O&M teams to designers means that designs become more cost-effective.18

• Transactioncosts – most London law firms have gained experience in deals, so the time required for due diligence has decreased. For example, they now have standard check lists and template contracts.

• System design – For example, 320W modules with 15deg racking rather than 250W modules with 25 degree racking reduces performance slightly, but produces lower racks and shorter shadows, which enables more MW per Ha.

15 For example, listed funds such as Bluefield, TRIG and Next Energy have floated. Funds are asking for lower retentions on EPCs, and funds are not requiring so much contingency between guaranteed PR and what is actually achieved. This has caused the cost of UK capital to fall.

16 For example, www.solarpowerportal.co.uk/news/corbin_industries_invests_500000_in_new_computer_controlled_manufacturing_t

17 Ethical Power, Lark, Natural Generation and British Solar Renewables are examples of companies who have made this step.

18 For example, the UK is the world leader in ensuring solar parks stay in agricultural use. In a well-designed solar park it costs £300pa/MW to maintain grass and wash modules in order to provide the PR warranty. In a poorly designed one it costs £2,500pa/MW. More solar parks means specialist British O&M providers who buy specialist machinery to maintain the solar parks more cost effectively than the very manual approaches which were first used.

Cost Reduction Potential of Large Scale Solar PV22

APPENDIx 4: QUOTES SUPPORTING RAPID DECREASE IN SOLAR PV COSTSInternational Renewable Energy Agency (IRENA)19: “Overall PV system costs are projected to continue to decline rapidly.”

European Photovoltaic Industry Association (EPIA)20: “[Solar] is rapidly moving towards cost-competitiveness.”

UBS21: “Solar is at the edge of being a competitive power generation technology.”

CitiGroup22: “…Prospects look bright in 2014 and beyond as costs continue to decline and improve the LCOE picture.”

19 Renewable Energy Cost Analysis – Solar Photovoltaics, 2012, IRENA, www.irena.org/DocumentDownloads/Publications/RE_Technologies_Cost_Analysis-SOLAR_PV.pdf

20 Global Market Outlook (2014), EPIA, www.epia.org/news/publications/global-market-outlook-for-photovoltaics-2014-2018

21 Big power out, solar in: UBS urges investors to join renewables revolution (2014), Guardian, http://gu.com/p/4x3k3/tw

22 Evolving Economics of Power and Alternative Energy (2014), Citi, https://ir.citi.com/xTCfhm65e3stqHLMoq9vFFtw38r5adyTiKwFYxYA2Z37EuFvOGL63A%3d%3d

Cost Reduction Potential of Large Scale Solar PV 23

AbOUT ThE SOLAR TRADE ASSOCIATIONThe Solar Trade Association is the leading voice for the solar industry in the UK, and the only trade body representing both solar thermal and PV. With a diverse membership we reflect the whole solar supply chain with manufacturers, developers, distributers and installers through to consultancy firms and training bodies. Established in 1978 as a not-for-profit organisation, the STA’s primary objective is to ensure the sustainable growth of the share of solar energy in the UK energy mix.

The Solar Trade Association2nd Floor25 Eccleston PlaceLondonSW1W 9NFTel: +44 (0)20 7925 3575Fax: +44 (0)20 7925 2715Web: www.solar-trade.org.uk Email: info@solar-trade.org.uk

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