In 2023, global investment in solar overtook investment in oil for the first time. In the story of the energy transition, investing capital in solar energy has never been so exciting – solar booms while the cost of generating solar electricity drops. The script for solar project development is changing.
Many new characters have joined a stage previously dominated by government subsidies and feed-in-premiums. No longer mere ‘extras’, private investors – ranging from financial institutions to corporates – are seizing prominent roles. Against the landscape of the 2022 energy crisis, electricity markets have demonstrated extreme resilience, paving the way for solar projects to explore merchant remuneration routes. How has the backdrop changed, and what does the sector need to keep investment flowing?
The next-generation support schemes
While governments no longer solely direct the narrative of solar investments, their role remains pivotal in achieving our deployment ambitions. Nonetheless, in many EU countries, solar auctions have fallen short of expectations, resulting in the inefficient use of available public budgets and causing unnecessary delays in deployment. Additionally, bid ceilings proposed by auction regulators often do not accurately reflect the solar levelized cost of electricity (LCOE), especially given the challenges posed by inflation and a high-interest global environment that solar developers must contend with.
Some EU countries, like France or Portugal, are proactively tackling this inflationary environment, by indexing support schemes to price evolutions during both project construction and operation. This adjustment is set to increase the resilience of the solar business case to future changes in the macroeconomic environment and will likely be a good model to expand on and for other countries to follow.
Recently finalized EU legislation – the Net-Zero Industry Act and the Electricity Market Design Revision – will also set new rules for renewable energy auctions and public remuneration mechanisms. Among these requirements, is the incorporation of non-price criteria into the competitive auction processes of EU countries. Implementing these criteria clearly, and consistently across the EU, is crucial in preventing under-subscribed auction rounds, properly preparing industry, and supporting the acceleration of decarbonization. The technical details of these rules will come in an Implementing Act drafted by the European Commission and planned for the beginning of 2025.
Under the new EU Electricity Market Design, so-called ‘contracts-for-difference’ – the main public price support mechanism for renewables – have to be non-distortive and respond to market signals. While meeting this new objective, their ability to provide investors’ certainty and long-term hedging must 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 dispatch of cheap, clean electricity.
The rise of PPAs
Corporate Power Purchase Agreements (PPAs) are another key investment route, providing revenue certainty to solar developers as well as long-term electricity price visibility for corporate energy buyers. The corporate PPA market has truly taken off, with more than 10.4 GW of wind and solar capacity signed in 2023 alone, bringing the total in Europe to 36.2 GW. The RE-Source Platform notes that PPAs are spreading across the economy, having begun 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 sets PPAs as a key tool for industry to manage future volatility in the electricity markets. However, remaining barriers must be unlocked to accelerate corporate PPAs as a route to market for new wind and solar power plants.
Proving bankability to sign a 10 to 15-year PPA can be challenging for corporate buyers. To mitigate this, countries like France, Norway, and Spain have put in place state-backed PPA guarantee schemes. The uptake of these schemes will help to develop best practices for other governments and determine if this tool can open up PPAs to a wider pool of corporate energy buyers at an accessible cost.
Importantly, the Association of Issuing Bodies (AIB) will play a role in setting a harmonized European regulatory framework for Guarantees of Origin (GOs). GOs are the centerpiece of PPAs: a renewable PPA is not renewable without proof that the energy has been generated using renewable energy. Driving industry uptake of PPAs must be supported by a clear and reliable certification scheme.
Greening our monetary system
The business model for solar is almost the reverse of fossil energy production, rendering solar sensitive to fluctuations in interest rates, compared to its fossil fuel counterparts.
Solar, like many other clean technologies, requires significant initial investment, before breaking even owing to its very low operating costs. Unlike solar, fossil fuels typically exhibit a more balanced distribution between capital and operational expenditures, due to their dependency on fluctuating fuel prices throughout the asset's lifespan. Restrictive monetary policies don’t appropriately adapt to new energy business models and give fading technologies an unfair advantage that is misrepresentative of fossil energy’s future.
During the recent energy crisis, the profound interdependence of our economy on fossil fuel prices was difficult to ignore. The term “fossilflation” aptly encapsulates this phenomenon, given the nearly flawless correlation observed between global price indices and fossil fuel prices. Enhancing 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 energy stands out with one of the most competitive LCOE, and further offers the technical advantage of rapid deployment.
In this context, one proposition is gaining momentum: the implementation of a green interest rate by the European Central Bank (ECB). This concept, already implemented in Japan and China, already has many supporters in the European political landscape,
In its new operational framework for monetary policy, the ECB declared it will consider climate considerations when rolling out its future “structural longer-term credit operations.” Similar to its previous extensive Targeted Longer-Term Refinancing Operations (TLTRO) program, the ECB could extend loans to banks at favourable rates, contingent upon banks directing sufficient lending toward investments in renewable energy. If successful, the ECB could simply integrate this criterion in its general functioning, creating a dual interest rate mechanism where green investments would get a lower interest rate and other investments would still rely on traditional refinancing rates. This approach could effectively hasten the transition toward a cleaner energy mix, supporting the Central Bank's core mandate of price stability but also mitigating the impact of imported fossil fuel energy price volatility on the EU economy.
The European Investment Bank (EIB) will also have a role to play in smoothing out solar financing conditions. Guarantee and counter-guarantee instruments can capitalise on EIB’s financial robustness to unlock access to cheap financing for green projects with a lower credit rating. Additionally, the EIB can mirror the success of the Resilience and Recovery Plan (RRF) in reducing financing barriers for green transition investments
Casting solar in its leading role
By diversifying financing sources and avenues, solar energy is steadily emerging as the most compelling business case among all energy options. While acknowledging the challenges ahead, industry and policymakers can recognise the tangible solutions available to shape an investment landscape conducive to advancing the energy transition narrative. The critical next step is to set these solutions into action.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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