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Spanish renewables market set for rebirth, but clock is ticking
Spain is on the cusp of a renewables renaissance as it gets to work on the 8GW of new capacity delivered via the country’s auctions in the summer, but with just over two years until projects have to be in operation developers need to pick up the pace. Many developments still have to secure grid connections, planning permits and supply chain agreements, while for those requiring project finance a new financing model that mitigates regulatory risks will also have to be found. Sort all this out and Spain could, rather unexpectedly given the regulatory upheavals of 2010-2013, become a poster-child for European zero-subsidy onshore wind and PV
After several years of hiatus following the Spanish government’s tampering with renewables regulation between 2010-2013, the Spanish market returned with a vengeance over the summer, with the country allocating 8GW of new onshore wind and PV projects via two separate auctions.
And while Spain is still working through an avalanche of legal action from investors left out of pocket by its insidious return-shaving earlier in the decade, the recent auction activity offers both a redemption of sorts and a chance to show the rest of Europe how to drive zero-subsidy renewables.
But while there is now a considerable pipeline in the offing, and at a price that effectively dispenses with the need for subsidies, project sponsors have some hefty work in store to get auction developments online by an ambitious December 2019 deadline.
Many developers are understood to have bid without confirmed grid connection points for example, while others bid in old projects whose planning permits will need to be renewed. Projects also need to firm up supply chain contracts.
But above all, project sponsors will need to overcome the financing challenges presented by the new system.
A reasonable return?
Under the terms of the auction awards this year, projects are allowed to generate a pre-tax return of 7.4%, based on the capex value they gave to the projects when bidding (which in July ended up being at a 65.8% to 81.91% discount to the nominal capex set by government).
Even leaving aside the extraordinarily low project costs these discounts imply, projects still have to sell energy at the pool price – should this fall below levels expected, they will only be compensated the difference between the pool price and the price they need to make the 7.4% return at a later date. This has the potential to create cashflow constraints, industry sources say. Exactly how and when developers would be compensated is also still not widely understood.
“From a financing standpoint that floor price doesn’t help – you don’t get the money back when you need it,” says one lender active in the Spanish renewables market.
Projects are also subject to regulatory risk, with the allowed return reviewed every six years. The next regulatory period -2020-2025 – is at present set to see the “reasonable return” fixed by the government reduced from 7.4% to circa 4.5%.
This is because the return is calculated on average ten-year Spanish bond yields plus 300bps. The 7.4% allowed return of the current period was calculated when Spanish bond yields were at 4.4%. Bond yields are now around 1.64%. And the Spanish government has as yet given no indication that it would enact a new law that would allow this calculation to be adjusted upward.
While banks have begun to work on financing structures for zero-subsidy projects there is not yet a fixed template in place, with lenders differing on how they plan to mitigate such risks.
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