‍The new Lithuanian Electricity Grid Access Tariff (Pasinaudojimo elektros tinklais aprašas - PETA), which was supposed to be a compromise for the further development of commercial solar parks, has brought a new headache to developers. With no specific rules on generation limits for solar parks in the document, developers cannot yet count on bank financing for their projects. Banks themselves would be interested in solar parks in Lithuania, but they also agree that the current proposed regime is not detailed enough for solar projects to be financed.

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Developers of large-scale commercial solar parks had planned almost 4 GW of total capacity in Lithuania last year, but their fate was thrown into uncertainty last July when the law unexpectedly set a maximum cap of 2 GW installed capacity. This situation was particularly worrying for solar park developers, who had already signed long-term lease agreements for thousands of hectares of land, Letters of Intent with the grid operator Litgrid and paid millions in security deposits.

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At the beginning of March this year, a compromise was offered to developers - to curtail production instead of limiting the total installed capacity of solar parks. This is a common practice in the West and satisfactory to market players. However, the PETA description approved by the State Energy Regulatory Council (Valstybinė energetikos reguliavimo taryba - VERT) lacked vital details for developers, as it did not specify the scope of such limits or the compensation mechanisms in the event of surplus generation. In other words, in order to proceed with the development of the planned solar parks, developers are forced to accept that in case of excess energy in the system, generation can be disconnected indefinitely. Neither the specific annual amounts of these limits, nor the protection against future increases in such limits, nor the compensation mechanisms for exceeding them are specified in PETA. Moreover, PETA is only a procedure that can be changed on a regular basis, and so both solar park developers and banks would like to see any limitations written in the Lithuanian law.

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Aistis Radavičius, Head of Development in Lithuania at Aura Power, comments that these uncertainties are currently preventing the company from obtaining financing. Bank loans are a common way to finance solar park projects worth tens or hundreds of millions of euros in Western countries.

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"We have already had preliminary talks with the largest Lithuanian banks and their answer is crystal clear: they are certainly interested in such projects in principle, but financing is not possible under the current conditions. The banks now simply do not understand how the mechanism will work, and how long we will not be able to produce electricity with no income received. Clearly, the factors create risks that the loan will not be serviced. We have also spoken to the PPAs: they are also reluctant to sign contracts without knowing how much electricity we will be able to supply. And a power purchase agreement is also one of the conditions for obtaining bank financing. It is likely that electricity consumption will grow, transmission grids will be strengthened, new opportunities for electricity storage or hydrogen production will emerge, and in practice these restrictions may not even be necessary. However, the fact today is that the current scheme does not allow solar parks to obtain bank financing, which continues to hamper the development of large-scale solar parks in Lithuania," says Radavičius.

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Green Genius, a renewable energy company operating in 8 European markets, faces similar challenges in Lithuania. Ruslanas Sklepovičius, the company's CEO, says they have planned a total of 180MW projects, worth €150 million in Lithuania. They were already stalled for a year due to the 2GW cap, but now there are also concerns about financing.

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"We are talking to world-class financial institutions and we feel that there could be serious challenges to finance projects in Lithuania. Under the current scheme, restrictions of up to 100% are possible in the future, and such a risk is not acceptable to anyone", says R. Sklepovičius.

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Opinion of banks

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Jonas Urbonas, Head of Corporate Banking at Luminor, a top 3 Lithuanian bank, confirms the fears of the solar energy industry. He says that more specificity on the terms of curtailment would be needed when considering financing options.

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"Luminor is willing to consider financing for commercial solar projects above the 2 GW quota. However, in order to assess the options, we need a very clear definition of how the disconnection of solar parks will be regulated," says Urbonas.

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According to Vilius Juzikis, Member of the Board and the Head of Business Banking at SEB, given the current procedure for accessing the transmission grid, forecasting the production of solar projects above the 2 GW quota would be extremely difficult, as the power generated by such projects is likely to be reduced to zero due to the planned restrictions. 

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"This greatly increases the risk of financing projects, as there is no way to assess cash flows. It would also make it difficult for investors to sign long-term fixed power purchase and sale agreements with potential buyers of green electricity, and without these agreements, the Bank's project financing is almost impossible, given the volatility of electricity prices and the uncertainty in the long term, as well as the payback period of such investments," Juzikis commented.

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The intensity of financing and the cost of capital depend on the risk of the investment project, he said. Therefore, as the risk of a project increases, so does the cost of capital, which is a large part of the cost of renewable electricity projects. In order to make such projects profitable, the price of electricity would have to increase unreasonably. 

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"In other words, with the above-mentioned restrictions on solar projects, it is unlikely that investors will be willing to invest and banks will be willing to finance such projects due to the excessive uncertainty and, consequently, the extremely high risk. SEB's experts believe that in order to continue to increase investment in the development of renewable electricity sources, solutions would be needed to reduce the risk of financing such projects, to ensure greater regulatory transparency and to ensure the stability and predictability of renewable energy activities," SEB's representative says.

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Aura Power has heard similar views privately from other financial market participants. However, the company hopes that market regulators will still be able to resolve the situation. As for the regulation of production limitations, Radavičius suggests that Lithuania should simply follow the best practices of the West: applying the lowest limitations to the earliest renewable energy projects entering the market and setting specific numbers for maximum curtailment.

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"We first propose to apply the chronological principle known as LIFO (Last In First Out), as used in the UK, Ireland and elsewhere. It is fair to be less restrictive on projects that have come to market earlier and have taken more risks in their time. As for a specific production cap, 5% is considered to be the threshold above which a solar project is considered unprofitable. But even this is solved by applying compensation for the actual limitation above this figure: this would motivate the grid operator to improve its networks and other infrastructure even faster. The compensation mechanism has been working successfully in Lithuania for some time now in the area of network repair and is a truly working incentive for operators to improve," said Radavičius.

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For his part, R. Sklepovičius, the head of Green Genius, speaks of the need for public debate, clear conditions and the rules being enshrined in law rather than in a low level sub-legislative act that can be easily changed.

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"In Germany, restrictions have been in place for years. But producers are compensated for the hours when restrictions apply. In the Netherlands, grid operators and developers have agreed on maximum limits, but the grid operator has committed to invest in smart grid solutions at specific dates to keep the growth of renewable energy going. In Lithuania, we can also enshrine the curtailment rules in law, but after a public debate and with clearly agreed amounts and conditions. Only then will financial investors be able to assess the risks and decide how much they can bear," says Mr Sklepovičius.

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A lost opportunity

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Martynas Nagevičius of the Lithuanian Renewable Energy Confederation also agrees with the above-mentioned problems. He adds that unspecified restrictions also raise developers' fears because they could be applied in a biased way, e.g. to artificially reduce the supply of electricity on the market and thus speed up the payback of public capital projects.

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"To reduce investor and bank mistrust and concerns about excessive market interference by the network operator in the future, the best way forward would be to change the law, not the sub-legislative rules. The law should stipulate that the grid operator can only restrict generation in cases where solar power plants in Lithuania generate more electricity than is currently consumed in Lithuania. In all other cases, the curtailment should not exceed 5% of annual electricity production. If it exceeds that (for example, due to a line fault or similar circumstances), the transmission grid operator would compensate the producer for the lost income", - suggests Nagevičius.

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He also points to the paradox that in many EU countries the development of renewable energy is stalling for reasons that Lithuania does not have - underdeveloped grids, interconnections and substation infrastructure. 

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"We don't have this problem because we have a really well-developed electricity system that can connect far more solar and wind power plants than we have now. But we have replaced this problem with an artificial grid deficit created by the government. There is no other EU country where the law restricts the development of solar energy. And in this sense, we are truly unique," says Mr Nagevičius, while pointing out that other problems remain for smaller solar parks and projects and for generating consumers. All of them have recently found it increasingly difficult to get connection permits.

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Finally, he worries that some investors may already be disappointed: almost a year has already been lost due to the initial 2GW quota, the current uncertainties continue to confuse, and investors' confidence in the reputation of Lithuania and the country's institutions is falling.

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"A lot has changed during this “lost year”. Last year we had very high electricity prices and low interest rates from banks, which were willing to lend to those investing in solar parks. Unfortunately, this window of opportunity is slowly closing. I am sure that some of the planned investments will no longer reach Lithuania. We need to concentrate on minimising the losses", says Mr Nagevičius.

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Before the 2 GW quota was introduced last summer and the resulting halt in the development of solar parks, Lithuanian and foreign capital had planned to develop more than 3,700 MW of installed capacity of solar parks in Lithuania, which would have been connected to the high-voltage grid. Investments in these energy infrastructure projects would exceed €3 billion. This would be an unprecedented investment in renewable energy in Lithuania, which is still heavily dependent on electricity imports and suffers from high prices. The planned capacity of such solar parks could be enough to meet the needs of 2.2 million Lithuanian households and make Lithuania an electricity exporter. In addition, solar energy has the highest public support in European countries, in particular for its environmental friendliness.

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