Full Merchant Solar Projects Are Increasingly Possible

One of the most important characteristics of wind and solar generation is known as intermittency or variability. Intermittency or variability happens when a resource (wind blowing or solar irradiance) is not available due to weather patterns. To tackle this issue and bring certainty to investors in these sectors, developers have used long-term offtake agreements known as power purchase agreements (PPAs). They oblige offtakers (buyers) to buy electricity generated by projects at a fixed price. Initially, these were offered by governments and utilities but recently even large corporations deem PPAs as bankable and use them.

PPAs Were the Golden Standard

Financing a solar or wind project without a PPA was previously seen as impossible. This was true when the levelized cost of energy (LCOE) of these projects was above wholesale prices and projects lost money for every kilowatt-hour of electricity sold. Since the LCOE is around or below wholesale prices now, some developers and their financiers have started to leave some of their expected generation outside PPA, accepting some level of price risk.

Still, not signing a PPA or operating as a merchant project (a project selling the electricity directly into the wholesale market) at all is considered impossible. As more intermittent wind or solar resources are added, and specifically more solar, a new wholesale price pattern emerge known in the industry as a duck curve. When the market is in this situation, prices during the peak generation hours of solar (around noon) fall significantly, sometimes into negative territory. This effect is magnified as more and more solar is added to the system

Despite this risk, the Spanish developer Renovalia Energy has managed to finance a 79.2 MW full merchant project (i.e., without any sort of long-term PPA). Financing will come from the Spanish bank Banco Sabadell, which will provide 75% of the capital needed to develop this project.

Will Full Merchant Projects Become the Norm?

It is still early to tell if full merchant projects will become the norm. Renovalia Energy’s project has some specific advantages that will not last long. For example, despite Spain’s good solar resources, the Spanish market is underdeveloped due to an anti-solar regulatory environment (e.g., the cancellation of feed-in tariffs, sun tax, etc., which were in place since 2009 and scrapped in 2018). This means that projects that come online soon should expect some years before the effects of the duck curve hits the Spanish market. This should be enough to recoup a portion of the deployed capital.

The opportunity Renovalia Energy saw is transient—the opportunity window will shut in the future as more projects increase solar penetration. Energy storage technology could make full merchant projects the norm. Solar plus storage projects are a reality and their costs are coming down fast. Adding storage not only reduces the price risk associated with intermittency but can also bring new revenue by offering grid services.

Full merchant solar projects may not be the norm now but we will see more of them in markets with the right conditions like Spain. In the long-term, full merchant projects will grow in popularity now that a technological roadmap shows what is possible.