Photovoltaics in Spain: a restart
In Spain, a country where irradiation reaches one of the highest levels in the EU, photovoltaics (PV) plateaued at an installed capacity of 4.6 GW in 2013.
Following significant development from 637 MW in 2007 to 4261 MW in 2011, which was propelled by the tariffs present at that time, a change in the regulatory environment led to an almost complete standstill of the installed capacity.
The fact that tariff prices of auctions were reaching values below 32 EUR/MWh in countries like Mexico or Chile showed that market parity could have also been achieved in Spain. This point was supported by historical average electricity prices, which were above 40 EUR/MWh on average.
These projects are forward-looking and basing the business case on past electricity prices alone would be wrong. An accessible source of information for possible future costs are the derivatives markets like EEX, OMIE, OMIP. There we see forward prices of 54, 51 and 49 EUR/MWh for 2020, 2021 and 2022 respectively, which are way above the 32 EUR/MWh of those projects in Mexico and Chile.
The market parity was confirmed when the government in Spain auctioned around 8,000 MW of renewable installed capacity. The bidders winning at that auction requested no tariff. The business cases and the paper supporting that conclusion was the easy part. It is a long way from an idea to a ready-built plant, detailed below.
The different phases, shown above, highlight some of the obstacles that need to be resolved to get the project to the final stage:
- Regulation: In Spain, regulation has undergone almost no change since 2012, at which point tariffs were still present. Furthermore, the current legislation is open to interpretation still, making the uncertainty along the way a source of unpleasant surprises.
- Financing: How do you explain to banks that they have to finance a project with full merchant risk? How can you help them develop from a tariff to a spot price world? Essential is the third point, the Power Purchase Agreement (PPA).
- PPA: This legal contract provides most banks with the comfort they seek in this new badge of projects. PPA was a sort of alien in the Iberian market, which meant that you needed to work with the financing party but also with the PPA off-taker and convinces them, as well as their committees, that they would be taking on a manageable amount of risk. Off-takers also need to cover their risk, and as the PPA is not standardised with a structured market, it cannot be removed easily from their balance sheet.
This mixture of merchant risk, PPA and lack of standardisation causes off-takers and financing parties to be extremely cautious towards these financing structures, which can result in the premature end of a project.
- EPC: A crucial part of the process, is somewhat more straightforward in Spain due to its historical relationship with PV plants, the significant amount of Energy Performance Certificate (EPC) providers and the established know-how.
Where there are risk and difficulty, there is a possible reward which will most probably be exploited by early movers. The pain suffered by early movers is leading to a renaissance of PV in Spain, where over 20 GW of new PV installed capacity has already secured their grid capacity by placing bank or insurance guarantees.
The future for the PV industry in Spain is bright, but for those projects with secured connections but changes in regulation, financing and PPA standardisation need to happen so that the above mentioned 20 GW in new PV installed capacity is to become a reality.
Investment Manager with over 18 years experience holding an engineering diploma, an MBA and CFA Charter which have enabled him to strategically drive the full lifecycle of investments as well as merge and acquisitions with focus on infrastructure (renewables). He has played a key role in over 60 debt/equity transaction in the renewable sectors with a volume of more than 500 MEUR. César actually leads aventron merge and acquisitions and development activities in southern Europe and also acts as financial specialist in the rest of the regions where aventron is present.
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