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UtILItY WeeK | 10th - 16th OctOber 2014 | 21 Finance & Investment T he UK solar sector has come a long way since the introduction of the first feed-in tariff in April 2010. The attractive and highly predictable returns generated by large-scale ground-mounted installations under the current Renewables Obligation subsidy regime has driven growth set to reach 6GW by the end of the year, and has seen new investment flood into the sector. The decision by the Department of Energy and Climate Change to replace the existing obligation scheme with a new contracts for difference (CfD) subsidy mechanism for solar projects larger than 5MW from April next year is not expected to slow the sector's long-term growth trajectory, for a number of reasons. First, for funds such as Foresight Solar Fund Ltd (FSFL), the emergence of a vibrant secondary market in large-scale solar assets will present a significant oppor- tunity in 2015 and beyond. Second, the obligation scheme will remain open to solar projects of less than 5MW and we expect to see large portfo- lios of aggre- gated projects of 5MW or less becom- ing available to acquire. Finally, onshore wind, with which large-scale solar would need to compete under the new CfD mechanism, will remain eligible for support under the obligation scheme until 2017. Competition for CfD subsidies with onshore wind will therefore be limited and will likely drive efficiencies in the solar industry, leading to the development of even larger projects than seen under the obligation scheme to achieve economies of scale. The early introduction of the CfD scheme will force the UK solar industry to respond by improving efficiency and reducing costs. In the long term, this will help to ensure the industry's continued and sustained growth. FSFL is one of the UK's largest investors in opera- tional, large-scale solar power plants, with a portfolio of nine assets totalling 185MW. Growing investor interest in the UK solar sector was evident on 25 September when FSFL announced its intention to raise up to a further £100 million of equity to refinance 74MW of capacity recently acquired using a debt facility. Jamie Richards, partner and head of infrastructure, Foresight Group "The early introduction of the CfD scheme will force the UK solar industry to respond by improving efficiency and reducing costs." Investor view Jamie Richards Competition for CfD subsidies with onshore wind will likely drive efficiencies in the solar industry Taking all of these factors into account, by 2030, households' energy-related expend- iture would increase, on average, by £22 a year in the scenario in which the fourth car- bon budget is met. Meeting the fourth carbon budget will entail challenges for utilities. Electricity will form an important part of the transition, and as the carbon intensity of electricity declines, the rationale for investing in low-carbon measures which rely on electricity (such as electric vehicles) improves. Policies will be required to support low- carbon investment in the electricity sector and to ensure that domestic energy-intensive industry remains competitive. The analysis also shows that well-designed policies could lead to net benefits for consumers because of increases in employment and real incomes, and that, if the government is able to encour- age households to take up cost-effective energy-efficiency measures, the net impact on household energy bills would be small. Sophie Billington, senior economist, Cambridge Econometrics the four carbon budgets set out by the climate change act budget carbon budget level % reduction below base year 1st Carbon budget (2008-12) 3,018 MtCO2e 23% 2nd Carbon budget (2013-17) 2,782 MtCO2e 29% 3rd Carbon budget (2018-22) 2,544 MtCO2e 35% by 2020 4th Carbon budget (2023-27) 1,950 MtCO2e 50% by 2025 Source: Decc 2013 Source: Thomson Reuters Point Carbon 2014 70 60 50 40 30 20 10 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Carbon price support in the power sector EU ETS price faced by industry Carbon price floor (4CB and 4CB+) Reuters EU ETS price (4CB and 4CB+ scenarios) Central assumption carbon price assumptions in the 4cb and 4cb+ scenarios central gas price assumptions and loW/high sensitivities 120 100 80 60 40 20 0 Pence per therm £/tCO2 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 "The UK is on the cusp of a complete shi in the way we plan for energy use and we encourage UK business custom- ers to consider all the options open to them. Whether you're a major steel manufacturer, a supermarket chain or a single convenience store, now is the time to start taking energy effi- ciency seriously and budgeting for energy use in the medium and long term. In turn, this will free up vital capital that can be re-invested into other areas of the business." Wayne Mitchell, head of industrial and commercial at Npower comment from the industry