Spanish PV could go merchant but market must change

pv magazine: The Spanish government has finally auctioned off its first solar quota, after many years in which large-scale PV was banned. What are your thoughts on the auction that was held in late July?

Donoso: Well, Spain's second auction for renewable energy, and the first where solar had a real chance to win, has allocated approximately 3.9 GW of solar capacity. This is undoubtedly a good result. If you then ask me if I was satisfied on how the two auctions were conducted, well, my answers is “no.”

Were the bidding rules too complicated?

Instead of an auction mechanism based on the maximum discount principle, we had proposed a standard auction system, based on the following principles: a transparent and simple mechanism, where each technology can express its own competitiveness, where volumes are assigned based on the price per kWh produced, as this is the only way to ensure that only efficient projects are assigned volumes; and based on a “pay as bid” mechanism that ensures that the bid corresponds to the final pricing. Also, we proposed a system where specific volumes were assigned to smaller projects. On the contrary, the system put in place by the government has not brought transparency in the renewable energy market.

It was difficult to understand the auction and explain it in a simple way. The concept of “maximum discount,” for example…

When the bidding rules were announced, we also needed time to sort out all the complexities of the two auctions. As for the concept of maximum discount, it is related to the retroactive measures that the government implemented to cut off renewable energy retribution. It defined a standard cost and a standard OPEX that were used as a basis to calculate a 7.3% profitability rate. In the auction, the government decided to use the standard OPEX (€1.2 millon per MW) as a reference element, so that project promoters would define their standard costs based on the discounts they were able to offer on this standard OPEX.

We still don't know anything about the auction's average prices. Can you provide an update?

Well, this is one the problems of a complicated bidding mechanism. The “variable floor” was supposed to be at around €30.5  and €32.00/MWh. But we all know that this is not really a minimum price, as the tariffs may be changed every six years in accordance with the principle of “reasonable profitability.” Reasonable profitability is the result of the average performance of 10-year state obligations plus 300 basis points, and this procedure is established by Royal Decree 413/2014. According to this principle, the variations of the performance of state obligations may result in a change of the reasonable profitability. And according to the Royal Decree, this can be revised every six years.

Does this mean that large-scale solar is now nearing the threshold of €0.03/kWh in Spain?

Not really. Projects will get the market price and the “variable floor” will be introduced only if these projects do not reach the assigned profitability during the project lifetime.

Do you believe prices could fall further in the auctions that will be held by 2020?

From a technological point of view, we expect prices to drop even further, thanks to R&D improvements. As for the prices that will be seen in the next auctions, it will depend not only on the competitiveness of the technology, but also on how interest rates change. PV is a capital-intensive technology, so this element will have a specific impact.

Was the auction mechanism designed to prevent solar from looking competitive and showing its potential?

This auction mechanism was inspired by the same principle that inspired all retroactive cuts for solar incentives we have seen over the past years, and this principle is the aforementioned “reasonable profitability.” If the government had done it differently, it would have said: “We have done everything wrong in the past.” The government was simply hostage to its own mistakes, and these bidding rules were just a sign of continuity from all of Spain's bad renewable energy policies. They have just recreated an auction system within their counter-reform. However, in the first auction carried out this year, the bidding mechanism was designed in a way that allowed wind energy to get priority over PV, even in situations where the competitiveness of both technologies resulted in a tie.

Do you believe that all of the 3.9 GW of allocated capacity will be installed?

I am quite sure that if not all of it, a very big portion of this capacity will come online. Most projects are backed by solid industrial groups and there are all the conditions for their development, although timing in some cases may be an issue.

Most of the winning consortia are led by big Spanish utilities or industrial groups.

If we look at the international auction experience, we can see that highly competitive prices are offered. And such competitive prices are possible only with economies of scale, which is something that mainly big industrial groups or consortia can afford. This is why at UNEF we have always said that specific auctions should be reserved for smaller projects.

Large-scale solar in Spain is not only about auctions. There are also several “grid-parity” projects under development, especially in the sunniest southern regions. Do you believe that solar is ready for the spot market in Spain?

Several projects may really start in the near future, although financing still is a problem. These projects may require up to 60% of equity, and this is not easy to achieve. Another problem is also represented by the current market design, which was conceived in the 1980s and is based on marginalism. This market design does not adapt to the characteristics of renewable energy, where the market price is defined according to the variable costs of technologies. (That is) an element that for PV and other renewable energy technology is equal to zero. The Spanish PV sector is willing to go merchant. But in order to ensure good integration, the market structure has to change to adapt to the features of renewable energy and ultimately define prices in an efficient way.

Is there potential for private PPAs in the Spanish renewable energy market?

The current legislation already allows these kinds of contracts and their potential is considerable. The first PPA between a renewable energy producer and a private company was signed in July. It was between Portugal's EDP and Spanish milk producer Leche Pascual. EDP will sell power produced by one of its wind power plants in Spain to Leche Pascual under a five-year PPA.

Which would be the ideal duration for a PPA for this kind for solar?

Ideally, the longer the duration of the PPA, the better. But the ideal duration should be more than 10 years, to ensure that the plants can be amortized.

Which are the main drivers for private PPAs in Spain?

Above all the necessity for many industrial and commercial consumers to reduce their energy bills. If this will meet with the ability of the solar sector to drive down costs, the success of the private PPA model will be guaranteed. Furthermore, there is huge potential for PPAs with public entities such as regional governments or municipalities. They are also willing to pay less for the power they consume, and solar and renewables in general are becoming cheaper than other sources. Also private companies are willing to go for PPAs to show that they are committed to using renewable energy and fighting climate change.

So is there is no way that the development of solar energy will be halted in Spain again?

Solar is cheap in Spain, as well as in many regions of the world with a lot of sun. This is a fact. PV is helping to create more competitiveness in the global energy market, and Spain may not be an exception. In a medium-term scenario, the convergence of both environmental objectives related to the fight against climate change and of economic ones — that is, lower prices — will create a situation in which PV will play a crucial role in Spain, both in the national energy market mix and in future investments.