Investing in Spain

Spanish Feed-in-Tariff (FiT) scheme was abolished for new renewable energy projects back in 2014 (retroactive effect from July 2013); whilst for existing installations FiT scheme was replaced with a retribution regime aimed at granting to all operating assets a Reasonable Return (“Rentabilidad Razonable”) through a double incentive: (i) Return on Investment (to recover the initial investment) and; (ii) Return on Operation (to cover operating expenses). However, Government is entitled to call for auctions that may result in the granting of specific subsidies under the same scheme of operating assets for new developments, as done in 2016 and 2017.

Spain intends to go beyond EU objectives, so that post-auction period will represent an important challenge for the sector. The main difference between nowadays and years ago is that grid parity has now been reached, which means that by selling energy at market prices it is possible to cover costs and achieve profitability.

From route-to-market standpoint, as a result of having reached grid parity, there are three types of renewables energies (RE) projects now being delivered into the market: (I) auction projects, (II) PPA projects and (III) full-merchant projects.

Onshore wind and Solar PV grid parity have taken renewable energy industry to new paradigm, where investment structures had become more complex, but investment opportunities have grown considerably. Additionally, Spain offers very good resource and low renewable energy penetration, compared to real deployment capabilities. All these combined makes Spain one of the most attractive OECD markets.

Spain is the second European country with the largest installed wind capacity and the fifth in the world, only behind China, the United States, Germany and India. The country is widely committed to comply with the 2020 target, for that purpose, a boost on the share of renewables is taking place and will continue increasing over the following years, since Spain will need to double its renewable capacity by 2030 to comply with European renewable energy targets.

Spanish Government, led by Teresa Ribera, Minister for Transición Ecológica proposed through “Anteproyecto de ley de cambio climático y transición energética” an increased target of 35% of Spanish energy consumption coming from renewable energy. To that end, the following roadmap is proposed:

-Period 2020 – 2030 auctions shall be carried out to develop a minimum of 3GW of annual capacity.

-Every 5 years, specific measures will be carried out to define the share amount needed to achieve the targets (the period may be modified to 2.5 years).

-A new legal framework for renewables simplifying administrative procedures and burdens will be stablished.

-Renewable energy generation plants shall be given priority to access distribution and transport network.

Key drivers and risks on an investment in a RE project in Spain:

-Connection points vs. Land: capacity of current substations has become a problem when entering the market. Bonds (40.000€/MW) to be granted without visibility of the available capacity and the risks of finding lands in the nearby considering the bubble in the market as a consequence of so many developers requesting capacity, have resulted on speculation and difficulties to have a project.

-PPA: Since Spanish renewable energy market was reactivated mainly driven by auctions launched in 2016-2017, PPA structures had become a reality when assessing renewable energy investments in Spain. Reasons why PPA are growing in popularity are simple: (i) limited subsidy-scheme projects; (ii) aversion to regulatory risk and; (iii) non-recourse financing requirements. Variety of PPA structures is wide: financial or physical contracts, fixed-price, floor, collar, upside sharing, market indexed, etc. PPA improves visibility on energy prices and therefore predictable cash flows which is instrumental to access non-recourse financing.

-Auctions: tight deadline to meet the deadlines of 31/12/2019 COD.

-Increasing prices: as a consequence of the lack of real opportunities and the liquidity of the market, which tend to reduce returns and therefore a misallocation with the assumed risks.

Vector Cuatro M&A and Financial Advisory business line provides its clients with tailor-made market reports covering, inter alia, country and sector analysis, development and connection process description, market price hedging (PPA and auction) description, tax memo, asset valuation analysis including expected returns and comparable transactions in the market, financing structures definition.

In addition, Vector Cuatro M&A and Financial Advisory business line is well experienced on the valuation of PV and wind projects through the preparation of financial models covering development, construction and operations.