Overview of Spain‘s Renewable Energy Sector Solar-FIT and electricity market

In a nutshell:

After the economic crisis, which was also caused by the sudden discontinuation of the support for renewable energies, Spain has managed to see a transition. The economy is recovering and new renewable energy plants no longer depend on state subsidies. An overview.

In a nutshell:

After the economic crisis, which was also caused by the sudden discontinuation of the support for renewable energies, Spain has managed to see a transition. The economy is recovering and new renewable energy plants no longer depend on state subsidies. An overview.

 When Spain announced the end of the support for renewable energy plants in 2012, followed by the 2013 announcement that the statutorily guaranteed FIT would be reduced with retroactive effect, hardly anyone would have expected that only 4 years later Spain would reappear on the RE scene as a very attractive country. Too high were the operating losses generated by the power plants which, in part, had been designed and installed at far too high a cost, and resulted in a number of depreciation charges for operators and financing institutions. Existing power plants still receive funding from the Spanish electricity market but according to the applicable law RD 413/2014, the incentives may be significantly reduced as of 1 January 2020. When the above-mentioned law was being enacted, the legislator provided that funding (which had already been significantly reduced once before, see above) would be adjusted every 6 years depending on the development of the Spanish 10-year treasury bonds. The first 6-year period expires on 31/12/2019 and, now, the decision of the Minister of Energy is being anxiously awaited. In principle, the electricity market is able to finance itself and is also slightly profitable, i.e. it is far off from the 2012 tariff deficit of EUR 28 billion which had led to the above-mentioned reductions. On the other hand, there are lawsuits pending against Spain before arbitration tribunals the value of which is estimated at EUR 7.5 billion, which would have to be borne by the electricity market, and a reduction in the electricity price – to the disadvantage of the operators of RE plants – would be also quite good in political terms for the currently crippled government of Mariano Rajoy. The law promises a reasonable rate of return, which is currently at 7.5%, i.e. 300 basis points over the Spanish 10-year treasury bonds issued in 2012. If these bonds were now at 1.5% or less, one could simply calculate the effects of a possible reduction in funding in 2020. It remains to be seen whether the Ministry of Industry will exhaust all the possibilities offered by the law.

These possible reductions, of course, refer only to power plants that receive any kind of funding from the electricity market.

Large-scale PV installations and wind farms that are being newly designed now will depend only on the spot market and the developments regarding PPAs. In 2017, the Spanish government organised two technology-neutral auctions for more than 5GW where contracts were awarded only to power plants that waived their claim for funding amid the then prevailing prices on the spot market. A floor price was guaranteed (about 38€/MWh), but can also be adjusted in 2020, i.e. reduced. Accordingly, the auctions are assessed very differently by the market players, and many project developers and investors initially did not even participate in the auctions.

Like Baywa, which has just concluded a 15-year PPA with the Norwegian supplier Statkraft on the purchase of electricity generated in a 170 MW solar farm, situated south of Sevilla and due to be connected to the grid by the end of this year. As usual, the business terms are confidential, but the long term of the agreement and the uncertainty regarding the development of spot prices on the European electricity markets suggest that the PPA price has been coupled with the spot market at least in part. It is common to agree on floor and roof prices, together with a % deduction from the respective spot price. It remains to be seen whether this business model will be successful in the long term. We should hope so, for the benefit of the environment and the Spanish economy.

 When Spain announced the end of the support for renewable energy plants in 2012, followed by the 2013 announcement that the statutorily guaranteed FIT would be reduced with retroactive effect, hardly anyone would have expected that only 4 years later Spain would reappear on the RE scene as a very attractive country. Too high were the operating losses generated by the power plants which, in part, had been designed and installed at far too high a cost, and resulted in a number of depreciation charges for operators and financing institutions. Existing power plants still receive funding from the Spanish electricity market but according to the applicable law RD 413/2014, the incentives may be significantly reduced as of 1 January 2020. When the above-mentioned law was being enacted, the legislator provided that funding (which had already been significantly reduced once before, see above) would be adjusted every 6 years depending on the development of the Spanish 10-year treasury bonds. The first 6-year period expires on 31/12/2019 and, now, the decision of the Minister of Energy is being anxiously awaited. In principle, the electricity market is able to finance itself and is also slightly profitable, i.e. it is far off from the 2012 tariff deficit of EUR 28 billion which had led to the above-mentioned reductions. On the other hand, there are lawsuits pending against Spain before arbitration tribunals the value of which is estimated at EUR 7.5 billion, which would have to be borne by the electricity market, and a reduction in the electricity price – to the disadvantage of the operators of RE plants – would be also quite good in political terms for the currently crippled government of Mariano Rajoy. The law promises a reasonable rate of return, which is currently at 7.5%, i.e. 300 basis points over the Spanish 10-year treasury bonds issued in 2012. If these bonds were now at 1.5% or less, one could simply calculate the effects of a possible reduction in funding in 2020. It remains to be seen whether the Ministry of Industry will exhaust all the possibilities offered by the law.

These possible reductions, of course, refer only to power plants that receive any kind of funding from the electricity market.

Large-scale PV installations and wind farms that are being newly designed now will depend only on the spot market and the developments regarding PPAs. In 2017, the Spanish government organised two technology-neutral auctions for more than 5GW where contracts were awarded only to power plants that waived their claim for funding amid the then prevailing prices on the spot market. A floor price was guaranteed (about 38€/MWh), but can also be adjusted in 2020, i.e. reduced. Accordingly, the auctions are assessed very differently by the market players, and many project developers and investors initially did not even participate in the auctions.

Like Baywa, which has just concluded a 15-year PPA with the Norwegian supplier Statkraft on the purchase of electricity generated in a 170 MW solar farm, situated south of Sevilla and due to be connected to the grid by the end of this year. As usual, the business terms are confidential, but the long term of the agreement and the uncertainty regarding the development of spot prices on the European electricity markets suggest that the PPA price has been coupled with the spot market at least in part. It is common to agree on floor and roof prices, together with a % deduction from the respective spot price. It remains to be seen whether this business model will be successful in the long term. We should hope so, for the benefit of the environment and the Spanish economy.