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ADBI Working Paper Series FINANCING SOLAR PHOTOVOLTAIC TRANSITIONS: FROM UTILITY TO RESIDENTIAL MARKET ADOPTION IN EMERGING ECONOMIES Ranaporn Tantiwechwuttikul and Masaru Yarime No. 856 August 2018 Asian Development Bank Institute 每日免费获取报告 1 、每日微信群内分享5+ 最新重磅报告； 2 、每日分享当日 华尔街日报、金融时报； 3 、每周分享 经济学人 4 、每月汇总500+ 份当月重磅报告 （增值服务） 关注公号 回复： 加入“起点财经”微信群。 The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. The Asian Development Bank recognizes “China” as the People’s Republic of China. Suggested citation: Tantiwechwuttikul, R. and M. Yarime. 2018. Financing Solar Photovoltaic Transitions: From Utility to Residential Market Adoption in Emerging Economies. ADBI Working Paper 856. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/financing-solar-photovoltaic-transitions-utility-residential- market-adoption Please contact the authors for information about this paper. Email: ranaporn.t@gmail.com, yarimemasa@gmail.com Ranaporn Tantiwechwuttikul is a PhD candidate of the Graduate Program in Sustainability Science – Global Leadership Initiative (GPSS-GLI), Graduate School of Frontier Sciences of the University of Tokyo, Japan. Masaru Yarime is an associate professor at the School of Energy and Environment of the City University of Hong Kong, Hong Kong, China. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: info@adbi.org © 2018 Asian Development Bank Institute ADBI Working Paper 856 Tantiwechwuttikul and Yarime Abstract Solar photovoltaic (PV) technological leap-frogging greatly enhances energy accessibility, yet energy affordability remains a critical challenge. Traditional financing options, categorized as the solar-as-asset model, usually favor utility-scale PV projects, whereas the investment growth in smaller-scale PV systems is far behind, particularly in emerging countries. To further untapped PV potentials, we need to promote technological adoption in non-utility markets. That requires alternative financing approaches, such as the solar-as- service model. This paper examines the advantages and disadvantages of different financial schemes for introducing PV facilities in terms of the suitability of funding vehicles and investment mechanisms. Given the policy expense curtailment, owing to the gradual PV competitiveness, our analysis particularly focuses on the emerging market for PV installations for self-consumption. As the main obstacle is the high upfront cost of PV systems, we examine the new financial models in which customers buy the service rather than PV system per se. We consider what conditions would be necessary to facilitate the third-party ownership models and alternative financing schemes. Finally, this paper discusses what policy measures and instruments can be deployed to foster further PV adoption in the context of emerging economies. This study also provides implications for corporate strategy and financial institutions. Keywords: PV investment models, PV price competitiveness, distributed PV system, solar-as-service, solar third-party ownership JEL Classification: O16, O33, Q48 ADBI Working Paper 856 Tantiwechwuttikul and Yarime Contents 1. INTRODUCTION . 1 2. PV POLICY AND INVESTMENT MODELS . 2 2.1 Market-Based Support Mechanisms . 2 2.2 Regulatory Policies 2 2.3 Flanking Policies . 3 3. PV INSTALLATION TRANSITION FROM UTILITY SCALE TO DPV SYSTEM . 4 4. FINANCING INNOVATIONS . 6 5. CONCLUSION AND POLICY RECOMMENDATIONS . 13 REFERENCES . 15 ADBI Working Paper 856 Tantiwechwuttikul and Yarime 1 1. INTRODUCTION Since the Industrial Revolution in the 19th century, fossil fuels—coals, oils, and natural gases—have come to account for around 80% of total primary energy supply (IPCC 2014). Besides the soaring anthropogenic greenhouse gas emissions, these resources are depleted and cannot solely secure increasing energy demand. A reduction in fossil fuels consumption and the promotion of renewable energy utilization will be a critical pathway toward a low carbon society (MacKay 2009). In order to achieve energy sustainability, each country faces different challenges due not only to geographic and climatic uniqueness, but also resource constraints and technological availability. As the soaring energy demand is directly related to the population growth, the issue will be more pronounced in emerging economies, where 85% of the 9.7 billion world population in 2050 is projected to be, compared to 15% in developed countries. In addition, the rapid growth of mega-cities is evident and urban areas will accommodate around 70% of inhabitants by 2050 (UN 2017). The term “energy trilemma” has been coined by the World Energy Council in reference to the three dimensions of energy security, energy equity, and environmental sustainability. The energy trilemma also addresses complex interactions between public and private actors, governments and regulators, economic and social factors, national resources, environmental concerns, and individual behaviors (World Energy Council 2013). Despite the dissimilar forms of energy contained in each resource, all renewable energy (RE) can be converted into electricity, which is the most convenient energy vector as it is easily transformed into other forms, such as light and heat, and can be conveniently transmitted and stored. It is widely considered to be a fundamental enabler of modern society. However, the high upfront cost and long payback periods of RE technologies are major impasses in clean technology adoption. Thus, this paper particularly addresses energy equity in terms of accessibility and affordability. Solar photovoltaics (PV) are carefully selected as the subject of research. PV has shown the steepest learning curve (in terms of the sharpest PV panel cost reduction) amongst other renewable energy technologies (REN21 2016). In addition, thanks to the modular units, PV systems can be deployed on various scales, ranging from rooftop systems to ground-mounted systems in utility-scale solar farms, and are compatible as both grid-connected systems and off-grid/standalone systems suitable for remote areas. The initial high upfront cost of PV technology has justified the rationale of market intervention by the government, and PV-related policies truly signify the role of policy- induced technological change which, to some extent, disrupts the electric power industry worldwide. However, particularly in emerging economies, policy expense and policy discontinuity are often amongst the leading issues surrounding how further PV technology adoption can be deployed. This paper consists of three sections. Firstly, it considers PV policy mechanisms and financing options based on three sectors: residential, commercial/industrial, and utility. The advantages and disadvantages of different financial schemes for introducing PV facilities in terms of the suitability of funding vehicles and investment mechanisms are reviewed. Secondly, policy implications are classified based on three stages of PV price competitiveness compared to retail electricity price. The analysis particularly focuses on the transition of PV system installation from utility-scale projects to distributed PV (DPV) systems in residential and commercial/industrial sectors. The last section will address what conditions would be necessary to facilitate the financing model and other third-party ownership models, and what policy measures and instruments can be deployed to foster further PV adoption in the context of emerging ADBI Working Paper 856 Tantiwechwuttikul and Yarime 2 economies. The conclusion will also summarize the implications for corporate strategy and financial institutions. 2. PV POLICY AND INVESTMENT MODELS While it is known that solar PV technology has been developing since the 1960s and a series of technological breakthroughs have been achieved, market adoption has nevertheless been sluggish and has directed attention particularly to silicon-based PV (Fraunhofer ISE 2018). Besides technogical challenges, the barrier to PV technology adoption in an existing fossil fuel-based electricity market typically revolves around the cost issue. The global solar PV market growth is well-aligned with the price reduction in solar modules. Besides the technological improvement aspect of the manufacturing, economic factors also influence the solar module pricing mechanism; the real interest rate has a positive correlation, whereas exchange rate, knowledge stock, and oil price have a negative correlation (Taghizadeh-Hesary, Yoshino, and Inagaki 2018). Hence, public policy intervention initially plays an important role. In terms of policy design for PV technological diffusion, the government intervention can be broadly divided into three categories (IET 2015) as follows. 2.1 Market-Based Support Mechanisms Market-based support mechanisms consist of two main approaches. In the price-based market instruments, price is determined by the policymaker, while quantity is regulated by the market. In addition to price, the policy can be tailored to focus specifically on the investment (i.e., investment subsidies, tax incentives) and/or the generation (i.e., feed-in premium, feed-in tariff, net metering). In the quantity-based market instruments, quantity is determined by the policymaker, while price is determined by the market. Quota obligation (i.e., tradable green certificates or renewable portfolio standards), tender scheme, and auctions are amongst the policy choices. Some support mechanisms are listed in Table 1. Table 1: Some Market-Based Support Mechanisms Price-based Instruments Quantity-based Instruments Investment-focused Investment subsidies Tax incentives Generation-focused Feed-in premium Feed-in tariff Net metering Net billing Tax incentives Quota obligation Tender scheme Auctions Source: Adapted from IET (2015). 2.2 Regulatory Policies Grid connection capacity, adminstrative procedures, construction permit processes, utility interconnection rules, and technical standards are amongst policy design elements aiming to accommodate project establishment, streamline project execution, and ensure project operation. ADBI Working Paper 856 Tantiwechwuttikul and Yarime 3 2.3 Flanking Policies Flanking policies include, but are not limited to, research and development (R the stable and forecastable project cash flows are the main source of collateral and loan repayment. Hence, a reliable public support scheme or a long-term power purchasing agreement is preferred. Moreover, the multi-contacting and rich dynamics in various phases of project execution are key characteristics of project financing. Inevitably, the complexity embedded within project financing needs knowledge-intensive arrangements, and transaction costs can be high (RENAC 2016). For a residential or commercial/industrial rooftop PV system, two investment options are self-financing, and retail debt or concessionary financing instruments, including mortgage-based loan, personal loan, and saving guarantee program. The practicality of solar crowdfunding (for loan or leasing) and the solar third-party ownership model (pay-as-you-go business model, which allows customers to pay for the power service and avoid the high upfront cost of the PV system) is yet to be demonstrated within the existing power market conditions, especially in emerging countries, where a new legal business structure and supporting policy have never been implemented. For a utility-scale project, it is noteworthy to remark the different investment patterns despite less diversity in financing schemes. Even though all utility-scale projects are established as limited companies, the scrutiny of their shareholder structure often reveals parent companies that are responsible for the actual financial resource allocation. If the parent company is a listed company on the stock market, usually both debt and equity financing are utilized; but if the parent company is a non-listed company, it may depend on debt financing and/or corporate financing, and gain indirect benefits from a tax shield (as interest on debt is a tax-deductible expense). Concerning the cost of capital, debt financing can typically be obtained at a lower effective cost by ADBI Working Paper 856 Tantiwechwuttikul and Yarime 4 a company that has performed according to expectations. However, the fixed cost of debt can be burdensome and can increase risk if the company fails to generate enough cash flow. Besides typical debt and equity financing options, alternative options are operating leases and capital leases. The comparison of each option is in Table 2 (RENAC 2016). Table 2: Funding Vehicles Structure Potential advantages Potential disadvantages Debt Fast, drawable options Higher rates, on-balance sheet Equity No impact on debt profile Potential future capital constraints Capital leases Tax benefits, low transaction costs On-balance sheet Operating leases Tax benefits, low transaction costs May require on-balance sheet 3. PV INSTALLATION TRANSITION FROM UTILITY SCALE TO DPV SYSTEM A commonly used indicator to compare the costs of different types of electricity generation source is the levelized cost of electricity (LCOE). Three key drivers of LCOE of a PV system are: (1) the capital and installation costs of PV modules and the balance of the system, reflected in a unit of cost per watt (USD/W); (2) the average annual electricity yield (kWh/kW), which is a function of local solar radiation and solar cells’ technical performance; and (3) the cost of finance for the entire PV system installation and operation (IRENA 2012). Grid parity refers to a point in time when the LCOE of an alternative energy source is less than or equal to the retail electricity price in a given country. In the context of PV, reaching grid parity determines PV technological competitiveness without subsidies or government support. Nonetheless, PV grid parity will not only stimulate PV technological diffusion, but also trigger the development of other PV-related businesses—e.g., solar inverters, energy storage technologies (chie