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Webinar: Trends in renewable energy support

Is the Spanish case a forerunner for the rest of the EU?

Matthew Jones – Senior Analyst – EU Power & Carbon

Anise Ganbold – Senior Analyst – EU Power & Carbon

12 July 2018

copyright © 2018 ICIS analytics.icis.com 2

Housekeeping

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The recording and the slides will be available after the live event

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What we’ll discuss

Historical developments

Renewable auctions in 2016-2017 and Spain’s 2020 targets

Spain further out – developments to 2030

Conclusions

Q&A


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Historical developments


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Installed RES capacity by country

Spain Germany Italy France UKSource: IRENA

Renewable development in Spain slows: What went wrong?



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ECT cases against Spain involving renewable scheme reform

41 complaints by foreign companies under the ECT so far

Source: ICISSource: ICIS


Renewable Auctions


Spanish renewable auction design

The government sets a starting price for each technology type

The starting price considers expectation of market prices, capital costs, operating costs, running hours and other factors

Government reserves the right to review the starting prices every three years – next review is due end-2019

Companies bid a percentage discount to the starting price

Deadline for commissioning is 31 Dec 2019

Penalties for 2016 projects that miss deadline, up to €20/kW and for 2017 projects up to €60/kW



Auction Date Technology Capacity target (MW) Capacity awarded (MW) Weighted average subsidy price (€/MWh)

Jan 2016Onshore wind

700 in total569 0

Biomass 200 0

May 2017

Onshore wind

3000 in total

2,780 39.9

Other RES 19 41.6

Solar 1 42.2

Jul 2017Onshore wind

3000 in total1,128 28.2

Solar 3,909 32.7

Total 6700 8,606

Renewable auctions resulted in 8.6GW of new RES capacity

Source: ICIS, OMIE



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Prices at auctions - Spain vs other EU countries

Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France

Auction strike prices in Spain are lower than in other EU countries

Source: ICIS



Spain has lower auction prices but higher market prices, though volatility is high

Source: ICIS, EEX, OMIE

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Lowest subsidy price vs. 2020 market price

Colourful bars = Lowest subsidy 2020 power price

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Colourful bars = Lowest subsidy 2020 power price Revenue received





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Intra-day price - Range in 2018 to date



More renewable capacity ‘cannibalises’ the capture price

Renewables can be a victim of their own success through price cannibalisation

Capture prices reflect the actual income that a generator achieves in the market

A rapid build-out of renewable capacity could depress capture price as projects will have the same production profile

Capture price declines with more RES generation

RES generation MWh/h

€/M

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2018: fewer generators capture an average higher price

Income for RES in 2018



More renewable capacity ‘cannibalises’ the capture price

Renewables can be a victim of their own success through price cannibalisation

Capture prices reflect the actual income that a generator achieves in the market

A rapid build-out of renewable capacity could depress capture price as projects will have the same production profile

Capture price declines with more RES generation

RES generation MWh/h

€/M

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Income in 2030

2030: more generators capture an average lower price


2020 Targets


Spain’s RES target is 20% of final energy consumption

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Spain RES share in final energy consumption

Heating & Cooling Transport Electricity 2020 TargetSource: Eurostat



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Spanish RES capacity with auctions +8.6GW of auctionedcapacity

In an ideal scenario auctioned capacity could be enough

In a high case assumption where all successful capacity comes online, total installed RES capacity reaches 56.7GW in 2020

Source: ICIS, Eurostat



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Spanish RES capacity with auctions +8.6GW of auctionedcapacity

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Spain RES E-generation with auctions +24TWh fromauctioned capacity

In an ideal scenario auctioned capacity could be enough

When you take into account the load factors used by the government* during the auctions, you can convert the auctioned capacity into generation

*27% solar, 34% wind, 57% other. We assumed 69% for biomass




What is needed to reach the 2020 target?

In a scenario where

1. energy demand is flat between 2016 and 2020 and

2. RES in heating & cooling and transport is also flat

The auctioned RES capacity of 24TWh would bring total RES generation to 19.7% of energy demand


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Spain RES output scenario with auctions - assume other inputs flat between 2016-2020

Heating & Cooling Transport Electricity 20% Target



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Spain RES output scenario with auctions - with growth in H&C and Transport sectors

Heating & Cooling Transport Electricity 20% Target

What is needed to reach the 2020 target?

In a scenario where

1. energy demand is flat between 2016 and 2020 and

2. RES in heating & cooling and transport is flat between 2016 and 2020

The auctioned RES capacity of 24TWh would bring total RES generation to 19.7% of energy demand

If instead renewables in heating & cooling and transport grow at modest rates

The share of renewables would be 20.3% by 2020

Therefore there is some margin for key variables such as - Load factors: the government used

relatively high load factors in its auctions- Energy demand development - RES closures- RES in other sectors, H&C and Transport




The auctioned projects – which are likely to come online?

More than half of companies reported some progress in 2018

Yes UnknownSource: ICIS



Forestalia, 1.9 GW

ACS Group, 1.6 GW

Enel, 1.1 GWNaturgy, 0.9 GW

Alfanar, 0.7 GW

Solaria, 0.3 GW

Siemens Gamesa, 0.2 GW

OPDE, 0.2 GW

Greenalia, 0.1 GW

Jorge Group, 0.1 GW

EDP, 0.1 GW

Other, 1.4 GW

TOTAL PROJECT SIZE BY PARENT COMPANY


Source: ICIS




Projects owned by local companies have regional expertise and links but have limited funds

Projects owned by large parent companies could afford to pay the penalties if they miss the target

Iberdrola is noticeably missing – possible it is waiting for better auction conditions next time?

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Most of the progress reported in 2018 comes from the largest parent companies

Yes UnknownSource: ICIS



Developments up to 2020

The results of the 2016-2017 renewables auctions are promising

All of the successful capacity bid ‘subsidy-free’

Spanish prices can be volatile

Almost 60% of auctioned capacity has reported some progress this year, we expect the same share to meet the end-2019 deadline

We think the government will take a ‘wait-and-see’ approach this year


Developments to 2030: targets, capacity and support systems


Spanish 2030 RES target in the EU context

EU

2020: 20% (binding)

2030: 32% RES (binding)

• Spain

• 2020: 20% RES (binding)

• 2030: ?% RES (non-binding)

• Spain’s plans to 2030 need to be drawn up by the end of 2018

• The government is aiming to release its climate change law by August



What 2030 renewable target will Spain go for?

Spanish Commission of Experts released a baseline scenario, which would lead to a 29.7% RES share in final energy consumption

In light of the EU agreement on a 32% share, will Spain attempt a higher share? 0

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2016 (17% RES share) 2020 (20% RES share) 2030 (29.7% RES share) 2030 (32% RES share)

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Solar/wind capacity scenarios (GW)

Wind Solar

Source: ICIS/Spanish Commission of Experts



Capacity additions 2021-2030

At a target of 29.7% RES, Spain would require 39.4GW of additional wind and solar 2021-2030

At a target of 32% RES, this would rise to 50.5GW

According to Spanish solar association UNEF, there are already 24GW of solar projects in the approval process

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RES capacity additions vs. capacity required 2021-2030

RES Capacity additions RES required p.a. 2021-2030 (29.7%) RES required p.a. 2021-2030 (32%)

Source: ICIS/IRENA


How can Spain bring this capacity online?


Full merchant risk

Merchant projects are risky given uncertainty over future prices and volatility

While we expect wholesale prices to increase, downside risk remains

Will lenders be scared off by the scale of the risk?

What rates of return will they expect on investments?

Source: OMIE

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Spanish hourly prices July 2017-July 2018

Hourly prices Average price



Full merchant risk

Merchant projects are risky given uncertainty over future prices and volatility

While we expect wholesale prices to increase, downside risk remains

Will lenders be scared off by the scale of the risk?

Will large utilities be willing to invest in Spain or will they prefer less risky markets?

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Uncertainty over future direction of Spanish prices

+/- €2 p.a. Forward curveSource: ICIS



Power Purchase Agreements (PPAs)

PPAs de-risk projects by locking in long-term prices

We are starting to see the first PPAs signed for RES projects in Spain

PPA

CorporateWholesale

reseller



Power Purchase Agreements (PPAs)

PPAs de-risk projects by locking in long-term prices

We are starting to see the first PPAs signed for RES projects in Spain

The question is whether there will be enough demand for PPAs to enable large-scale subsidy-free rollout?

Spain is likely to set up a trading platform for PPAs

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European corporate PPA demand vs. Spanish RES capacity requirements

European RES capacity sourced through PPAs

RES required p.a. 2021-2030 (29.7%)

RES required p.a. 2021-2030 (32%)

Source: ICIS/WindEurope



Minimum price floors

The implicit floor price from the previous auctions is of questionable relevance

If merchant projects struggle to obtain financing on sign PPAs, the government may have to rethink this model

Will they introduce a higher floor price to improve project bankability?

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Recent minimum prices vs. forward curve and price uncertainty

+/- €2 p.a. Forward curve Wind price floor Solar price floor

Source: ICIS



Conclusion: Is the Spanish case a forerunner for the rest of the EU?

Subsidy-free projects are beginning to emerge in a number of EU member states

However, Spain will be the first EU country to attempt to roll out subsidy-free capacity at scale

Spain will therefore provide a test case to the rest of the EU as to what is possible

Investor appetite for risk given market price uncertainty will remain the greatest challenge going forward

Given the quantity of capacity that needs to come online to meet targets, the government will need to provide better terms than those on offer in the recent auction


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Matthew Jones

Senior Analyst – EU Power and Carbon Markets

[email protected]

Anise Ganbold

Senior Analyst – EU Power and Carbon Markets

[email protected]

https://www.icis.com/

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