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PV Investor GuideNew business models for photovoltaics in international markets

PV Investor GuideNew business models for photovoltaics in international markets

ImprintStatus: August 2014

PublisherBSW-Solar, The German Solar Industry Association (Bundesverband Solarwirtschaft e. V.), www.solarwirtschaft.de

AuthorsChristian Grundner, eclareon GmbH

María Jesús Baez Morandi, eclareon S.L.

Christine Wörlen, Arepo Consult

EditingMathias Böswetter, Rainer Brohm, Wibke Korf, Jan Knaack, Jörg Mayer, Joscha Rosenbusch, BSW-Solar - German Solar Industry Association

AcknowledgmentExpertise and case studies were kindly provided by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and the

Reiner Lemoine Institute.

© BSW-Solar – German Solar Industry Association, Berlin, www.solarwirtschaft.de

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The guide was compiled with greatest possible care and to the best of our knowledge. However, as mistakes can never be ruled out and content

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The German Solar Industry Association (BSW-Solar) is the interest group of the German solar industry and represents the interest of around

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throughout the entire solar industry. Our objective is to establish solar energy as a permanent pillar of the energy industry.

4 — PV INVESTOR GUIDE - NEW BUSINESS MODELS FOR PHOTOVOLTAICS IN INTERNATIONAL MARKETS

TABLE OF CONTENTS

— Foreword BSW-Solar 2

— Foreword Intersolar 3

— Figures, Tables and Pictures 7

Figures 8

Tables 10

Pictures 10

CHAPTER 1

— Preface 11

CHAPTER 2

— Introduction for PV Business Models 13

2.1 General Characteristics 14

2.2 General Project Structure 18

2.3 Status of PV Economics 20

2.4 Overview on Export Financing 25

2.5 Excursus: Solar Leasing 27

CHAPTER 3

— PV Self-consumption 29

3.1 Introduction 30

3.1.1 General Characteristics 30

3.1.2 Reasons for PV Self-consumption 30

3.1.3 Application Segments 31

3.2 Project Development 32

3.2.1 Project Structure 32

3.2.2 Planning and Design 33

— 5TABLE OF CONTENT

3.2.3 Implementation 35

3.2.4 Operations 36

3.3 Project Economics 38

3.3.1 Key Input Parameters 38

3.3.2 Sample Project Calculation 38

3.3.3 Sensitivity Analysis 41

3.4 Key Success Factors 43

3.5 Sample Projects 44

3.5.1 Supermarket “Super Selectos”, El Salvador 44

Chapter 4

— Net-metering 46

4.1 Introduction 47


4.1.2 Reasons for Net-metering 47




4.2.2 Planning, Design and Implementation 51

4.2.3 Operation 51





4.3.4 Key Success Factors 59


4.4.1 Net-metering in San Francisco, California 60

4.4.2 Net-metering in Mexico 63

Chapter 5

— Power Purchase Agreements 67

5.1 Introduction 68


5.1.2 Reasons for PPAs 70





5.2.3 Implementation and Operation 73








5.5.1 Direct Line PPA, San Salvador, El Salvador 80

5.5.2 Generation Utility PPA, La Paz, Mexico 84

Chapter 6

— PV-Hybrid Mini Grids 87

6.1 Introduction 88


6.1.2 Reasons for PV-Hybrid Mini Grids 90





6.2.3 Implementation 104

6.2.4 Operations 106



6.3.2 Sample Project Calculation I: PV-Diesel-Battery Mini Grid 111

6.3.3 Sample Project Calculation II: PV hybridization of a Diesel Mini Grid 116




6.5.1 PV-Hybrid Mini Grid for Telecom Towers and Villages in Uganda 121

— Conclusions 124

— Annex: Acronyms 127


PREFACE

Triggered by the remarkable decreases in photovoltaic (PV) components and system prices of the

recent years, in more and more application segments and locations the available alternative sources

for electricity are more expensive than the kWh generated by a PV system. Based on these frame-

work conditions, new business models for the operation of PV systems in the different application

segments such as residential homes, commercial and industrial uses as well as off-grid locations

and others are evolving. A PV business model in this sense is an operating model of the PV system

that integrates the stakeholder and market environment in a way that makes an economic viable

operation of the PV system possible for the investor. Based on this definition, it is obvious that the

complexity of PV projects is increasing compared to projects build in the feed-in tariff era.1 This how-

ever offers a unique opportunity for the PV sector to become independent from feed-in tariffs and

evolve into a future where PV plays a major role in the electricity sector of a low carbon economy.

Despite this promising future, PV will remain very capital intensive, and investors will continue to

be challenged by the increased complexity when implementing the business model for a PV project.

In addition, due to its decentralized nature, which moves generation very close to consumption, PV

can only fully leverage its strength in small to medium sized applications. This means that for a wi-

despread application of PV, the investment of semi-professional investors is needed. This guide on

international business models for PV aims to help these kinds of investors cope with the increased

complexity by providing them with best practices for the implementation of PV projects using vari-

ous PV business models.

In addition to educating investors on the implementation of profitable PV projects, the second key

enabler for a widespread application of PV is the regulative framework, as well as aspects such as

the grid connection process, the handling of excess PV electricity, the sale of PV electricity to local

consumers via a direct line or the grid, how Mini Grids in off-grid regions fit into the overall energy

sector and its roadmap for the future, the availability of debt financing and complementing support

schemes that encourage the implementation of certain business models in early stages of the mar-

ket. The regulative framework needs to be further developed to support the implementation of the

PV business models. The first step to achieve this is by reaching a thorough understanding of PV

business models; this guide will be the basis for the development of an adequate regulative frame-

work.

A selection of PV business models that currently have the greatest relevance in international mar-

kets has been analyzed by BSW-Solar regarding their implementation and profitability in various

markets. Based on this analysis in the following chapters, the business models will first be structured

according to key differentiators, after which the selected business models will be presented individu-

ally. The presentation is done on a generic level to ensure applicability in every country and region.

For each business model the general introduction is followed by a chapter on the specifics for project

development and project economics. This is completed by a selection of real sample projects for

each business model to show the practical viability of the presented business model.1 Still, feed-in-tariffs are a well-proven and cost-efficient instrument to kick-off the market, compensate for competitive disadvantages of RES

and stimulate private capital. Their deployment heavily depends on the specific market environment and energy subsidies in a country.

— 13

2

—

INTRODUCTION FOR PV BUSINESS MODELS

2

—



GENERAL CHARACTERISTICS

In the last few years, PV cost competitiveness has improved remarkably mainly due to large cost re-

ductions in system prices. As a result, in many markets it is already more attractive from an econo-

mic point of view to self-consume PV electricity than to buy electricity from the grid. The moment

when the cost of PV-generated electricity equals the cost of electricity from the grid is referred to

as “grid parity”, which is indicated in Figure 1.

2.1

Simplified illustration of PV grid parity and PV generation parity

Figure 1

Grid electricity price

PV electricity cost (LCOE*)

Grid Parity

• Grid electricity is cheaper than PV-generated electricity

- PV needs support mechanisms (FiT,tax credit, etc.)

• PV-generated electricity is cheaper than grid electricity including distribution costs

- It is more attractive to self-consume PV electricity than to buy electricity from the grid

Generation Parity

Generation price

• PV-generated electricity is cheaper than generation prices excluding distribution costs

- Not only self-consumption on site is competitive but also supply of PV electricity via the public grid is a viable business model

EU

R c

t/kW

h

Years

Note: * Levelized Cost of Electricity

— 15

Once grid parity2 is reached, certain electricity consumers will prefer to cover part of their

electricity demand with PV-generated electricity instead of buying all their electricity from the

utility. The next big step for PV competitiveness is generation parity,3 which is very similar to

grid parity except that here PV competes with sometimes even lower generation prices of other

centralized or decentralized generation sources. Large ground-mounted PV installations usually

supply their electricity to consumers via a public grid and thus compete with other centralized

generation sources and prices. In the case of off-grid PV installations, usually small to medium

sized systems, PV competes with other remotely available alternatives, which are very often die-

sel generators (gensets) but also small or large wind turbines or CHP plants based on biomass

or natural gas.

Potential business models for PV systems can be structured according to how they compete with

other generation sources. First, a PV system can compete at grid parity level meaning that the

competition is taking place at or close to the point of grid-supplied consumption. A PV system

has the advantage of being able to generate electricity at the point of consumption, whereas

other centralized generation sources have to use the transmission and distribution grid to sup-

ply an electricity consumer; this results in a cost advantage for PV.

Second, a PV system can compete at generation parity level with other generation sources. This

means the cost advantage resulting from avoided transmission costs cannot be leveraged by

the PV system because either the grid also has to be used to supply consumers, e.g. for large

ground-mounted systems, or, in the case of an off-grid location, competition takes place between

alternatives that both generate at the point of consumption, such as diesel generation and PV.

In this guidebook, we address five of the seven PV business models mentioned in Figure 2, which

are briefly introduced in the following.


2 Grid parity occurs when an alternative energy source can generate electricity at a levelized cost (LCoE) that is less than or equal to the

price of purchasing power from the electricity grid. The term is most commonly used when discussing renewable energy sources, notably solar power and wind power.

3 Generation parity on the other hand occurs when alternative energy sources can generate electricity at a

LCoE that is less or equal than the generation costs of conventional power plants without considering transmission and distribution costs.

Figure 2

Differentiation of various PV business models

GRID PARITYPV competes with grid electricity prices consisting of generation and distribution costs at the point of con-sumption.

GENERATION PARITYPV directly competes with generation prices and has to bear the same dis-tribution costs like centralized gene-ration sources.Via public grid vs. central generation sources

off-grid vs. other decentralized generation

Self-consumption

Net-metering

Direct Line PPA*

Utility PPA*

Virtual Power Plant

PV-hybrid Mini Grid

Mini PVNote: * Power Purchase Agreement


Self-consumption

Here, the PV system owner and electricity consumer is the same legal entity. The electricity is di-

rectly consumed on-site without using the grid. Usually, excess electricity is sold to a third party,

e.g. to the grid operator for a feed-in tariff. For consistently high loads throughout the whole year,

a self-consumption share of 100% relation to demand is possible for small PV systems. In that case

a feed-in tariff for excess electricity is not needed even if small amounts of electricity are lost. The

key driver for the profitability of this segment is the cost of grid electricity. The self-consumption

business models will be described in Chapter 3.

Net-metering

Net-metering is very similar to self-consumption: Here too, the PV system owner and electricity

consumer is the same legal entity. It differs in how excess electricity is handled. The PV generation

that is not directly consumed on-site is fed into the grid and balanced by credits or by reversed me-

tering. The grid effectively acts as storage for excess electricity, which eases the dimensioning of

the PV system. As with self-consumption, the main driver for profitability is the grid electricity price

and the way excess electricity is credited and balanced. Building on the self-consumption chapter,

the net-metering business model will be described in Chapter 4.

Direct Line PPA

The PV system owner sells the electricity within the same building or via a direct line to a nearby

consumer. They are different legal entities but ownership in the PV system may be shared between

both parties. A direct line PPA avoids the use of the public grid for the supply of the PV electricity

and any regulative issues as well as potential grid costs. The profitability is mainly driven by the

costs for grid electricity as an alternative source for the consumer. The consumer reduces his grid

electricity demand and consumes PV electricity at a lower price while still consuming grid electrici-

ty for his residual demand. The direct line PPA business model will be described in Chapter 5.

Utility PPA

The utility PPA structures the supply of PV electricity to a utility or the distribution grid operator

(DSO) via a power purchase agreement (PPA) for a feed-in tariff. The feed-in tariff may be fixed or

indexed. Other sources of remuneration like green certificates may be part of the business model.

Utility PPA contracts are usually granted via tenders with a level of high competition on prices. The

description of the utility PPA business model is found in Chapter 5 as well.

PV-hybrid Mini Grid

PV-hybrid mini grids are typically used for remote regions with no or with only a weak national grid,

but also suitable for industrial parks with an independent grid. They include grid infrastructure,

other generation and storage to reliably supply residential, commercial or industrial demand. The

— 17

main drivers for an investment in a PV-hybrid mini grid are reduced overall costs for electricity due

to a replacement of e.g. diesel-based generation, an increased reliability of electricity supply in

weak grid locations and savings of CO2 emissions. The main driver for profitability is the reduced

cost of alternative sources of electricity that is available (grid or diesel genset) and an increased

reliability of supply is a strong non-monetary factor as well. The PV-hybrid mini grid business model

will be described in Chapter 6.

Although not covered in this guide, the following business models are briefly described for the sake

of completeness.

Virtual Power Plant

This model represents the sale of PV electricity at the electricity exchange (EEX), often via pooling

of several PV plants and other forms of generation (e.g. hydro, wind, biogas, fossil). The goal is to

create a certain generation profile that allows taking advantage of peak prices during certain times

of the day to increase profits. Other sources of remuneration could be included in the calculation

for the model, e.g. green certificates. The virtual power plant business model is not covered in this

guide since it still lacks relevance in the market and no commercial-scale project has been realized

so far. It may be added in later editions of this guide.

Mini PV

Mini PV systems are used for a single purpose and without grid connections (lighting, cell phone

charging, water purification, household appliances), and are very flexible regarding their location.

The driver of this market segment are electricity savings and an easy access to electricity that

otherwise wouldn’t be available. Due to the wide diversity of this segment and since it is more like

consumer products than a commercial-scale investment; it is not covered by this guide.



GENERAL PROJECT STRUCTURE

From an investor standpoint an understanding of the structure of a PV project, the involved

stakeholders and their business relationships is essential to be able to assess the involved risks

and to implement a project for sustainable long-term operation. The individual business model

has a strong impact on the project structure, but it is always based on the general structure

illustrated in Figure 3.

The central roles in a project are the owner, plant operator and the power consumer. For self-

consumption and net-metering these roles are represented jointly by a single entity by definiti-

on. External investors may be integrated via a leasing structure for example, but ownership re-

mains with the entity that bears the operational risks and benefits from savings by consuming

the PV electricity. For PPA projects the power consumer still plays a key role as main off-taker

and source of revenue for t he project but usually the power consumer does not hold shares

in the ownership of the PV system.

2.2

General project structure for PV projects

Figure 3

CashflowPowerflowContracts

Loan Contract

Payout, Fees, Debt Service

Investment Capex

EPC Contract

Grid contract

Excess Electricity

Feed-in tarif

Supply Contract

PowerSupply

Power Price

EPC

O&M SERVICE

ELECTRICITY EXCHANGE

Service Contract

Service Fee, Opex

UTILITY

BANK

EQUITYINVESTORS

Shares

Payout, Dividends POWER

CONSUMER

OWNER OPERATOR

GRID OPERATOR

Market Price

— 19

A key relation for the project is the supply of residual electricity from the grid. The price and the re-

liability of the residual electricity supply strongly influence the profitability of the whole investment

and are key in the relation between the PV plant operator and the power consumer. For this reason,

general information on the economics of projects will be provided in the next chapter, while specific

information on the respective business model can be found in the project economics sub-chapters

for each business model.

Because the load profile of the power consumer and the generation profile of the PV system usually

do not perfectly match, another key relation is with the local grid operator who takes the excess PV

electricity and remunerates it via a net-metering scheme or a feed-in tariff. If such support schemes

are not available, the remaining alternative is the sale of the excess electricity for a market price

via the electricity exchange. In unregulated markets it is often the case that participation in the

market as an independent power producer is not even allowed; this forces self-consumers to avoid

any grid injection and to avoid losses by reducing the PV system size to ensure self-consumption

shares above 90%.

The construction and operation of medium to large-scale PV systems is often subcontracted by the

system operator in order to benefit from the cost advantages and the experience of specialized

EPC and O&M service companies. In addition, this also avoids certain construction and operational

risks for the owner and operator of the PV system.

Especially in developing countries, the relation to banks and equity investors for the financing of

projects is one of the most crucial factors of a PV project. Since PV investments are very capital-

intensive they require low-cost and long-term financing for successful implementation. Banks and

investors need to understand the applied business model and the risks involved, and the market

needs a certain project pipeline to encourage banks to build the knowledge for a sufficient assess-

ment of projects.

The above-mentioned relations between the involved stakeholders and their individual structure

strongly influence the profitability of the projects. The next section provides an overview on the

various key parameters for the economics of a project.


— 57NET-METERING

4.3.3 —SENSITIVITY ANALYSIS

In the presented sample case the yearly electricity price escalation has been assumed with 5%

p.a., which is for many countries a very conservative assumption. Looking at the past 5 to 10 years,

price increases of 10% and up to 15% per year can be observed. However, the electricity market is

usually very regulated, with subsidies for low-income consumers especially prevalent in developing

countries. Steep price increases for many consecutive years may cause government intervention to

slow down price escalation; however, the underlying drivers are continuously increasing prices for

conventional energy sources, which limit a government’s ability to intervene because of budgetary

restrictions.

Sensitivity for electricity price escalation [% p.a.]

Figure 29

BASECASE

26% 29%

33% 36%

39% 42%

45% 48%

5.3 4.7 4.3 4.0 3.7 3.5 3.4 3.3

0% 2% 4% 6% 8% 10% 12% 14% 16%

Equity IRR Amortisation

Equity IRR[%]

Amortization[a]


Figure 30 looks at the influence of changing system prices due to greater experience on the

part of the installer, lower component prices and also investment subsidies. The sensitivity of

the amortization changes for higher prices than the base case when the debt tenor is similar to

the amortization period because the debt service influences the yearly cashflow available for

dividends to the equity investor. The equity IRR instead reacts in almost linear correlation to

changing system prices.

Figure 31 analyses the correlation for changing system yields and the profitability of the invest-

ment. The sensitivity is not exactly linear because of the block structure of the electricity tariff,

and because changes in the total generation per year influence indirect savings due to lower

average prices for the remaining grid consumption.

Sensitivity for specific yield [kWh/kWp/a]

Figure 31

BASECASE

18%

21%

26%

30% 33%

35%

39% 42%

46%

8.9

7.7

6.5

4.8 4.3

3.8 3.2 2.9

2.5

1,000 1,200 1,400 1,600 1,800 2,000 2,200


Equity IRR[%]

Amortization[a]

Sensitivity for system price reduction and subsidies [%]

Figure 30

BASECASE

21% 24%

28%

33%

40%

51%

7.9 7.2

5.7

4.3

3.1 2.2

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%


Equity IRR[%]

Amortization[a]

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PV Investor Guide - Pressemeldungen BSW-Solar · PDF filePV Investor Guide New business models ... 3.3.2 Sample Project Calculation 38 ... sized systems, PV competes with other remotely