The “collapse” of the Solar Flagship Program has recently hit the news. With Minister Ferguson re-opening the bidding for the photovoltaic (PV) component of the program, and extending the deadline for the solar thermal, it is worth exploring some of the issues surrounding the collapse, and the current environment. Much has changed since the inception of the program, particularly the cost of PV.
It’s hard to get your hands on a Power Purchase Agreement
The failure of the projects to secure financing illustrates a key difficulty facing renewable energy project developers, namely obtaining Power Purchase Agreements (PPA). PPAs are contracts with an “off-taker”, generally a retailer, to purchase the electricity generated for a period of time at a certain price. They provide a degree of investor certainty to ensure the project’s “bankability”.
Without a PPA in place it is proving impossible for large-scale solar developers to secure financing from lending institutions.
For renewables, the cause of this difficulty is two-fold. There is a soft market for renewable energy certificates, and retailers are reluctant to enter into PPAs with third parties.
Under the Large-scale Renewable Energy Target (LRET), retailers are obliged to purchase what are now known as Large-scale Generation Certificates (LGCs) produced by a renewable source. In a previous certificate scheme, a combination of factors resulted in solar PV creating an excess of certificates (ultimately collapsing the scheme). Retailers “banked” these excess certificates, and subsequently there has been little need for retailers to enter into new agreements with renewable energy generators.