The latest episode of Spanish draft regulations regarding electricity market reform and electricity tariff deficits appears, once again, to be unfavorable towards renewable energies. If enacted in Q4’13 as drafted, PV demand would decline and this could also become the final retroactive revenue penalty that assigns “toxic” PV assets to a “bad-bank”.
Potential Market Impact
Regarding the drafted retroactive impact on existing PV operator revenue expectations, a radical change is made from incentive rate remuneration to assuring those operators a “reasonable” 7.5% return on their original investment. In the meantime, current remuneration of incentives is “on account” and is subject to future terms.
Three firms have been enlisted by the administration to work out the mechanism details using data provided by the administration and related agencies. The Spanish PV Association, UNEF, has referred to the latest turn of events as “covert expropriation” and the negative impact on many private PV operators.
Regarding drafted future impact, barriers are being put up for PV market growth in the form of grid-access fees (called a backup toll) and administrative issues that could curb the potential market for onsite consumption applications.
Overall, the current environment reflects the unsustainable incentives and conflicting business models within a traditional market of regulatory formation from 1997, while maintaining legacy aspects related to hydro and coal resources.
Bank Loan Default Exposure
Economic reports indicate that banks have loaned €38 billion to renewable energy projects in Spain, €20 billion of which falls on Spanish bank entities. This comprises about 60,000 PV installations whose defaults may sum to €20 billion, of which €14 billion are of Spanish entities. So far, only BBVA and Santander have quantified their renewables loan exposures at €1.9 billion and €1.5 billion respectively, which collectively amount to less than 10% of total loan exposure in all renewables.
Spanish banks are not in a hurry to see a repeat of the real estate boom/bust outcome that resulted in them effectively becoming agency-branches that are required to sell property stock. Current default provision estimates for renewable energy loans are around €10 billion, but that figure is likely to change.
While the Spanish PV bubble may provide greater than €10 billion of default risk, the government did prepare a first-round bank rescue request to EU of €100 billion and the current bank rescue outlay is around €60 billion. Public debt would absorb this if the banks do not repay, in addition to airports that were built but are yet to see commercial operations, high speed train links built and later shut down, and desalinization plants built but not energized.
The Minister of Industry has stated publicly that most renewable energy operators will need to re-negotiate their loan contracts on the basis of the new regulation terms, and the Minister further believes they should have no problems in this regard.
Near Term Outlook
In summary, there have been no policy-positives for PV within Spain since 2007 and the RD661 regulation that set a 400 MW target that became more than 3 GW in reality with highly attractive FIT remuneration. Since then, a succession of major impositions on PV has resulted in unprecedented punitive actions. On this occasion, it would be further retroactive penalties through a new trade mechanism, and negating future market demand for onsite consumption.
One positive that can be taken from this latest episode is greater visibility on more aspects of the Spanish electricity market. The administration’s stance and actions appear to assign tariff-deficit blame primarily on renewable energies, in spite of some conflicting data and analysis in existence.
The over-capacity situation of the Spanish generating fleet (currently +100 GW against a 45 GW peak, with little electricity export facility) includes 26 GW of gas-fired combined cycle generators installed during 2002–2010 according to government energy planning.
In the current reform case, the Minister of Industry announced that as much as 6 GW of the combined cycle fleet could be “hibernated”. While the 26 GW grouping has been operating at about 30% capacity for several years (and in Q1’13 at just 10%), they have also enjoyed a stand-by payment (capacity payment) which the ministry expects to reduce on this reform.
Also, now the administration is highlighting the over-capacity situation as a further reason to pull back on renewable alternatives.
Impact on PV Demand in Spain
The near term PV outlook in Spain is for further declines, if the drafted regulations are enacted. The current most-likely forecast for 2013 is just 68 MW before any enactment impact, well down on the high of 2008 when annual demand exceeded 2.4 GW. With enactment, annual demand is likely to remain at low levels during 2014 also.
Despite this, there is currently more than 9 GW of developer-announced PV “macro-projects” of greater than 50 MW, seeking to compete on the open electricity market without premium incentives or guaranteed sales. There are several barriers to these macro-projects including project financing and operating with very tight margins between cost of electricity and daily market rates (that are typically closer to €0.03/kWh than €0.06/kWh). In addition is the now highlighted over-capacity situation which should reasonable preclude new capacity of any sort.