Reducing risk in the secondary solar market

January 13, 2016

Article originally appeared in PV Tech Power Magazine.

O&M due diligence  |  Emanuele Tacchino of Alectris outlines the lessons learned from the major solar secondary markets for helping investors utilise due diligence phase operations and maintenance (O&M) expertise to hedge risk and increase long-term profitability of their asset acquisitions

Alectric PV Tech TwitterFollowing the grid connection rush, several countries now have an extensive base of installed PV capacity. Investors in these markets are currently turning their interests to solar PV acquisitions and portfolio consolidation. It is within these vibrant markets that the financial benefits of exploiting opera-tions and maintenance (O&M) counsel during acquisition due diligence are being realised by investors. The strategy outlined in this paper, which draws on experience in Italy (one of the world’s major PV markets), is applicable to any global region in which the solar PV secondary market is robust and where investors are looking for ways to hedge risk and increase the long-term profitability of their acquired assets.

Consolidation in the solar PV secondary markets

The Italian solar secondary market presents an ideal case study. The solar PV landscape in Italy continues to be dominated by a large number of mid-size grid-connected plants, with the majority of them having been in operation for more than two years. According to reports from Italian company Gestore dei Servizi Energetici (GSE), there are more than 5,000 PV plants smaller than 3MWp in operation and approximately 2,000 larger ones, delivering a total capacity of approximately 7GWp. The top five solar PV portfolio companies own approximately 3.8% of the total installed capacity in Italy, with the total for the top ten players amounting to 1GWp. The market is therefore highly fragmented.

In comparison, the other EU countries, with the ‘young’ UK PV market on top, show completely different values in terms of relevance of the top PV portfolios markets follows the level of maturity of each respective country. For example, the UK market started from the very beginning as a ‘PV learned’ market, with various big funds involved, which have played a significant role in the development of the more mature markets (Germany, Spain, Italy). The results point to solid conditions and potential for the development and growth of a similar consolidation in the Italian solar PV secondary market, which is currently taking place.

Even after the recent legal and incentive changes (Spalma Incentivi, among others) affecting solar PV plant internal rate of return (IRR), as well as the patience levels of plant owners and the subsequent operating cost restructuring involving primary stakeholders (O&M servicer, asset managers), the acquisition of an operating PV plant in Italy at the right conditions still affords strong financial returns for investors.

In addition, the country’s renewed political stability has allowed Italy to become more appealing for foreign investments: according to the 2015 A.T. Kearney Foreign Direct Investment Confidence Index [2], Italy has jumped from 20th place in 2014 to 12th place in 2015. The A.T. Kearney Index highlights, among the first 12 positions (the major PV markets of the world), the most appealing countries for investment. These markets create conditions for the maximum benefits of PV market development and portfolio consolidation.

Consolidation of solar PV best practices

Globally the major solar industry players and stakeholders are developing best-practice guidelines and standards; these standards will support homogeneous worldwide development of PV. One result will be a more robust secondary market, impacting investors and off-takers, and indeed the whole financial community.

The development of best practices is evident in nearly every realm of solar PV throughout the world. These efforts include:

  • A standardised tendering for investors and EPC constructors
  • Activities to improve the investment rating of PV plants and projects.
  • Asset care, including O&M and asset management.
  • An emerging discipline to standardise bankability criteria and requirements.

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