Market Risk Analysis on Solar Thermal vs. Solar Photovoltaic System in UK - Essay Example

Market Risk Analysis on Solar Thermal vs. Solar Photovoltaic System in UK Table of Contents I. Introduction ………………………….……………………………. 4 a. Purpose of the Research Study ……………………… 6 b. Rationale for the Selected Research Topic ………… 6 c. Scope and Limitations …………………………………. 7 d. Research Questions ……………………………………. 7 e. Definition of Terms …………………………………….. 8 II. Literature Review ………………………………………………….. 10 a. Similarities and Differences between Solar Photovaltaic and Solar Thermal System ……………… 10 b. Advantages and Disadvantages of Using Solar Photovoltaic and Solar Thermal System ..................... 11 c. PESTLE Analysis in UK ………………………………… 12 c.1 Political ………………………………………… 12 c.2 Environment ………………………………….. 14 c.3 Social ………………………………………….. 15 c.4 Technology ……………………………………. 15 c.5 Economic ……………………………………… 16 III. Risk Management Analysis ………….…………………………... 17 a. Credit Risks ……………………..……………………….. 17 b. Climate Risks ………………………..…………………... 17 c. Market Risks ………………………..………………..….. 17 IV. Conclusion and Recommendations ………………………….…. 20 Appendix I – Historical Trend of Electricity Generated by Renewable Resources in UK …………………………………….……. 22 Appendix II – CO2 Emission in UK ……………………………………… 23 Appendix III – Summary of Cost and Efficiency of Different Solar Photovoltaic Cells ………………………………………… 24 Appendix IV – Summary of Advantages and Disadvantages of Solar Thermal and Solar Photovoltaic System ………… 25 Appendix V – Summary of Tariff Level for New Installation of Solar PV System (p/kWh) ............................................... 26 Appendix VI – Figure of a House Facing South ……………………….. 27 Appendix VII – Population Trend in UK ………………………………… 28 Appendix VIII – Trend of Oil and Gas Reserves ………………………. 29 Appendix IX – Employment and Unemployment Trend in UK ……..… 30 Appendix X – Computation of 5 x 7 meters Solar Photovoltaic System Facing North, East, South and West ………….. 31 References …………………………………………………………………… 32 – 36 Chapter I – Introduction As of 2008, the United Kingdom has been increasingly dependent over the use of renewable energy resources. In line with this, 5.5% (approximately 4.3 million tonnes of oil equivalent) of the total electricity that was generated in UK was produced from the use of renewable resources such as biofuels (76.19%), wind power (14.29%), and hydroelectricity (9.52%) (Office for National Statistics, 2011). Even though the use of renewable energy resources has been increasing, there is still a long way for the UK government to reach its goal of generating 30% of its electricity from renewable resources aside from decreasing its carbon dioxide emission by 40% by year 2020 (Department of Energy & Climate Change, 2011). (See Appendix I – Historical Trend of Electricity Generated by Renewable Resources in UK on page 22) It is a universal knowledge that the burning of oil and natural gas could produce and emit excessive carbon monoxide and carbon dioxide that could trigger global warming. To combat the global climate changes, the UK government decided to gradually shift from the use of non-renewable to renewable energy resources (Committee on Climate Change, 2010). Recently, the Committee on Climate Change announced that the Scottish Government will reduce the carbon gas emission by 3.5% annually between 2020 to 2050 (Committee on Climate Change, 2011). As a result of increasing the use of non-renewable energy resources, the annual emission of carbon dioxide throughout the United Kingdom decreased from 8.95 metric tons per capita in 1995 down to 8.6 metric tons per capita in 2007 (Federal Statistical Office Germany, 2010). (See Appendix II – CO2 Emission in UK on page 23) Solar photovoltaic (PV) and solar thermal is another form of renewable energy resources that will enable the UK government generate electricity using the sunlight that falls upon the silicon layer of a solar system (Goodall 2007, p. 268). To enable the reader gain better understanding about solar PV and solar thermal system, a brief literature review will be conducted concerning the nature and advantages of these two alternative energy resources. Given that existing UK renewable energy industry is focused over the use of biofuels, wind power, and hydroelectricity, this report will conduct a risk management analysis whether or not the UK government should extend its financial and political support in the promotion of either solar photovoltaic or solar thermal as one of the potential renewable energy resources throughout the United Kingdom. The establishment of solar photovoltaic and solar thermal system is widely used in many countries around the world. In relation to the political, environment, social, technology, and economic situation in UK, this report will identify and examine the advantages and disadvantages of investing on solar PV and solar thermal system. Eventually, several case scenarios will be presented as part of conducting a management risk analysis. Based on the market risks, credit risks, and climate risks results, this report will conclude as to whether or not the use of solar PV or solar thermal system is a good option in making the UK government reaches its goal of generating 30% of its electricity from renewable resources by 2020. Purpose of the Research Study Since the UK government is aiming at generating 30% of its electricity from renewable resources by 2020, the main purpose of this study is to examine whether or not it would be feasible and cost effective on the part of the UK government to extend its support over the use of either solar photovoltaic or solar thermal system. Rationale for Selecting the Research Topic Aiming to lessen the carbon emission, the UK government decided to explore the use of renewable energy resources over non-renewable energy resources like fuel and coal. Up to the present time, UK is heavily dependent over the use of biofuels (76.19%), wind power (14.29%), and hydroelectricity (9.52%) when generating electrical power (Office for National Statistics, 2011). Scientific American Magazine reported that “the sun’s energy that strikes the earth for a short span of 40 minutes is equivalent to the global energy consumption for a year” (Bishop & Associates, 2009). In response to global warming, depletion of natural resources, increase in population growth, increase in energy prices, and the significantly increasing energy demand (Bishop & Associates, 2009), conducting a feasibility study and management risk analysis with regards to the cost-benefit of investing on either solar photovoltaic and/or solar thermal system is essential part of improving the use of renewable energy resources throughout the United Kingdom. Since the UK government is far from reaching its goal of generating at least 30% of its total electricity consumption from renewable resources by year 2020, it is necessary to explore other forms of renewable energy resources such as the solar power because of the abundant supply of solar energy which comes directly from sunlight, Scope and Limitations Aside from discussing the differences between solar photovoltaic and solar thermal system, the scope of this study is not limited in comparing the advantages and disadvantages of using solar photovoltaic and solar thermal system but also conduct PESTLE analysis (political, environment, social, technology, and economic) to examine whether or not it is feasible to invest on solar photovoltaic or solar thermal system in UK. Together with the use of biofuels, wind power, and hydroelectricity, this report will conduct risk management test analysis whether or not the use of either solar photovoltaic or solar thermal system will make the UK government generate 30% of its electricity from renewable resources by 2020. Given that this study is focused on determining whether or not it would be feasible and cost effective on the part of the UK government to extend its support over the use of either solar photovoltaic or solar thermal system, this report is limited in terms of discussing other forms of renewable energy resources other than solar photovoltaic and solar thermal system. Research Questions The following research questions will be used as a guide throughout the research study: 1. What is the difference between a solar photovoltaic and solar thermal system? 2. What are the advantages and disadvantages of using solar photovoltaic and solar thermal system? 3. Is the use of solar photovoltaic more cost-effective as compared to the use of solar thermal system? 4. Should the UK government extend financial and political support over the use of solar photovoltaic or solar thermal system? 5. Considering the political, environment, social, and economic situation in UK, is it feasible on the part of the UK government to invest in the establishment of solar photovoltaic and/or solar thermal system? 6. Should the UK government consider investment on solar PV and/or solar thermal system as a good option in reaching its goal of generating 30% of its electricity from renewable resources by 2020? Definition of Terms Photovoltaic – “a technology which uses a solar panel device to produce free electrons when exposed to light” (Clean Air Ideas, 2011). Renewable Energy – “energy derived from resources that are regenerative which cannot be depleted” (Bishop & Associates, 2009). Solar Thermal – “a form of power generation that uses concentrated sunlight to heat a fluid that is then used to drive a motor or turbine” (Science Dictionary, 2011). Chapter II – Literature Review Similarities and Differences between Solar Photovaltaic and Solar Thermal System Solar thermal energy is a solar technology that makes use of solar energy for thermal or heat production (Markman, 2008) whereas solar photovoltaic is a solar technology that converts solar radiation to electrical current by using semi-conductors that creates photovoltaic effect (Angelo, 2006, p. 550; Williams, 2002, p. 37). Using a thermal engine, a solar thermal plant receives heat energy from the sun in order to boil water to produce steam that runs the turbines (Williams, 2002, p. 36). On the other hand, solar photovoltaic system does not require a thermal engine to generate electric current (Williams, 2002, p. 37). The process of heating water to produce steam is not necessary with the use of solar photovoltaic system since its solar panels which contains photovoltaic materials is good enough to convert the sunlight into electric current (Angelo, 2006, p. 550). With this in mind, the only difference between the two systems is that the low and medium temperature collected from the solar thermal system is commonly used in heating swimming pools, heating air and water for residential and commercial usage respectively (Denholm, 2007; Energy Information Administration, 1993, p. 15). Similar to the solar photovoltaic system, very high temperature that is generated from a solar thermal system can be used in generating electricity (Casazza & Delea, 2010, p. 75). Despite the differences in the purpose of using solar photovoltaic and solar thermal system, these two technologies requires the use of concentrated or direct sunlight in order to produce electric current (Casazza & Delea, 2010, p. 75; Williams, 2002, p. 37). Advantages and Disadvantages of Using Solar Photovoltaic and Solar Thermal System The use of either solar photovoltaic or solar thermal system is highly dependent on the availability of the sunlight. Provided that there is sufficient sunlight available to heat up the panels, the UK government could take advantage of solar energy panels. On the contrary, the absence or decreased sunlight during winter, autumn, and spring season will make the solar technology ineffective in terms of generating high voltage of electricity (Casazza & Delea, 2010, p. 82; Williams, 2002, pp. 36 – 38). The use of solar photovoltaic system could generate electricity as long as the sunlight reaches the voltaic cells (Williams, 2002, p. 37; Hamakawa, 1987). As compared to the use of solar thermal system, the use of solar photovoltaic system is more advantageous in the sense that this type of solar technology is capable of generating electric current even in cloudy days (Williams, 2002, p. 38). Because of the efficiency of solar photovoltaic system in terms of converting sunlight into electric current, solar photovoltaic technology is widely used in many countries as compared to the solar thermal system (Russell, 2010; Kropp, 2009). Investment in solar technology does not require fuel expenditures. Aside from the cost of downtime for maintenance and repair, the UK government should keep in mind that the use of either solar photovoltaic requires large amount of capital since purchasing lightweight solar cells can be very expensive (Casazza & Delea, 2010, p. 82; Williams, 2002, pp. 37 – 38). As compared to solar thermal system, investing on solar photovoltaic system is more cost-effective in the long-run since this type of solar technology requires less mechanical maintenance as compared to the use of solar thermal system (Williams, 2002, p. 38). With regards to the use of a solar thermal system, it is necessary to keep the solar collectors clean from dust and grime in order for the system to produce large amount of energy (Williams, 2002, p. 37). Since the use of solar thermal system requires frequent maintenance, the use of this system requires higher operating cost as compared to the use of solar photovoltaic system (ibid). Therefore, investment on solar thermal system may require a larger sum of expenditures related to the maintenance and operational funds as compared to the use of solar photovoltaic technology. PESTLE Analysis in UK In relation to the socio-economic advantages of solar energy resources, it is necessary to examine the political, environment, social, technological, and economic condition in UK in order to determine the feasibility of the UK government to invest in the promotion of solar energy panels throughout the United Kingdom. Political The UK government strongly supports the use of renewable energy resources. Back in April 2002, the government implemented the Scotland Renewables Obligation (RO) as a form of incentive given to accredited electricity suppliers to encourage them the use of renewable energy sources in the production of electricity (ofgem, 2011). For the same purpose, RO was implemented in Northern Ireland back in April 2005 (ibid). Serving as an evidence that the supplier is capable of generating electricity from renewable energy resources, suppliers of electricity are obliged to present their Renewables Obligation Certificates (ROCs) each year (ofgem, 2011). Suppliers who failed to present ROC will have to pay the fixed price per MWh which is adjusted to the Retail Price Index annually (buy-out fund). Upon removing the costs and accrued interests, the total RO buy-out fund that was collected on the 1st of September 2010 amounted to £303,427,603 (England and Wales), £15,841,285 (Scotland), and £4,037,864 (Northern Ireland) (ofgem, 2010). Proceeds gathered from suppliers with no ROC will be awarded to suppliers of electricity with ROC as a form of reward. For each ROC the suppliers will present is equivalent to £15.15 worth of incentive (ibid). This strategy is effective in terms of obligating the suppliers of electricity to support the use of renewable energy resources. Applicable to small-scale suppliers of electricity, Microgeneration feed-in tariffs (FITs) or Clean Energy Cashback was implemented in UK last April 2010 to pay a fixed amount of money for qualified suppliers of electricity that uses renewable resources less than 5 MW power (Feed In Tariffs, 2011; Gipe, 2006). In line with this, individuals who will use solar photovoltaic system in generating electricity will be covered by the FITs for a maximum of 25 years (Brignall, 2010). The benefit of FITs contract for solar photovoltaic system is five years more as compared to other renewable energy resources like biomass or anaerobic digestion which will be qualified for FITs scheme for 20 years. (See Appendix V – Summary of Tariff Level for New Installation of Solar PV System (p/kWh) on page 26) Environment Investment on solar energy resources could lead to a long-term steady supply of electricity without causing harmful pollutants to the environment (Science Daily, 2007). Even though the use of solar photovoltaic system could generate electric current which is equivalent to 25% of the available sunlight (Bellemare, 2003), we should not disregard other factors that could make these solar panels less efficient. Aside from the type of materials used in manufacturing the solar photovoltaic panels (Williams, 2002, p. 38), common factors that could significantly affect the ability of solar panels to convert sunlight to electric currents includes the geographic location and direction where the solar panel is permanently installed, the time of the day, the weather condition. To maximize the efficiency of solar panels, the degree of the house roof where the solar panel is installed should receive sunlight from the south direction. A house roof that is facing either north, east or west direction would mean less electricity generated from the solar panels. Therefore, it is not proper to invest on solar photovoltaic system in case the house roof is not facing south. (See Appendix VI – Figure of a House Facing South on page 27; Appendix X – Computation of 5 x 7 meters Solar Photovoltaic System Facing North, East, South and West on page 31) On top of the solar roof direction, the latitude where the house is located could also affect the efficiency of the solar panel. In general, a house situated in higher latitude could yield to higher solar energy efficiency as compared to a house situated in lower latitude. This concept explains why Goodall (2007, p. 268) revealed that “the tip of Cornwall gets 30% more electricity generated from solar photovoltaic cells than in northern England. Social In mid-2009, the total population in UK was reported as high as 61,792,000 or 0.6% higher than the total population back in mid-2008 (Office of National Statistics, 2011b). In most cases, higher population rate would mean higher consumption of electricity in residential and commercial areas. (See Appendix VII – Population Trend in UK on page 28) With regards to health issues, the use of solar energy resources is safe to use since this technology does not emit harmful carbon dioxide which could be harmful to the health condition of each individual (Science Daily, 2007). Technology UK government should be aware that the use of photovoltaic cells made out of gallium arsenide could generate as much as 20% of electric current from the sunlight whereas photovoltaic cells made out of single crystal silicon could generate only 19% of electric current from the sunlight (Williams, 2002, p. 38). The use of less expensive solar photovoltaic cells made out of fabricated cast ribbons of silicon could only convert 10% to 15% of sunlight into electric current (ibid). Even though the use of solar photovoltaic cells made out of amorphous silicon is cheaper than the use of solar photovoltaic cells made out of fabricated cast ribbons of silicon, the use of this material could only convert 8% of sunlight into electric current (Williams, 2002, p. 38; Chalmers, 1976). (See Appendix III – Summary of Cost and Efficiency of Different Solar Photovoltaic Cells on page 24; See Appendix IV – Summary of Advantages and Disadvantages of Solar Thermal and Solar Photovoltaic System on page 25) Economic Oil and gas reserve in UK is gradually decreasing over time. As compared to 4.3 billion tonnes of oil and gas reserves in 1998, UK has estimated 2.7 billion oil and gas reserves (Office for National Statistics, 2011c). Since the market prices of oil and gas in the global market could anytime increase, the UK government should continuously search for alternative energy options to ensure a more stable economic environment. (See Appendix VIII – Trend of Oil and Gas Reserves on page 29) The use of solar energy is cost-effective in the long-run since the available solar energy is more than our needed daily energy consumption. In fact, solar energy resources can provide us with supply of electricity 30 times more than what our people needed to run the entire UK economy (Science Daily, 2009). During the last quarter of 2010, employment rate in UK was 70.4% which is 0.3% lower as compared to the third quarter (Office for National Statistics, 2011d). Since the unemployment rate in UK was 7.9% or 0.2% higher than the third quarter of the same year (ibid). With regards to the high cost of solar photovoltaic system, higher unemployment rate means that more people will not be able to afford investing on this type of renewable energy resources. Chapter III – Risk Management Analysis Credit Risks Combined with the 25 years benefits from the FITs scheme, the offering of low-interest in bank loans is an effective way of encouraging more people to borrow money from lending institutions in order to invest on solar photovoltaic system. However, the implementation of this strategy could trigger credit risk in the long run because of the unstable economic situation in the global markets. Since many people in UK are experiencing unstable job opportunity, there is a risk that many people will not be able to payback their bank loan on the agreed time. In other words, unstable income that many people in UK are currently experiencing would eventually increase the credit risks. (See Appendix IX – Employment and Unemployment Trend in UK on page 30) Climate and Environmental Risks Solar photovoltaic system does not emit carbon monoxide which could trigger global warming. Likewise, the use of solar photovoltaic system in residential and/or commercial areas does not produce environmental or health threats to the end-users except for the batteries used in the system (UNEP, 2011). Since the batteries used in solar photovoltaic cells contain hazardous materials, the UK government should implement a policy concerning the proper recycling and/or disposal of the non-working solar photovoltaic system. Market Risks The market prices of electricity throughout the entire United Kingdom varies from one place to another. Since the cost of electricity is more expensive in south-west part of the United Kingdom, Goodall (2007, p. 269) revealed that it is more economical and rational to invest on solar photovoltaic system as compared in north England or Scotland. In other words, investing on solar photovoltaic system can be less feasible in geographic areas like north England or Scotland since the use of other types of renewable energy resources can be less costly on the part of the consumers. Related to the implementation of FITs in UK, a total of six giant suppliers of electricity are responsible in giving discount to households and commercial establishments that has invested on the use of solar energy resources (Feed In Tariffs, 2011; Energy Saving Trust, 2010). Under the FITs scheme, energy suppliers compute and record the total electricity generated by the consumers using the solar photovoltaic cells. Depending on the total electricity produced by the solar energy resources, suppliers of electricity will deduct the energy consumed from the solar panel in a form of monthly reduction on electricity bill (Energy Saving Trust, 2010). To enjoy the benefit of generating 3.70kWp, each residence should spend £15,365.20 for 5 x 7 meters solar photovoltaic system. Even though investing on 3.70kWp system can generate electricity and profit after 25 years of using a 5 x 7 solar photovoltaic system, it would be more difficult on the UK government to convince residential owners with roof facing north because of the longer payback period and lesser profit gain as compared to solar photovoltaic system facing south, east and west. (See Appendix X – Computation of 5 x 7 meters Solar Photovoltaic System Facing North, East, South and West on page 31) With the solar panel facing south, resident A will earn £1,484.45 each year (£1,232.32 income from FITs @ 41.30p/kWh + £44.76 income from exporting energy @3.00p/kWh + £207.38 electricity savings) (Solar Guide, 2011). Resident A will benefit from the FITs scheme for 25 years. With payback time of 8 years and 8 months, resident A will earn £49,272.52 worth of energy savings after 25 years (ibid). Chapter V – Conclusion and Recommendation Conclusion Investment on new solar infrastructure can be very costly on the part of the UK government. To convince more people to invest on solar photovoltaic system as their own way of contributing to a more environmental-friendly living, the UK government implemented the FITs scheme. Despite the high cost of investing on solar technology, the long-term socio-economic and health benefits associated with the use of solar energy resources is far greater than the consequences of having to pay a high price over solar photovoltaic technology. Given that the use of solar energy resources does not emit carbon dioxide, the environment will be free from air pollution. Considering the abundant supply of sunlight, the UK government should consider taking advantage of investing on solar energy panels. Depending on the purpose of the consumers, investment on solar thermal system is more advantageous when it comes to heating the residential and commercial air during winter season. On the other hand, it is more advantageous on the part of the UK government to invest more on solar photovoltaic system when it comes to generating electric current. Considering the weather condition in UK, it is more feasible to invest on solar photovoltaic than the solar thermal system since solar photovoltaic panels can work even on cloudy days. Aside from requiring less maintenance and repair costs, the use of solar photovoltaic system is also more beneficial in terms of generating electric current during cloudy days. Recommendations Environmental factors could lessen the efficiency of the solar energy system. Therefore, the UK government should take time educating the people on how they can maximize the benefits out of using this technology. In line with this, the local government should inform the need to install the solar photovoltaic system on the house roof facing south direction. Likewise, it is also important to take note that placing the system on higher latitude could also increase its electricity generating efficiency. Since there is a limitation with regards to the availability of sunlight, the UK government should consider other options that could make investment on solar photovoltaic system more feasible. Based on the research study of Hadfield (2001), the UK government should consider investing on satellites that could make the sunlight continuously available day and night. By considering the idea of placing the solar energy panels in space, it will be possible for the UK government to be able to generate electric current all year round. The batteries used in the solar photovoltaic system contain hazardous materials (UNEP, 2011). For this reason, it is highly recommended that the UK government should implement environmental policy concerning the proper recycling and/or disposal of the non-working solar photovoltaic system. *** End *** Appendix I – Historical Trend of Electricity Generated by Renewable Resources in UK Source: Office for National Statistics, 2011 Appendix II – CO2 Emission in UK Source: Federal Statistical Office Germany, 2010 Appendix III – Summary of Cost and Efficiency of Different Solar Photovoltaic Cells Photovoltaic Cell Material Cost Efficiency (% of electric current from the sunlight) Gallium Arsenide Most Expensive 20% Single Crystal Silicon Less Expensive than Gallium Arsenide 19% Fabricated Cast Ribbons of Silicon Less Expensive than Single Crystal Silicon 10% to 15% Amorphous Silicon Less Expensive than Fabricated Cast Ribbons of Silicon 8% Source: Williams, 2002, p. 38 Appendix IV – Summary of Advantages and Disadvantages of Solar Thermal and Solar Photovoltaic System Advantages Disadvantages Solar Photovoltaic Generate electric current from sunlight. Does not require fuel expenditures. Can generate electric current even in cloudy days (Williams, 2002, p. 38). More cost-effective in the long-run since it requires less cost of downtime for mechanical maintenance and repair. Highly dependent on the availability of the sunlight. Less effective during winter, autumn, and spring season. Requires large amount of capital. Solar Thermal Generate electric current from sunlight. Generate heat for swimming pool and warming the air in residential or commercial area during winter season. Does not require fuel expenditures. Requires less capital than solar photovoltaic. Highly dependent on the availability of the sunlight. Less effective during winter, autumn, and spring season. Higher cost of downtime for maintenance and repair. Necessary to keep the solar collectors clean from dust and grime. Appendix V – Summary of Tariff Level for New Installation of Solar PV System (p/kWh) Type / Size Installed between 15th July 2009 and 31th March 2012 Installed between 1st April 2012 and 31th March 2013 PV Read More