Four Tips to Consider Before Investing in a Solar Farm

Solar is an inexhaustible form of energy that has become a key renewable source in the drive to phase out fossil-based power. Its popularity in the renewable energy mix is possible due to its 80% drop in PV module production cost since 2009, facilitated by manufacturing economies of scale and end-market demand. Continued innovation to boost the performance of its balance-of-systems (BOS), increased competition and even better economies of scale could result in up to 70% reduction in the global weighted average installation cost, according to a study by the International Renewable Energy Agency (IRENA). In 2019, solar PV represented the second-largest absolute generation growth of all renewables. The time for solar energy has arrived.

Overview of a solar PV power plant. Source: IFC

Investment in solar power should increase in the coming years to tap into its outstanding scalability, which can range for watt-scale installations for residential use to utility-scale designs that cover hundreds of megawatts. But taking advantage of this scalability requires finesse to balance incentives, costs, and profitability while keeping within the boundaries of the existing grid. Below we highlight four essential tips to consider when investing in a commercial solar farm.

Tip #1:  Legal frameworks will make or break your project

The latest research shows that among major hurdles for new PV developments, legal frameworks are a key concern. A lack of model contracts and best practice standards in many markets can lead to unpredictability and make it almost impossible to accurately assess timescales for project delivery, forecast investment returns, predict permitting timelines, and manage risks. Without a robust plan that approaches legal feasibility systematically during the feasibility stage, the project may not get very far, or even drag out for years with no clear direction.

Solar power plant lifecycle Source: Camarinha-Matos et. al

Understanding the crucial link between legalities and the success of a solar farm involves more than just completing a checklist of essential permits, environmental laws, and construction requirements. Thorough assessment of country-specific legal frameworks should include:

  • Restrictions and time required to obtain a permit
  • Market predictability that identifies market participants and their role in the grid
  • Influence of incumbents and possible escalating concerns about integrating solar PV on the existing grid
  • Condition of the current grid and willingness of the government or the operator to foresee the necessary reinforcements
  • Financing and legal frameworks in place to encourage affordable options for solar PV adoption
  • The current political climate of the country which plays a key role in market attractiveness for renewable energy investments
  • Interfaces between different government agencies and effect of each on the timeline for awarding necessary permits and other documents
  • Land use restrictions and community opinion about solar PV
  • Policies regarding curtailment and long-term rewards for solar power generation
  • Insertion of a clear roadmap within a regulatory framework that covers the entire lifecycle of a solar PV project from pre-planning to decommissioning

Tip #2: Optimize, optimize, optimize

Solar energy is intermittent, which causes fluctuating energy output and unpredictability. Environmental changes such as temperature, atmospheric pressure, variations of the solar angle, and solar radiation, among other factors, play an essential role in the energy output of solar cells. While PV can use all the incident solar radiation, plant optimization is necessary to maximize results.

Effect of tilt on solar capture. Source: IFC

Solar plant optimization begins with strategic siting to identify land that presents favorable characteristics, such as: earthquake free zones; flat surface free of any sinks, trees, and unfavorable soil conditions; flood-free zones; little to no shading effects; favorable latitude and longitude to take full advantage of the sun’s trajectory; land that has no archeological or ecosystem restrictions; and location that provides an optimum, cost-effective point to be connected to the grid. Plant optimization is coupled with the optimal tilt angle of the solar units and aims to maximize sun exposure. The direction of tilt depends on whether the site is located in the northern or southern hemisphere

After appropriate land has been identified, the next step is to gather reliable historical resource data for the chosen site.

Solar energy varies temporally and spatially, so it is essential to have a clear understanding of how data vary in time and the quality of its spatial resolution. This is important to correctly assess the validity of the data to make important investment decisions from generator modeling, feasibility studies, and financial risk assessment. To ensure accurate energy yield predictions, losses within the elements of the balance-of-system should be considered. Additionally, shading losses with time-step simulation and scenario-based modeling that consider the varying irradiance and other environmental and location-specific factors are essential to accurately forecast solar energy output.

Tip #3: Design iron-clad feasibility studies

The costs associated with PV installation are traditionally split into two parts: the cost of the solar PV module and balance-of-system (BOS). Costs related to the BOS include the control unit, inverter, design, labor, protection devices, electrical wiring, land, construction, hardware and software, and regulatory and financing costs.

BOS costs and all other costs incurred throughout the project life cycle are site-specific and highly sensitive to the current solar market in a particular country. When conducting the pre-feasibility study, every cost related to capital expenditure (CAPEX) and operating expenditure (OPEX) should be considered in granular detail. To assess the financial feasibility of a solar energy plant, the energy yield, revenue streams, CAPEX and OPEX costs, and loans are essential to consider. Grid connection constraints that require additional resources to facilitate the safe uptake of solar energy while preserving the grid’s reliability and availability should also be considered.

In order to develop a comprehensive feasibility study, financial modeling decisions should be based on scenario modeling, where different input parameters are changed to assess sensitivities on a long-term basis. Examples of data that are included in solar PV financial modeling include OPEX, annual energy yield, CAPEX, grid totaling costs, tariffs, and project size. Sensitivity analysis aims to determine the project’s profitability and bankability if input parameters change and what the consequences would be on bad year. Changes to inputs provide key signals for investment decisions and help to mitigate risks. For instance, variability in grid costs due to location-specific constraints and uncertainties in legal frameworks add a certain level of unpredictability to initial expenditures and also energy yield. If these are not assessed during a financial sensitivity analysis, then wrong decisions are made, and the project may not be feasible.

Tip #4: Keep your eyes on innovation

Innovation is an integral part of the technological advances of solar PV and plays an important role in energy yield and lowering OPEX. Studies have shown that better efficiency due to solar module innovation has slashed up to 50% off OPEX and improved energy yield. Additionally, as mentioned in the introduction of this article, innovation in solar PV module (and other factors) are responsible for up to 70% reduction in the global weighted average installation cost. In other words, innovation affects the bankability and feasibility of any solar PV project.

The drive for innovation has resulted in a spike of various manufacturers offering many efficient commercial solar PV across the globe and this competition drives down the costs of solar PV even further. Taking advantage of this involves understanding how solar PV supplier selection directly influences all the project costs. Therefore, making the right supplier decision is crucial in the preliminary studies to guarantee a return on investment (ROI) that more than covers project costs. Other relevant benchmarks that ascertain performance, system availability, product reliability, maintainability, and service life are factors to consider when selecting PV systems and associated suppliers. 

When conducting site assessment, it is also essential to bear in mind that no two sites are the same, so a particular PV system’s performance at a specific location does not guarantee the same performance at a different location. Again, this is where innovation comes in. Understanding the project’s site-specific nature will ensure that modules that offer the best efficiency, energy yield, and lowest maintenance costs are installed at a particular site.  

Conclusion

Solar PV modules will continue to displace fossil-based energy from grids around the world. Improved efficiency, and lower maintenance costs are key selling points that incumbents can no longer check off but have become important drivers of solar energy. 

While the ultimate aim is to maximize solar energy output on a site that adheres to all legal and environmental obligations, the various interfaces during the project lifecycle create different risk points that must be factored into feasibility, construction, and financial studies. This guarantees better solar project finesse that further increases bankability and feasibility while driving down installation and operation costs.  

For more in-depth knowledge about utility-scale PV developments, have a look at this report made accessible by the International Finance Corporation.