Achieving market competitiveness in the solar industry

With the season for New Year’s resolutions also comes the inevitable resigned sighs of policymakers in the region approaching solar. Yes it is good for you.

Yes, I will exercise and quit smoking and lose weight this year and support solar etc etc. And yes, with that sigh, it needs a FiT prop without which its competitiveness against baseload isn’t quite there.

For the rapidly growing economies of Asia, especially in ASEAN, renewables in general pose a conundrum of conflicting desires and pains. The strong economic growth simply requires more generation capacity, and renewables could deliver quick MWs on the ground without the concern about imported energy security.

On top of it, renewables are socially popular too. However, in addition to a host of niggling aches such as occasionality and size, simply they are more expensive than fossil alternatives.

Solar in particular highlights these issues due to the limited output restricted to sunny daylight hours, scale of acreage needed per MW, and its cost. Even with the recent drastic price falls in panel costs, the cost comparison for solar is still roughly 12 cents/kwh vs 4 for coal, give or take some variance.

As a result of such conflicting pressures, various countries have or are in the process of, rolling out FiT support programs for solar development in the region.

The most successful of these has been the program in Thailand under the straightforward VSPP program where solar tariff adders of 5.5 Baht per kwh as well as simplified PPA and grid interconnect has resulted in a successful rollouts of numerous 10+MW solar farms, ongoing support programs for additional solar, an umbrella program for 800MW over local villages, and an ambitious target of 3000MW by 2021.

The comprehensive and established nature of the program gives confidence to developers and investors to pursue solar development in the country. Simply, it works.

Other entrants such as the Philippines and Malaysia have introduced new solar support programs. However, these still have various teething issues such as a highly segmented and stratified cascade of FiT prices over different KW and MW outputs as well as declining price support over time.

Most challenging, an overall cap on the total MW eligible for the FiT supports (for example 50MW in the case of the Philippines) means that there is less of an overall market growth incentive than a narrow niche play to grab a very limited real estate. Especially for operators and investors needing scale, shaving the pie thinly may raise transaction costs and uncertainty.

In the case of Indonesia, the situation is even more complex due to some additional layers of uncertainty due to the governance between local PLN and central PLN over the scope and applicability of the renewables FiT terms, the ongoing ownership structural questions involving the scope of foreign and domestic entities, and the upcoming Presidential election cycle. The complexity of Indonesia though, may also provide a key into where renewables, even solar, may be able to achieve market competitiveness.

Indonesia is a sprawling archipelagic nation of 17,000 islands across a geographic distance spanning New York to California. However, the number of islands connected to a backbone grid is just “3”, in effect leaving thousands of major island population and business centers dependent on local spider grid networks and too often on expensive and limited imported diesel gensets.

Therein lies the opportunity for renewables to finally achieve market competitiveness on its own. The avoided costs of such fuel oil generation then sets the market competitiveness threshold at between 14 to 20 cents per kwh which suddenly makes even solar, a viable cost alternative.  

There are enough such concentrations of demand of 50+MW to make solar plants scalable across multiple locations. Even in a “cup half-full half-empty” outlook, while Indonesia has a comparatively low electrification rate of 65% with over 90 million people without electricity, it also means that due to the island nature of the country, that over 140 million people and businesses do have access in concentrated economic geographies and for those locations, even daylight augmentation by solar could help ease the strain on the existing local genset and fuel oil generation systems.

The more local the spider grid too the more compact the way potential load and wheeling issues could be addressed too.

Finally, similar to the private-sector driver for solar in parts of India, the island demand pockets also encompass significant concentrations of corporate demand (including even some export industries). In turn, such concentrations could be creditworthy or financeable in their own right, and hence the financial profile of potential supply projects would then be based on private sector demand rather than only on a national FiT basis.

Rather than a hindrance, the island fragmented grid reality may be just the complement to get distributed renewables such as solar to be commercially viable on a standalone basis without an FiT to hold it back to any more resigned sighs. Now to focus on that New Year exercise and diet program…