Friday, April 13, 2012

A Proxy Theory - Rome vs. London

Jefferies put out an outstanding overview of Italy's new FiT rules today. This report is hands down the best research note I've seen in a coon's age. Note: Apparently coon's age makes some people uncomfortable. That's pathetically over-sensitive if you ask me. Are we to stop watching Dukes of Hazzard for fear of an appearance by Cooter? One time my dad and I lost our black lab in Watts. Once you've experienced yelling out Blackie, Blackie, Blackie on a dark night in Watts you don't find coon's age all that provocative. But I digress...

The proposed new FiT rules in Italy bear a striking resemblance to the UK's rules. In the new FiT structure you get one FiT for all production and what amounts to an additional bonus for backfeeding. This structure is exceptionally generous considering Italy's plentiful sunshine and sky high electricity rates. Here are the proposed FiT rates for small rooftop systems.

-All production will receive a minimum tariff of 13.3 ct/kWh
-Exported production will receive a tariff of 21.5 ct/kWh

If you assume a 70% Export Factor (equivalent to a 30% self-consumption rate) the Value of Production (VOP) breaks down like so:

VOP = (Production FiT + Retail Rate) x (1 - Export Factor) + Export FiT x Export Factor 
VOP = (13.3 ct/kWh + 24 ct/kWh) x .3 + 21.5 ct/kWh x .7 = 26.24 ct/kWh

This VOP is less than the UK's VOP of 31.8 ct/kWh but there are two factors that require attention. For simplicity I've used the same Export Factor (AKA: 1 - Self-consumption rate) in all the calculations I've made in the last few posts. When I was comparing Germany to the UK this was a reasonable assumption but this isn't a good assumption for Italy because Italians make different demands on electricity than the Brits or Germans. We can safely assume that A/C requirements in Italy will lead to appreciably higher self-consumption rates. If you plug in a revised Export Factor of .5 it changes the VOP:

VOP = (13.3 ct/kWh + 24 ct/kWh) x .5 + 21.5 ct/kWh x .5 = 29.4 ct/kWh

This VOP is still less than the 31.8 ct/kWh VOP in the UK but I don't think the Italians will care much. Consider that a 1 Kilowatt photoelectric system in Italy can annually generate over 1200 kWhs. The same system in the UK may only generate 800 kWhs. Sunshine is so unfair. 

Do Things Tie Together?

Lately I've been following the UK installation statistics closely. It's always fascinating to see how a market reacts to new incentives. It appears that installs are gaining speed surprisingly fast in the UK despite the new FiT rates. If the installation rates keep climbing we will see over 3 GW in 2012. I don't want to get ahead of myself but here's an interesting thought. I'd argue that we can use the British market (which closely tracks installation statistics) as a proxy of sorts for the Italian market (which does not closely track installations statistics). This may seem like a stretch but borrowing rates, installation costs and FiTs/VOPs are comparable in both countries. If not for the solarity advantage of Italy we would expect very similar IRRs between these nations. But like I said, sunshine ain't fair so we'll see higher IRRs in Italy and by extension you'd have to assume higher growth.  If at mid-year the statistics show that the  Brits are on track to install 3 GW  in 2012 we'd be able to use this stat as a baseline and figure that the Italians will install more than 3 GW. It should be interesting to see how this Proxy Theory plays out. 

Follow up...

I took another look at the installation statistics for the U.K. today. Turns out, everything dropped off a cliff in the first week of April. You'd expect this to happen if there had been a FiT revision starting in April but as far as I know the FiT revision (99% of it at least) went into effect on March 3rd. 

"From April 2012, the feed-in tariff rate for systems under four kilowatts will be 21p per kilowatt hour. Anyone who installed between December 12th and March 3rd 2012 will get the higher rate of 43.3p. Anyone who installed between March 3rd and April 1st will get the higher rate for a few weeks and then drop to the 21p rate in April."

If the FiT adjustment took place in March why did the installs drop off in April? Very curious. Here's a clue that explains why the market tanked. 

"On April 1 a new requirement was put in place where a ‘building’ to which a solar PV system is attached must be independently assessed to meet Energy Performance Certificate grade D (EPCD) or above in order to claim FiTs." 

It appears this new energy assessment requirement is creating a traffic jam of sorts. Not to worry - this is nothing more than a hiccup. 

No comments:

Post a Comment