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May 20 (The following statement was released by the rating agency)
An earlier-than-expected switch to using contracts for difference to subsidise large UK solar projects would improve long-term price visibility, Fitch Ratings says. The change in framework would also probably slow growth of capacity in the short term, while longer term the viability of new projects would depend on the strike price and cost of solar technology compared with onshore wind.
The government's proposal was prompted by a surge in new capacity of large-scale solar photovoltaics (PV) in the UK since 2012. The intention is to bring forward the cut-off date for application under the existing renewables obligation (ROCs) framework from 2017 to 2015 for solar PV over 5MW. From 2015, new projects would be remunerated under the contract for difference framework, with a grace period for projects that already have significant commitments.
The contracts for difference framework will provide generators with a definite sale price, the strike price, which includes the market price component. This eliminates price risk and simplifies the forecasting of future revenue streams, which will largely be volume dependent. In contrast, ROCs are tradable securities and therefore the buy-out price can vary, as can the electricity market price. Therefore in analysing project-financed solar PV plants under the existing regime we pay close attention to the extent price risk is mitigated through power purchase agreements.
The government proposal for the strike price applicable to PV projects for the initial period (GBP120/MWh for 2014-2015, falling to GBP100/MWh in 2018-2019) is intended to provide returns broadly in line with the return a project would be expected to receive under the ROCs framework. However, from 2019 PV projects are likely to directly compete for capacity allocation with other mature technologies, such as onshore wind, which is currently cheaper. The sector's prospects will therefore depend on its ability to further reduce costs and improve competitiveness.
The switch should help provide a platform for controlled growth of solar PV capacity and associated costs, because the scheme has a capped total budget and because potential developers will bid against each other in a reverse auction. This could help avoid the boom-and-bust cycle for solar PV that has arisen in other European markets. We believe the sustainability of incentive frameworks is essential for supporting long-term sector prospects.