4 minute read 19 May 2020
Wind turbines at sunrise off the north east coast image

How Spanish renewables are set to weather short-term storms

By Víctor Pérez

EY Global Gas Leader and Mediterranean Energy Sector Leader

Helping energy industry leaders around the world transform their organizations. Gas expert in international arbitration. Published photographer, singer and guitarist.

4 minute read 19 May 2020

Investors remain positive about the country’s prospects as the new coalition government outlines ambitious targets for wind and solar.

This article is part of the 55th edition of the Renewable Energy Country Attractiveness Index (RECAI).

Spain’s renewable energy industry entered 2020 with an optimistic outlook, buoyed by aggressive targets introduced by the country’s new coalition government and the anticipation of strong growth in unsubsidized merchant generation. While the COVID-19 pandemic has complicated the near-term picture, prospects for the sector look good in the medium term.

Climate and energy policy is a high priority for the coalition government, which was formed after the latest round of inconclusive elections in November and is led by Socialist Party Prime Minister Pedro Sánchez. In April, it submitted to the European Commission its national energy and climate plan, which sets a target of a 23% cut in emissions by 2030, compared with 1990 levels.

The plan anticipates an increase in wind power from 28GW in 2020, to 40GW by 2025, and 50GW by 2030. It is targeting growth in solar photovoltaics (PV), from 8.4GW at the start of this year, to 22GW by 2025 and 39GW in 2030.

These plans are seen by market participants as aggressive, but achievable – and a long way from the start-stop history of renewables in Spain, which resulted in generous feed-in tariffs being cut retrospectively, raising the ire of investors and developers.

This follows strong growth in both wind and solar last year. In wind, 2.3GW of new capacity came online, bringing the total to 25GW, according to transmission system operator Red Eléctrica de España (REE). In solar, Spain became Europe’s top market for capacity additions for the first time since 2008, says SolarPower Europe. Figures from REE show the country adding 4.2GW of solar PV. That growth continues: in April, Iberdrola’s 500MW Núñez de Balboa solar farm in southwest Spain – Europe’s largest solar PV plant – began supplying power.

These plans are seen by market participants as aggressive, but achievable – and a long way from the start-stop history of renewables in Spain, which resulted in generous feed-in tariffs being cut retrospectively, raising the ire of investors and developers.

While the Government had planned auctions for the end of March, these have been delayed because of COVID-19. However, a large proportion of the growth in renewable energy is expected to be delivered by merchant plants, given the increasing cost-competitiveness of wind and solar technologies.

COVID-19 impacts

Spain has been hit hard by COVID-19. As is the case elsewhere, pressure on international supply chains and difficulties moving key staff around will delay construction on some projects. However, the Government gave exemptions to developers to continue working on some renewables projects during the shutdown, and manufacturers with Spanish operations – such as Vestas, Siemens Gamesa and LM Wind Power – resumed production after a two-week halt. 

Of bigger concern to developers, particularly of merchant projects, is the impact of the economic lockdown and any subsequent downturn on power prices. Wholesale power prices in Spain’s pool were down 63% year on year in early April. However, futures prices are recovering, signaling that the market sees the impact as short-term.

Meanwhile, flagship Spanish energy companies have signaled their determination to continue investing in renewables. Iberdrola, for example, unveiled a “global action plan” in response to COVID-19, including a commitment to accelerate its €10b investment plan. Endesa is also continuing with its planned increases in renewables capacity.

Low power prices do, however, make it challenging to sell corporate power purchase agreements (PPAs) to local buyers. Most domestic buyers are driven by near-term cost, rather than sustainability considerations or the advantages of using PPAs to lock in long-term power prices – current low pool prices provide an attractive opportunity to do so. 

At the present time, many PPAs are sold to corporate buyers outside of Spain. For example, Amazon has entered into PPAs with two Spanish projects, the latest being a 50MW solar farm in Aragón. In December, energy trader Statkraft entered into a 10-year PPA with five solar projects, totaling 252MW, while Heineken has struck a deal with Iberdrola to support a new 50MW solar plant in Andévalo, and AB InBev has signed a 10-year virtual PPA for 130MW of solar power to cover its pan-European operations.

Meanwhile, flagship Spanish energy companies have signaled their determination to continue investing in renewables. Iberdrola, for example, unveiled a “global action plan” in response to COVID-19, including a commitment to accelerate its €10b investment plan. Endesa is also continuing with its planned increases in renewables capacity.

In a move that would promote domestic demand, the Government is considering requiring local energy-intensive companies to source 10% of their power through PPAs. The proposed regulation would also allow corporates to meet this target by purchasing guarantees of origin (GO) certificates, but such a strategy would expose them to the risk of a supply squeeze in that market.

Outlook

Short-term disruptions from COVID-19 notwithstanding, most investors remain positive on Spain. The country benefits from good renewable energy sources; the direction of travel is clear, in policy terms; and the lack of subsidies now needed by the clean-energy sector makes pro-renewables policies less costly and less exposed to regulatory risk than in the past.

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Summary

Spain has been hit hard by COVID-19, but climate and energy policy remains a high priority for the new coalition government. It has set out aggressive but achievable plans to increase wind and solar, and most investors remain positive about Spain’s medium-term prospects.

About this article

By Víctor Pérez

EY Global Gas Leader and Mediterranean Energy Sector Leader

Helping energy industry leaders around the world transform their organizations. Gas expert in international arbitration. Published photographer, singer and guitarist.