Clouds On The Horizon For Solar

BMI View: The recent solar boom in the UK may appear to be positive news for the UK's solar industry on the surface; however, we maintain our view that this level of growth is unsustainable over the long term given the proposed cuts to subsidies. Furthermore, we warn that the influx of so much capacity could have significant implications for the country's grid infrastructure.

The UK's solar industry is booming, with new photovoltaic (PV) installations surpassing 1 gigawatt (GW) during the first three months of 2014. According to the Solar Trade Association, PV capacity stands at about 4.7GW (as of July 2014) and is set to continue expanding rapidly over the coming six months. We have upwardly revised our solar forecasts for the UK on account of this surge in installations, raising capacity to just over 6GW by end-2014 (up from a previous 4GW). Much of this additional capacity comprises ground-mounted, utility-scale solar projects and is concentrated heavily in southern England - where solar insolation levels are higher.

Regulatory Uncertainty Driving Surge In Capacity

Solar Upwardly Revised
UK Solar Generation And Capacity, 2013 - 2023

Clouds On The Horizon For Solar

BMI View: The recent solar boom in the UK may appear to be positive news for the UK's solar industry on the surface; however, we maintain our view that this level of growth is unsustainable over the long term given the proposed cuts to subsidies. Furthermore, we warn that the influx of so much capacity could have significant implications for the country's grid infrastructure.

The UK's solar industry is booming, with new photovoltaic (PV) installations surpassing 1 gigawatt (GW) during the first three months of 2014. According to the Solar Trade Association, PV capacity stands at about 4.7GW (as of July 2014) and is set to continue expanding rapidly over the coming six months. We have upwardly revised our solar forecasts for the UK on account of this surge in installations, raising capacity to just over 6GW by end-2014 (up from a previous 4GW). Much of this additional capacity comprises ground-mounted, utility-scale solar projects and is concentrated heavily in southern England - where solar insolation levels are higher.

Regulatory Uncertainty Driving Surge In Capacity

The UK's solar industry has registered significant growth over the last few years, with solar capacity increasing from just over 75 megawatts (MW) in 2010 to 2.7GW by end-2013. The government's feed-in tariff (FiT) programme, which offers solar developers guaranteed financial subsidies for the electricity generated from solar power plants, has been helping to drive this growth. However, we believe that the uncertainty surrounding the FiT programme is the primary reason underpinning the recent boom in solar PV, as developers rush to commission large-scale projects before subsidies are cut in April 2015.

The UK government announced proposals in May 2014 to cut the subsidies offered to solar developers that are building projects with a capacity of 5MW or above (see 'Subsidy Cuts To Threaten Solar Targets', May 15 2014). The proposals, which are expected to take effect from April 2015, mean developers would not receive financial incentives under the renewables obligation scheme. Instead, solar projects exceeding 5MW would have to qualify for support under the new contracts for difference scheme (CfD), but would then have to compete directly with other renewable energy technologies, such as wind power and biomass.

We expect more developers to capitalise on the lucrative government subsidies before they are potentially cut - resulting in high installation levels over the next six-to-eight months. This is reflected in our forecasts, as we have factored in high growth rates for 2015 (30% y-o-y), to account for the anticipated surge at the beginning of the year. That said, we maintain our view that this level of growth is unsustainable over the long term as the economic viability of large projects becomes questionable as subsidies are reduced. Therefore, we anticipate muted growth post-2015, with annual average growth rates of just 4% between 2016 and 2023.

Solar Upwardly Revised
UK Solar Generation And Capacity, 2013 - 2023

The solar boom also has wider implications for the country's grid infrastructure. We have previously warned in our analysis that the UK's power network is likely to present a major bottleneck to a substantial expansion of solar power, as a huge surge in additional solar power could destabilise the grid ( see 'Limits To Solar Expansion', November 25 2013). National Grid has suggested that the country's transmission and distribution (T&D) infrastructure could handle up to 10GW of solar capacity without any major outages or frequency issues; however, this does limit potential solar expansion.

Additionally, environmental groups have voiced their concerns about the number of large ground-mounted projects in the pipeline and the impact they will have on the landscape - particularly on farmland that is now being used to accommodate solar panels instead of cultivating crops or livestock.

The Future Of UK Solar

Although we have seen a significant increase in ground-mounted solar projects, we expect community-based solar systems and rooftop installations to offer much greater growth potential in the long term. Government support for small-scale projects is likely to remain resilient, as the government (despite reducing subsidies for projects over 5MW) will reportedly expand support for community and rooftop facilities. This focus on small-scale solar will, however, threaten the UK's ability to hit its ambitious targets of 10GW to 12GW of installed solar capacity by 2020.

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