Luminous Energy explains strategy for CfD & PPA-backed solar farm following Statkraft deal

UK-based solar developer Luminous Energy last week announced the signing of a seven-year route-to-market PPA with Statkraft for its 28.5 MW Bracon Ash PV project in Norfolk, England, rounding off the revenue structure for the asset following previous moves to sign both a corporate PPA and CfD.

The new agreement is intended to incorporate and complement both the CfD, which was won in 2023’s fifth allocation round, and the 10-year virtual PPA signed with Bristol Airport earlier in 2024.

Following the conclusion of the Statkraft deal, Luminous Energy chief investment officer, Guy Lavarack, described to NPM Europe the motivations behind this blended revenue strategy, as well as other plans held by the group for the near future.

The first step in structuring the project came with a decision last year to only apply for a CfD for around a quarter of the project’s capacity, explains Lavarack.

“I read that Quinbrook only had a CfD for 40% of the output on Cleve Hill, so that really opened my mind to the possibility,” he says.

“Originally, we applied in April 2023 for 100% CfD and, after applying, then tendered for the corporate PPA – which was one of the first corporate PPAs we bid on.

“I was using it as a market testing exercise, not really thinking we would win in our first few – it was more just for the learning experience and of course there was a bit of risk given the solar farm was still not yet at financial close,” adds Lavarack.

Nevertheless, Luminous of course won the Bristol Airport virtual PPA tender and had the spare capacity to incorporate it alongside the CfD due to that earlier decision to not go for a 100% capacity bid for the government-backed incentive.

Timing, too, was in the company’s favour as it was named preferred bidder for the PPA tender in July 2023, just a few weeks before blind bids for the CfD went in in early August. There were also serendipitous circumstances surrounding the volume of the PPA, cementing the opportunity to combine the two revenue streams.

“I worked out we could technically still have the CfD and meet Bristol Airport’s minimum desired output [of circa 75% of total project volume]. So, the CfD really became a hedge to the fixed-price [and non-index-linked] vCPPA contract in case for some reason we did not ultimately end up agreeing heads of terms and signing the corporate PPA with Bristol Airport."

He added: "For a period of circa eight years the project will effectively have 100% contracted revenues with a tail either side. The two contracts are slightly off-set as the vCPPA starts more or less immediately, whereas the CfD starts June 1, 2027. Again, we did this to target a merchant nose, although that opportunity has reduced a bit over the last 12 months."

Luminous by this point had also already financed Bracon Ash with a debt package supplied by Mitsubishi HC Capital-backed Novuna, with the 20-year loan reaching financial close in August 2023, with the flexibility provided by the lender understood to be a key contributor to the developer being able to then go and maximise its revenue strategy.

Now, with PPA and CfD in place, Luminous has also secured the option to increase the debt gearing on the project, which it is closely considering.

The group has now also thrown the Statkraft route-to-market arrangement into the equation and Lavarack explains that the so-called virtual power plant service – which enables Statkraft to remotely curtail assets in order to avoid negative price periods – was a big draw in signing the contract with the Norwegian energy trader and distinguished it from other providers in the market.

“The main issues with where we have ended up is that the CfD contract and the vCPPA don’t pay us if pricing in the market is negative and of course we are seeing more prevalence of that in the market year-to-date with the prospect of higher levels to come as we move through the decade,” he says.

Looking ahead, Luminous is aiming to use Bracon Ash as a trailblazer for a 160 MW, four-project solar portfolio in the UK which will now be developed over the coming months and years.

But, that will likely not mean that exactly the same strategy will be pursued for the rest of the pipeline, but rather there will be a holistic view across the assets in order to create exposure to the desired level of risk.

“With Luminous having its origins as a developer, we are open to measured risk taking and it is slightly counter-intuitive for us to take out all of the risk in the project as it removes the upside potential. But we can get around this by taking a portfolio approach with the other projects coming through development and, on the next project, we will likely want to leave a portion of the revenues floating so as to facilitate some opportunity for some upside if power prices spike again in the future,” says Lavarack.

*This story was originally published exclusively for NPM Europe subscribers.

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