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Next generation opportunities in utility-scale solar

June 2017

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CONTACT

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ForewordThis document discusses the development of utility-scale solar and provides a perspective on opportunities and challenges for energy incumbents. It is a starting point for a discussion that many incum-bents are currently engaged in – is there a viable role for us to play in utility-scale solar, and what should the strategy be?

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Utility-scale solar is expanding fast and its cost-

competitiveness is improving accordingly. The

pressure on costs, margins and speed is intense,

and pure-play solar companies have dominated

the industry so far. Will this trend continue, or does

utility-scale solar hold viable opportunities for energy

incumbents going forward? In this knowledge per-

spective, QVARTZ takes stock of utility-scale solar

and outlines some opportunities and challenges for

energy incumbents.

From fringe to mainstream: Utility-scale solar is winning the cost race

The solar industry is steaming ahead, and 2016 was

another record year with a global market of around

74 GW installed, up 30% from 2015 (Figure 1). The

current projection is that the total installed capacity

will more than double from today's 320 GW to some

680 GW by 2020 (21% annual growth), and reach

1,300 GW by 2025. At this rate, solar will overtake

wind by 2020 in terms of annual capacity added,

and by 2022 have more total capacity installed. Solar

will then be placed right at the top across all energy

sources in terms of new capacity added, represent-

ing a third of all new capacity in 2020. Remarkably,

80% of all new capacity in California in 2016 was so-

lar energy (39% for the US as a whole), 28% in China

and 15% in Germany. Still, solar's share of global pow-

er production is only around 1%. In leading markets

like Germany, it is around 7%, while in California – a

major solar market – the share is now 13%.

Next generation opportunities in utility-scale solar

Figure 1: Development of PV solar installations

Global Solar PV Capacity (annual addition and cumulative)GW

Sources: Bloomberg New Energy Finance for 2010-2018 (GW); MAKE Global Outlook 2016 (wind numbers); Sources for the share numbers: SolarPower Europe Global Market Outlook 2016-2020 (solar); Global wind report by GWEC (wind); Bloomberg New

Energy Finance Outlook (2016) (conventional); IEA World Energy Outlook; MEC+ analysis; QVARTZ analysis

Solar's share of new additions

200

300

400

500

600

700

800

900

1000

1100

1200

1300

100 4372

2930

43

45

56

74

79

89

88

101

108

114

122

125

129

102145

191

247

320

399

489

577

678

786

900

1,022

1,148

1,276

0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

+40%

+21%

+13%

2011 2015 2020

Conventional

Added

Wind

Installed

Solar

100 100

54%

100

38%

18%25%

29%

21%14%33%

68%

750

1,070

5

Figure 2: Solar segments and main technologies

Source: Fraunhofer ISE: Photovoltaics report, updated 17 November 2016 (for the technology shares); QVARTZ analysis

Photovoltaic CSP

~68%

Multi

Mono

Thin film

CPV CSP(trough/ tower/dish)

~24%

~8%

~1%

Centralised utility scale

• Large ground-mount projects• Transmission grid connection• Power sold under PPA/FIT• Land availability and permits

tend to be challenging

• Ground-mount projects located closer to loads• Typically distribution grid connection• Power sold under PPA/FIT• Less land needed, permitting

tends to be simpler

• Rooftop installations• Self consumption of power

(net metering) or sell to the grid (feed-in tariff)

• Financed by rooftop owner or through third party ownership (leasing)

Commercial & Industrial

Residential

Distributed utility scale

~20–200+ MW

~1-20 MW

~98% ~2%

~10kW-3 MW

~1-8 kW

Segments and typical size Characteristics Solar technologies deployed

Uti

lity

Dis

trib

uted

Utility-scale solar is a segment dominated by the

standard multicrystalline technology, typically

deployed in 20-100 MW ground-mount projects,

followed by monocrystalline and thin film (Figure

2). The other solar technologies deployed in utility

projects are concentrated high-efficiency PV (CPV)

and concentrated solar power that converts heat into

steam (CSP). These technologies require high levels

of direct solar irradiation (ideally desert conditions),

which limits their market adoption, and these tech-

nologies have also struggled to bring down costs

as fast as standard PV due to the smaller volumes

deployed (~2%).

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The utility-scale segment has been a key driver

of the fast growth of solar during the last years,

reaching almost 60% of all solar capacity installed

in 2016 (Figure 3). A major trend for this segment

has been a shift from mature European markets

like Germany and Italy, which have relatively less

utility-scale projects and more rooftop installations,

to emerging markets like China and India, where

utility-scale solar dominates. In addition, the US

has been a very strong market for large projects,

supported by a 30% tax credit system. Going

forward, the three largest utility markets, China,

India and the US, will account for 2/3 of the

expected utility capacity added by 2020. Moreover,

other emerging 'gigawatt utility markets' to watch

areMexico, Chile and Brazil, with Middle Eastern and

African countries also getting into the game.

Figure 3: The utility-scale solar segment

Source: SolarPower Europe Global Market Outlook 2016-2020 and 2014-2018 for segment split (note: 2020 segment split based on high scenario); MEC+ analysis for utility-scale additions per region and market

China 85

United States 43

India 35

Mexico 7

Chile 4

Brazil 4

Indonesia 4

Taiwan 3

Saudia Arabia 3

Germany 3

Turkey 3

Algeria 3

Argentina 2

France 2

Japan 2

2013

2015

2020

E

2011–

2015

2016

–2020

E

86 225AsiaNorth America

Middle East

Europe

Africa

1% 2%6%

8%

4%

20%

1%19%

21%

57%60%

Latin America

Utility-solar as share of total capacityPer cent of added capacity

Utility-solar new additions by regionPer cent; GW

Top-15 utility markets 2016–2020Estimate of GW new capacity

Top-three marketsrepresent 2/3 ofexpected new utilitycapacity 2016-2020

Around 30 "GW- markets"expected to emerge globally, of which 24 are outside Europe and North America

RooftopUtility scale

6064

56

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Figure 4: Falling costs across the value chain

* Metal grade silicon** Based on multicrystalline modules and spot priceSource: PV Insight; expert interviews; QVARTZ analysis

• Fairly consolidated• New capacity in China• New technologies (FBR, MGS*)• Price and margin pressure• Trade conflicts impact pricing

• Capacity investments (China)• Integrated with cells/modules• Technology improvements

(diamond wiring, thinner wafers, kerfless concepts)

• Dominated by China/Taiwan• Multi technology leading, mono growing• Higher efficiency cells (e.g. PERC)

• Cost-out on design/sourcing • Higher watt effect per module• Lower efficiency losses • Emerging regional manufacturing

USD

/kg

USD

/waf

erU

SD/W

USD

/W

USD/W

Value chainPrice development2010 vs 2016**Drivers and trends

Total system cost"Best practice" cost for utility project

Polysilicon

Wafers

Cells

Modules

-83%

-83%

X%

-67%

-65%

75.0

3.0

0.6

1.3

12.6

0.5

0.2

0.5

0.3 (current)

52%

43%

33%31%

2010

2016

2017

2020

E

2.50

Variations across markets exist

1.15

0.900.80

1.30

1.20

0.50

0.65

0.30

0.60

0.25

0.55

Solar module share

What is fuelling the strong growth of solar is of

course a Moore's law-like drop in solar panel prices,

compounded by falling financing costs and more

cost-efficient installation and operations. Currently,

the lowest contracted cost to build a turn-key project

(over 10 MW) is around USD 0.85-0.90/W, down

some 65% from 2010 (figure 4). And panel prices

continue to plummet: Over the last 12 months, prices

have fallen by another 45%, putting the suppliers un-

der immense pressure. This rapid cost-out trend has

been driven mainly by scale and the shift of produc-

tion capacity to lower-cost countries, primarily China

and Taiwan, where 75% of the global capacity is now

located. At the same time, the industry struggles

with overcapacity and remains fragmented. The larg-

est cells/module producers, like Jinko and Trina, hold

less than 10% market share, and each player is vying

to grab market share by adding new capacity rather

than taking over old capacity in order to stay ahead

of the cost curve. As a result, prices are never far

from cash costs, and on a one-way, downward tra-

jectory. Looking ahead, we expect costs to continue

to decline in line with the historic learning curve, i.e.

panel prices to decline by another ~22-23% between

2016 and 2020 (-5.5% p.a.), and total system costs to

reach USD 0.80/W by 2020, and likely USD 0.75/W

for the lowest-cost projects.

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While the value chain margins will remain tight, the

market for new solar installations is opening up,

placing solar in direct competition with both wind

and conventional resources. Already, Power Purchase

Agreement (PPA) price bids in auctions continue to

break new ground, with the current records below

USD 30/MWh (Chile/UAE) for projects coming online

in 2019/2020. While subsidies play a part in these

low PPAs, the unsubsidised levellised cost of energy

(LCoE) of utility-scale solar is making great strides

(Figure 5). In optimal conditions that combine a lot

of sun and low cost of capital (e.g., California and

Australia), LCoE is already as low as USD ~40/MWh

without subsidies. In mature markets like Germany,

where cost of capital is very low but the sun hours

fewer, the LCoE is around USD 70/MWh – putting it

at a disadvantage to wind and wholesale prices

(although competitive in the rooftop segment).

In (sunny) emerging markets, the cost of capital is

typically somewhat higher, but solar is becoming

highly competitive in markets like Mexico and India,

and also Brazil and China. By 2020, we expect – all

else equal – that the lowest unsubsidised LCoE levels

will move close to USD 30/MWh, making it one of

the cheapest energy sources around. Furthermore,

bringing down the cost of capital in emerging mar-

kets will be a key driver to unlock new markets.

In short, we are entering new territory where solar

is becoming the cheapest energy source available in

sunny regions – and within reach in most markets.

This opens up a completely new set of questions,

challenges and opportunities.

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>1,800 (>21%)

1,500-1,800 (17-21%)

<1,400 (<16%)

Germany

United States

Australia

United States (CA)

Chile

Northern Italy

China

Mexico

Brazil

India

Solar outputkWh/kWp (CF**)

Mature markets (~4-5% CoC***)

Moderate market risk (~6-7% CoC)

Emerging market risk (~9-11% CoC)

80 72

62

62

51

31

46

5852

4436 39

6558

4955

4751

41

4639

65

555647

80

80 80 80

60 60

60 60 60

40 40

40 40 40

20 20

20 20 20

0 0

0 0 0

80 80

60 60

40 40

20 20

0 0

80

60

40

20

0

2017

2020

2025

2017

2020

2025

2017

2020

2025

2017

2020

2025

2017

2020

2025

2017

2020

2025

2017

2020

2025

2017

2020

2025

Indicative LCoE levels USD/MWh*

Figure 5: Solar cost competitiveness

Higher market risk and financing costs

Hig

her

pro

duc

tio

n

* Assumptions: CAPEX USD 0.90/W in 2017, USD 0.80/W in 2020, USD 0.66/W in 2025; OPEX at USD 15/kW/year in 2017, falling by 2% p.a. by 2025. 0.3% annual degradation factor.

** Capacity factor based on theoretical max. *** CoC: Cost of capital, i.e. the discount rate usedSource: Bloomberg New Energy Finance for the wind LCoE numbers; QVARTZ analysis

Wind LCOE, 2016 Range wholesale electricity prices

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Incumbents on the sideline

Despite the growth of utility-scale solar, incumbents

appear hesitant to enter the market. Most European

utilities have less than 1% of production coming from

solar. Of the major European utilities, ENEL is argua-

bly the leading company in incorporating utility-solar

firmly into its strategy, followed by ENGIE and EDF,

but still at modest levels (Figure 6). The situation is

similar in the US. Under RPS requirements, US utili-

ties are mandated to sell a certain share of renewable

energy. For example, Californian regulated utilities

need to reach 33% renewable energy by 2020, and a

company like PG&E is already at 30%. However, these

levels have been met mainly by entering into PPAs

with solar developers through highly competitive

tenders. Leading owners of solar assets, like NRG

and NextEra, have only around 7% and 3% respec-

tively of their production from solar. This is starting

to change, however, and US utilities are increasing-

ly taking a more active role in owning solar assets.

Similarly, the major oil companies and industrial

OEMs – for example GE, Siemens, Shell and Statoil –

are actively pursuing wind energy, but not solar in a

serious manner. French Total is perhaps an exception

with its ownership in SunPower since 2011 (and a

recent investment in the storage company Saft), but

it remains unclear how strategic the solar segment is

to Total.

Instead, the leading project development players are

solar manufacturers and pure-play solar developers

with tailored project-financing solutions. The US

manufacturers SunPower and First Solar have led

this trend, and together, they have more than 10 GW

in utility-scale pipeline, while Canadian Solar (of

China) claims a 9.8 GW pipeline. These companies

often follow a Build-Sell-Operate model, i.e. they use

the projects as a channel for their equipment sales,

tie in O&M revenues, and earn equity uplift when sell-

ing the assets to financial institutions (or to yieldcos)

at lower return levels. Pure-play solar developers

include companies such as SkyPower, FRV, Scatec

and BioTherm – all with gigawatt pipelines.

While the profitability of the utility-scale project

business is less transparent and comparing apples

to apples in regards to risks is notoriously difficult,

the fact that leading solar players have pursued

this segment aggressively suggests the rewards

have been substantial. First Solar, originally a pure

panel manufacturer, had by the end of 2016 grown its

project business to around half of its revenues, with

a similar picture for SunPower. Enel, one of the

utilities that strategically pursues utility-scale solar,

reports a solid 12-14% equity IRR on its Mexico solar

projects. Scatec, the pure-play solar developer and

power producer with a global presence, went public

in 2014 and has doubled its share price since on the

back of a growing pipeline and a proven business

model. Scatec has also communicated a target of

15% gross margin across development and construc-

tion, and 15% equity IRR on its power plant holdings.

Overall, the successful players have shown that there

is money to be made from utility-scale solar projects.

However, there are also signs indicating that the

pressure on margins is increasing. Indeed, SunPower

has started a refocus away from the project business

due to falling PPA prices, more competition, and

increased margin pressure.

There have been several structural reasons why the

incumbents have been hesitant, and why pure-play

companies and panel producers dominate. First, the

scale has simply been too small and fragmented for

utilities to prioritise solar over for example wind.

Second, the simplicity of solar makes many of the

capabilities of the incumbents, such as engineering

and complex project management, less valuable and

too expensive. Third, the low entry barriers combined

with rapidly falling costs have led to some degree

of speculative bidding in auctions that incumbents

struggle to match. Fourth, utilities have tended to

limit themselves to home markets, struggling to

'follow the market' into new regions where pure-play

companies are willing to go. Finally, the price curve

of solar has simply outpaced the expectations of

incumbents, putting them on the back foot com-

pared to those better plugged into the value chain

and willing to take a more aggressive perspective

on forward prices. By looking at these factors com-

bined, it becomes understandable that incumbents

have been hesitant – and so far found themselves left

on the sideline".

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Solar share(prod.)

PV capacityGW, YE2015 EU NA LA APAC AFR.

Solar pure-play companiesTotal pipelines, GW

Regions

Figure 6: Incumbent utilities solar activities

US

utili

ties

Eur

op

ean

utili

ties

Developers

OEMs

* Excluding solar thermal capacities of 50MW** Under Chapter 11 bankruptcy proceedingsSource: Company webpages; QVARTZ analysis

SkyPower

SunEdison**

Scatec Solar

Canadian Solar

SunPower

First Solar

Trina

Jinko 1.0

1.3

3.8

7.5

7.5

9.5

9.8 9.8

1.8

1.2Enel

EDF

Engie

e.on

Iberdrola*

EDP Renewables

RWE

DONG Energy

Statkraft

NRG

NextEra Energy

Duke Energy

Invenergy

1.5

1.3

0.4

0.2

~1%

~1%

~2%

—

~3%

~7%

~1%

~1%

—

~1%

—

—

—

0.9

0.6

0.2

0.1

0.1

0.0

0.0

0.0

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Hunting for complexity

As solar transitions into a more conventional energy

resource at cost-competitive levels, we believe the

capabilities and strengths of incumbents will become

relatively more valuable as complexity goes up in

certain areas (Figure 7). Further, the pure-play solar

companies that tend to project-finance project as-

sets with high leverage will be more restricted in how

much exposure they can take to market risks, and

also be at a disadvantage in regards to managing

greater operational complexity and interface risks

with other infrastructure assets.

Therefore, we believe it is timely for incumbents to

take a closer look at opportunities in utility solar, and

in particular seek out areas where higher complexity

can be found. The opportunities and strategies will

also vary depending on an incumbent's starting point

(Figure 8). At an aggregate level, we believe com-

plexity can be found along three main dimensions:

1. Market complexity: As solar expands into new

emerging markets, some types of incumbents may

have a competitive advantage over pure-play solar

companies. Larger infrastructure projects in emerg-

ing markets, negotiated bilaterally outside strict auc-

tion regimes, represent the kind of complexity that

incumbents prefer, and where margins are likely to

be healthier. Oil & gas companies, for example, have

a global footprint that can be leveraged to unlock

markets and projects not available to others.

2. Business model complexity: As mandates and

subsidies phase out, the solar market will move

beyond the standard 20-year PPA. Incumbents can

leverage their balance sheets and capabilities to

structure the power offtake more flexibly according

to market needs. The capabilities required to struc-

ture and operate portfolios with a mix of offtake

arrangements and flexible (corporate) PPAs go

beyond what most pure-play solar companies are set

up to do. Partly merchant market risk, for instance,

will be challenging to debt finance, and play into the

strengths of traditional utilities.

3. Technology complexity: New types of technol-

ogies and project types are emerging, where solar

is incorporated and optimised as part of a more

complex system. Such projects will include hybrid

systems (solar/wind), storage solutions with a mar-

ket-based offtake arrangement, projects that com-

bine distributed and centralised systems, etc. Again,

as solar becomes a mature technology, the natural

owners of the generation capacity will look more like

today's incumbents.

Solar is rapidly transitioning into a mainstream en-

ergy source, while incumbents have been hesitant

to drive this development. We believe that as solar

becomes cost-competitive and, as a result, more

market-based, there will be opportunities for incum-

bents to play a larger role. Now is the time to under-

stand the implications and define the solar strategy

in a larger perspective. Looking for complexity along

three key dimensions – market, business model and

technology – is a sensible place to start.

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Description

Co

mp

lexi

ty

Main capabilities

Incumbents' relative strength

• Feed-in-tariff set high to trigger investments

• Typically fixed for 20 years• Usually financed over the electricity bill• Requires strong policy support

• Secure land and permits• Secure financing

• Auctions set the price based on

competitive bidding (typically 20 years PPA)

• Volume set by government targets

• Utilities mandated to have a certain share come from renewables (e.g. US)

• Access to develop-ment capital

• Size to take portfolio approach

• Pipeline of attractive projects/sites

• Competitive cost position (EPC)

• Access to low cost of capital (debt and equity)

In addition:• Ability and appetite

to take limited price risk (in some markets)

In addition:• Market and pricing

insights • Offtake customer

network • Project structuring

abilities • Tailor technical

solutions to customer needs

• Feed-in-premiums (Germany), con-tract-for-difference (UK), certificates (Norway/Sweden)

• Incentive system linked to the market price

• FIP/CfD maintain high price certainty

• Auctions open across technologies

New structures and solutions, e.g.

• Market-based PPAs (voluntary) by utilities

• Corporate PPAs (voluntary)

• Merchant plants (wholesale), poten-tially with storage

• Hybrid projects (solar/wind)• New PPA structures

(flexible)

Figure 7: Transition of the utility-solar market

Pre ~2012

Future

Current

Direct subsidies

Fixed price auctions

Market-linkedincentives

Front-runner grid parity markets

Market based prices

Incumbents with no/limited advantageIncumbents in a strong position

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Construction

Expanding complexity

Utilities

Oil & Gas

Industrials & OEMs

Market complexity

Enter new markets with high potential, but under-developed market structure and regulatory regime

Develop new, innovative business models that expand the market, create value for new customer groups and lower total costs

Develop new technologies, combine solutions (e.g. hybrid systems) and integrate storage solutions

• Challenges: Stepping beyond home markets

• Value proposition: Deep understanding of power markets and regulatory regimes

• Challenges: Lack of agility and entrepreneurial culture

• Value proposition: Power market position; customer ownership, ability to scale; attractiveness as partner

• Challenges: Limited room for technology leadership, solar commoditised

• Value proposition: Energy and grid system expertise; leverage digitisation experience

• Challenges: Operate within existing setup and return levels

• Value proposition: Footprint and resources in promising markets

• Challenges: Lack of agility and entrepreneurial culture

• Value proposition: Access to capital in high-risk environ-ments; ability to scale; manage complex projects

• Challenges: Limited room for technology leadership; used to complex technologies

• Value proposition: Ability to integrate complex systems; transfer and deploy new

technologies

• Challenges: Ability to expand into new markets

• Value proposition: Build on existing footprint; supply

chains and markets

• Challenges: Limited familiarity with business model innovations

• Value proposition: Leverage own operations and energy needs (as buyer)

• Challenges: Highly competitive and scaled value chain

• Value proposition: Ability and appetite to develop and

deploy new (non-bankable) technologies

• Challenges: Ability to enter and competitiveness in new markets

• Value proposition: Experience in complex project manage-ment across markets

• Challenges: Limited familiarity with business model innovations

• Value proposition: Ability to take construction risks in com-plex projects

• Challenges: Low complexity limits room for innovative

solutions• Value proposition: Digitisation

in operations; automation and grid-system solutions

Figure 8: Expanding complexity for incumbents – a starting point to identify value proposition and challenges

Business model complexity Technology complexity

Complexity

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Are you interested in discussing where solar energy is heading and what the strategic implications may be for your company? Please contact Thomas or Anders directly for a discussion

Anders Roed Bruhnanders.roed.bruhn@qvartz.com+45 29 69 69 33

Thomas Nyheimthomas.nyheim@qvartz.com+47 901 80 355

www.qvartz.com