“The age of subsidies is over. The government has to make the energy transition possible and make things easy for investors, but does not have to pay for it.
These are the words of Spain’s energy secretary José Domínguez Abascal, speaking at Bloomberg New Energy Finance Summit in London last week.
His statement is in line with a new programme of energy reform, announced by the Spanish government last month, which aims to attract up to €100bn of investment in renewable energy generation and storage capacity by 2030. It is looking to achieve this to meet a target from the European Union for generating 32% of its energy from renewables over the same period. Green investors have welcomed the target.
However, €100bn of renewable energy investments is not an easy goal to achieve for a country that seriously damaged investor confidence with retroactive cuts to subsidies between 2010 and 2013. Spain is still fighting legal battles with investors over the financial impact of these cuts. We wrote about this here.
So, to return to Abascal’s quote, the country needs a good plan to restore confidence of investors if it is to attract over €9bn a year for the next 11 years. Has it got one?
A key step for the government is to remove bureaucratic obstacles in the permitting process for new wind and solar projects, and facilitate the process for repowering existing wind farms. Power purchase agreements are set to play a key role.
In fact, the PPA market in Spain has slowly taken off over the last year. Recent examples include EDP Renewables and Engie, which have both signed agreements to buy power from Spanish wind farms; and Statkraft, Axpo and Nexus, which have signed solar PPAs. These deals are encouraging signs of a renewables market that if finally awakening, after years of stagnation.
But we still see many challenges to overcome. For example, there is limited availability of solvent PPA off-takers, in particular among small and medium-size corporates, and this would limit the potential of such deals.
Second, national utilities in Spain are not yet signing PPAs with third parties. This means that PPAs have been signed only by foreign wind farm owners so far, as they have seen them as an opportunity to catch a market share against local companies.
Freek Spoorenberg, Vice President at BlackRock Real Assets, told A Word About Wind that the continued development of the PPA market is set to mitigate the challenges that come with grid parity projects. Putting in place guarantees to cover the solvency risk of off-takers together with national utility off-take targets may improve the availability of PPAs to developers and investors.
As far as we know, the government has no concrete plan to do either, even though making PPAs work could be the quickest way to make investors comfortable with market risks.
Another problem in Spain is that electricity over-capacity has not yet been fixed. Abascal said that the government had no specific plan about phasing out old coal power plants and it is counting on companies on taking that decision. This might work in some cases, but still leaves the growth of renewables a hostage of vested interests from those in the coal sector.
If the government started retiring excess capacity, starting with the oldest and dirtiest power plants, then it would create more room for renewables in the grid and give a positive signal to investors. With over 4GW of wind capacity awarded last year and more auctions to come, investors need that reassurance.
Finally, wind projects are still limited to generating a “reasonable return”, capped by the government, which affects returns on wind farms retroactively. If the government wants to really regain investor confidence, it needs to look at scrapping the cap.
Governments may be paying less in the way of direct subsidies, but politicians can still play an important role in making the transition possible and making things easy for investors. As yet, it doesn’t look like Spain’s leaders are doing enough.
