Large-scale solar is not ready for the spot market in Portugal

pv magazine: Mr. Sá da Costa, the Portuguese government has announced a new solar plan which is expected to create a remuneration scheme based on market prices, and without subsidies paid by consumers. What do you think about this new plan?

Sá da Costa: I see here just an announcement, inside which there’s nothing new. If this plan envisages the idea that solar and renewables may currently compete on the spot market, and the government wants more renewable energy generation capacity, well I believe that the plan is going in the wrong direction. The spot market is a marginal market based on fuel costs and, due to the price volatility of fossil fuels, when we will have 100% the spot market value will be zero, because the marginal cost of renewable is zero – we don’t pay for the sun, wind or rain, therefore no new projects will be built to give for free the electricity they produce. We have to find new ways to remunerate renewable power plants in a competitive environment, without subsidies.

Which may be the alternative for competing in the spot market?

Auctions. Tendering and competitive processes held for solar and renewables worldwide are already ensuring tariffs that are lower than those of fossil fuels. I believe that for large-scale solar 15-year PPAs may be the best solution, as these guarantee a reasonable long-term perspective. A 10-year PPA may be too short, but also PPAs exceeding 20 years may be too long. Every year, in fact, the performance of a solar plant decreases and the efficiency of the PV technology increases. With the efficiency of the plant going down, and technological progress going up, the longer the PPA the bigger the gap between old and new installations.

Portuguese Energy Secretary Jorge Seguro Sanches yesterday welcomed on his Twitter account the start of construction of a 46 MW solar park “without incentives” in Ourique, Beja district, southern Portugal. Does this mean that ‘grid-parity’ of solar plants is already happening?

As far as I know, they have only started to construct the fence for the solar park, and I am curious to see when the solar modules will be installed. To my knowledge, there are currently only 25 MW of operational renewable energy generation capacity which are selling power to the market in Portugal, and only 2 MW of this 25 MW are for solar. It’s a 2 MW facility built through crowdfunding whose construction was finalized at the end of September. On top of this, there’s a wind farm (18 MW) that lost the FiT in August and a small hydropower plant (5 MW) that also lost the FiT in June. The government, however, is expecting, in order to meet the 2020 target, to have 2 GW of renewable energy generation capacity in the spot market. How do they think to reach this target, with crowdfunding?

Why should “grid-parity” renewables not work on the spot market?

Because the plan of the government to bring them to the spot market is a failure. There are three main reasons for this failure. The first reason is the lack of the so-called aggregators, which were supposed to be created after a new energy law was published in October 2012. These aggregators were conceived as enterprises comprising different developers that, thanks to their size and capabilities, should be better positioned to address the challenges of securing financing and project development. Well, the reason why these aggregators were never formed is that a tender mechanism, which was also recommended in the law, was never implemented. Another big issue is represented by the creation of a guarantee of origin market. The entity which is now responsible for this, the Portuguese Directorate General for Geology and Energy (DGEG) is not yet prepared to execute this task. The government, on the other hand, is not taking the necessary measures to promote this market. Furthermore, the third and most fundamental reason is the lack of big volumes of renewable energy generation capacity in the spot market itself.

So, if renewables are not competitive for the spot market, and the government seems not to consider the introduction of an auction scheme, which may be the alternative for the development of large-scale solar and wind?

As association, we suggest a 2-year transition period, let’s call it an exception regime, in which big volumes can be installed and renewables receive compensation for deviations from offers in the daily market. As the size of the renewable energy portfolio under the spot market will increase, deviations will also decrease, thus lowering the amount of compensation. I believe that this may be a viable solution, although I repeat, auctions are currently the only way to deploy more large-scale solar throughout Portugal.

On the other hand, it must be remembered that the country has very low levels of solar development compared to most EU countries. With solar reaching such a low prices worldwide and Portugal’s solar radiation, is there not here a huge potential at stake?

Yes, we believe that solar PV is underdeveloped in Portugal, and is the renewable source that will increase the most in the near future. We expect that solar PV can grow from the less than 0.5 GW of today to around 9 GW by 2040. With this increase in the solar PV capacity, as well as with the wind and hydro previewed for that year, we will be close to have 100% renewable electricity. But this on the theoretical point of view and if there is no type of commitment from the Government in the name of the consumers to guaranteeing a period for a PPA for competitive and cheaper prices, it will be very difficult to achieve.