Spain's bulging solar queue spells risk of oversupply, price volatility

A looming grid connection deadline for solar projects in Spain is driving an unprecedented rush to build gigawatts of new capacity, but the solar ramp-up is already having significant cannibalization effects in the country's power market.

More than 55 GW of solar projects have secured access to the Spanish grid and must be built before the end of June 2025 or risk losing connection rights, according to analysts at S&P Global Commodity Insights.

That is driving a development frenzy, helping propel Spain toward its new 2030 target of 81% renewables penetration.

At the same time, the flood of projects is overwhelming planning authorities and installation providers, leaving many developers in a holding pattern.

The next 18 months "is going to be tough and you have to be really gauging the risk appetite," said Axel Thiemann, CEO of Sonnedix Power Holdings, a global renewable power producer majority-owned by investors advised by JP Morgan Asset Management.

S&P Global analysts said as much as 29 GW of the 55-GW pipeline is at risk of not being built by the mid-2025 deadline, either because projects are unable to obtain authorization in time or because they are deemed financially unviable.

The ability of grid operator Redeia Corporación to connect new capacity fast enough is also a major unknown.

Still, with 1 GW completed in the first half of 2023 and 7 GW under construction, the further 18 GW projected to come online by 2025 will more than double Spain's total installed grid-connected solar capacity in the space of two years.

This influx of new solar is already cannibalizing Spanish power prices, at times pushing them close to zero in recent months. The phenomenon is known as the "duck curve," with prices falling during daylight hours when solar production is high and demand is low. As more solar comes online, it can further reduce prices and returns on future projects.

"The risk of cannibalization is huge, especially given the limited projections for demand growth before 2030," said Diego Ortiz Garcia, principal research analyst at S&P Global Commodity Insights, adding that annual capture rates for solar will fall from 80% today to 15%-20% after 2025.

Looming deadline

Spain's bulging solar pipeline is nothing new. In the late 2010s, the market saw a speculative bubble emerge around grid connections after a flood of access requests, with ready-to-build projects being sold at lofty valuations.

The Spanish government responded in 2020 with a moratorium on new applications. Meanwhile, to make sure only serious projects went ahead, it introduced a series of new permitting and construction milestones for renewables developers.

But with authorities lacking the capacity to process applications in time, the government was forced earlier this year to grant certain developers a six-month extension to secure construction authorization, the new milestone being Jan. 25, 2024.

However, industry players on the ground are concerned that the commissioning deadline for those projects — June 25, 2025 — remains unchanged.

As a result, developers are now scrambling to secure constructors, equipment, financing and off-takers, with no guarantee that the 2025 deadline will be extended. This, they say, is putting their capital expenditure at risk.

"What investment committees and financing entities are asking us is, 'Do we go ahead with this investment considering the potential risk?'" said Jorge Toral, managing associate at law firm Linklaters in Madrid.

Toral said the government "will not leave investors without their projects, losing their capex," while other industry players also view an extension to the commissioning deadline as inevitable.

Shortage of installers

Until an extension is confirmed, however, the looming milestone is creating unprecedented demand for installation providers, equipment and off-takers.

The rush is also impacting developers' bottom lines. A shortage of engineering, procurement and construction (EPC) providers is driving up the cost of installation services, while the clamor for off-takers is depressing the price of power purchase agreements (PPAs).

Sonnedix began construction on 150 MW of solar in Spain earlier in 2023 and plans to start building another 150 MW later this year.

"It will start to get really, really tight in the first quarter of next year [to get projects completed by mid-2025]," Thiemann said in an interview. "I expect that there will be an effort [from the government] and I think there will be some relief."

While an extension would give developers breathing room, some analysts also point toward green shoots in the EPC market.

"I don't think it's as complicated as it seems for Spain to do 10 GW to 12 GW per year because the solar market is very agile, and we now see international EPCs offering their services," said Josefin Berg, associate director in the clean energy technology group at Commodity Insights, pointing to anecdotal evidence of companies coming over to Spain from Italy, for example.

"The complication is how costly is it going to be," Berg said in an interview. "Solar has a history of service providers adapting their pricing to what the clients can pay."

'Duck curve' emerging

Despite all the risks, few developers have stated — at least so far — that they are abandoning any projects, according to Berg.

That is bolstered by the fact that the 10 largest solar developers, including Iberdrola, Solaria Energía y Medio Ambiente, Endesa, TotalEnergies and Forestalia Renovables, control 45% of the 55-GW pipeline. Such companies are in the best position to negotiate supply deals and lock down financing, Berg said.

Installations are already ramping up as Spain looks to reach 76 GW of solar by 2030, a new target set out in the country's draft National Energy and Climate Plan.

Spanish solar projects produced 21 TWh in the seven months to July, according to Commodity Insights, a 31% increase compared to the year-ago period.

That higher penetration is hitting power prices during the day, leading to an ever-more pronounced duck curve. Some 300 low-price hours — defined as less than Eur5/MWh — have been recorded so far this year, beating the previous record of 202 set during the whole of 2021.

The midday price trough is a growing problem for solar producers and the wider Spanish power system, according to Endesa CEO José Bogas.

"We will see huge [price] volatility during this period," Bogas told analysts in June, discussing the pathway to 2030. "The renewable producer which doesn't have a [power purchase agreement] or doesn't have a customer to sell this electricity [to, and is] not hedged through these kind of elements, will face problems."