By Gurpreet Gujral, managing director and Francisca Wiggins, director of Atrato Partners, Investment Adviser to Atrato Onsite Energy plc (ROOF)
Energy costs have surged in the UK in recent months, as evidenced by the four-fold increase in natural gas prices since last winter. While price caps can somewhat alleviate the pain for domestic consumers, UK corporates are afforded no such protection.
With price instability likely to remain commonplace over the next decade, the use of onsite generation solutions – such as rooftop solar panels – could be the answer to combatting the energy crunch for corporates.
Momentum is mounting
For many businesses, the early appeal of adopting solar energy was linked to cost incentives, due to the substantial subsidies on offer. However, the cost of manufacturing solar PV technology has dropped significantly over recent years, enabling solar to emerge as a viable standalone economic solution.
Rather than investing in remote solar fields, onsite solar panels supply energy directly to businesses, enabling companies to realise considerable savings by avoiding costs associated with purchasing power through National Grid, as well as locking in fixed prices for the long term to reduce exposure to cost volatility. The current cost of energy from onsite solar assets typically ranges from 8 to 10p per kilowatt hour, while non-domestic energy consumers in the UK paid suppliers an average 13.92p per kilowatt hour in the third quarter of last year. As more customers reach the end of fixed price deals, the latter price is expected to increase to fully reflect the underlying increase in the price of energy imported from the National Grid, and this is driving increased interest in onsite generation options.
The second key driver of onsite solar adoption is linked to climate change goals. Zero carbon electricity is fundamental to achieving carbon neutrality, to which many large UK businesses have formally committed. While there are various options for the procurement of green electricity via the National Grid, until the grid itself is fully decarbonised, it is only through onsite generation that businesses can ensure the electricity they consume at the point of use has been generated from a zero carbon source. A direct connection to a renewable energy asset, such as rooftop solar, gives maximum traceability for a business’ carbon management.
Mitigating market exposure
Rather than focusing on distant carbon offsets, many major UK businesses, such as the country’s supermarket chains, are increasingly recognising the value of direct clean energy generation by space on and around existing buildings. By installing solar panels, companies no longer need to rely on the wholesale market to satisfy entire energy requirements. This reduces exposure to energy price turbulence witnessed in recent months.
Mitigating exposure to price volatility is equally important to investors seeking long-term resilient income. Our solution, Atrato Onsite Energy plc, establishes indexed PPAs (typically of 15+ years) with occupiers of the commercial properties housing the onsite solar assets. With the majority of revenue contracted, this solar solution can deliver stable inflation-linked returns, with low vulnerability to energy price fluctuations.
Alleviating cost pressures
Despite tailwinds lending impetus to rooftop solar adoption, the sector is not without challenges. In 2021, questions were raised over the manufacturing practices of some solar module companies in China, with continued emphasis on ethical supply chains likely to be a feature of 2022 and beyond. In our view, sourcing materials directly and conducting due diligence across the manufacturing supply chain is the best way of ensuring the production of solar equipment meets the highest ESG standards.
Cost pressures have also started to bite, with an approximate 20% increase in solar component prices due to higher transportation costs and supply constraints in polysilicon – the key raw material of solar modules. While cost pressures are yet to subside, elevated polysilicon prices tend to lead to increased supply, as higher cost manufacturers ramp up production.
Although such factors have recently increased solar energy costs, rooftop solar assets for large commercial and industrial users will likely continue to be substantially more competitive than wholesale energy prices for the remainder of 2022. This, along with the growing focus on achieving net-zero targets, continues to point to increased solar adoption in the years ahead.