Renewable generation and energy performance
Since we last wrote on this subject in mid-2021, there have been major changes in the UK power market. Geopolitical pressures have been layered onto a fast-changing energy system and many parties in the market have been feeling the stress.
Most important is the sustained spike in wholesale and supply prices as a result of various factors, not least the Russian invasion of Ukraine and the associated shock to supply and demand of commodities. Even though prices have come down, normal conditions are not expected to return for many years. There is also the concern around system resilience: can the UK balance supply and demand? And sustainability: can net zero be achieved?
Energy managers working for our clients have been charged with delivering certainty and are also now far more concerned than before about security of supply. They are also under real pressure to procure clean power and to meet the new rules for energy performance certification (EPC) of buildings that will come into effect in 2025 and 2028. Complying with these standards will be challenging: in the window April 2025 to March 2027, all non-domestic tenancies must have an EPC rating of “C” or above. In the window April 2028 to March 2030, this will increase to a “B” rating. The obligation to comply will fall on the landlord.
It all amounts to a once-in-a-generation shift that is now taking place in energy efficiency. Landlords and long-term tenants are now implementing numerous measures across their buildings and in building management.
Solar PV is proving particularly popular because it addresses more than one of the major current issues: energy performance and price certainty. We are seeing real examples of numerous other measures including installation of behind-the-meter batteries and CHP systems.
As we previously reported, at MDS Advisory we have significant expertise in this field and have been involved in extensive negotiations on behalf of our clients with major corporate counterparties, bulk purchasing schemes and local authorities. We want to share our observations.
The first is that it is proving easier than before to align interests. This is something that we have found with funded business models where the developer (the owner of the solar or other equipment) sells power to the landlord (the purchaser of the power that is generated or the recipient of the energy savings). Landlords now see the true benefit of long-term supply agreements. They accept the argument that the developer’s business is in “project finance”: the developer’s investment only works if there is sufficient time to make the return on investment. Alignment of interests is also evident with larger contracting schemes: there are sufficient incentives for both parties to overcome legal obstacles.
The second is that the commercial bargain (the price for which the solar power is supplied) is now easier to agree than before. The levelized cost of solar energy and the cost of purchasing solar energy are both invariably lower than the cost of power purchased or saved from other sources. The same applies in relation to heat and the impact of other measures such as building management software.
And third, insurers and asset managers have valid opinions on all of the relevant issues, but they are not now acting as roadblocks.
Finally, we have in recent months been assisting our clients in implementing far more sophisticated and broad-ranging product strategies. This includes developers bringing to their corporate counter-parties other technologies and supply agreements to fill in the gaps in purchasing that are not addressed solely through generation. The list of initiatives now being implemented is impressive and includes battery storage and demand response contracts, intelligent monitoring and management systems.