|A solar farm in Spain, where major utilities are pursuing large-scale investments.
Investors who have flooded into Spain's renewables market are showing no signs of slowing down, fueling a boom that some have warned is turning into a bubble.
During recent full-year 2019 earnings calls major utilities, oil companies and smaller developers all pointed to sizable growth plans in the country, even as some observers warn that opportunity seekers rushing in risk falling victim to their own success.
"There is a very big danger of a flood of new investments," João Manso Neto, chief executive of EDP Renováveis SA, said on a Feb. 20 call with analysts.
Manso Neto, whose company has favored investments in the U.S., warned that Spain could soon experience similar problems as California — where overproduction from solar farms pushes down power prices during the day, eating into profits for generators.
"So really, I'm not obsessed to build in Spain," Manso Neto said. He added that the company will nonetheless keep investing in the country.
Manso Neto's concern is not unfounded. In 2019, Red Eléctrica Corporación SA, which runs Spain's high-voltage power grid, granted access permits to developers for more than 110 GW of new renewables. That is roughly equal to the country's entire electricity generation capacity.
The vast majority of new connection requests, more than 80 GW, was for solar plants, which benefit from Spain's ample sunshine and have become cheap enough to build without subsidies.
At least 4.2 GW of subsidy-free, utility-scale solar is set to come online in 2020, according to late-stage project announcements tracked by BloombergNEF. Last year Spain connected roughly 6.5 GW of new green power, including wind, an increase from 2018.
Even under the government's ambitious climate plan, only around 50 GW will be required over the next 10 years. The Spanish government is expected to tender around 3 GW per year, starting in 2021, and the grid operator has already turned down dozens of gigawatts in access requests.
|A worker atop a turbine at Iberdrola's Maranchón wind farm in central Spain.
Asked about the risk of power price cannibalization on the company's Feb. 28 earnings call, Acciona SA's chairman and CEO, José Manuel Entrecanales, said he believed the market would self-correct at some point. Acciona is pursuing 3.3 GW of wind and solar projects in Spain, of which about half have grid access.
"If that concern starts becoming a tangible reality, we believe that the new installation pace will be reduced," Entrecanales said.
Executives at large utilities, on the other hand, often emphasize that they are somewhat isolated from power price risks, given their retail and business customers.
The same is true for oil companies, which have muscled in on utilities' turf. Galp Energia SGPS SA said in February that it aims to have 3.3 GW of solar installed in Iberia by 2023 after it acquired 914 MW of operating photovoltaic assets and a further 2 GW with grid permits from ACS SA. And Repsol SA already has 2.9 GW of renewables in operation and wants to install 7.5 GW by 2025, including in Spain.
"The short positions we have in the market coming from our customers, retail and so on, are bigger than the long positions we have from the production side," Repsol CEO Josu Jon Imaz told analysts Feb. 20. "That means that we are more protected than others."
'Hotbed' of investment
In lieu of state subsidies, developers of all stripes are increasingly signing power purchase agreements, or PPAs, to lock in revenues and isolate themselves against wholesale market swings, although most are likely to be exposed to merchant risk to some degree.
Ignacio Galán, chairman and CEO of Iberdrola SA, said on the company's earnings call on Feb. 26 that he would prefer if the government left the market to itself, since solar is now viable without any kind of subsidy support — a sentiment echoed by other executives.
"I'm not in favor of auctions because there are many players, mainly the incumbents ... that will go ahead with these renewables projects without the auctions," said José Bogas, CEO of Endesa SA, a subsidiary of Italy's Enel SpA and one of Iberdrola's main competitors in Spain.
The auctions, Bogas said on a Feb. 25 call, "have created the bubble that we have today in Spain" in regards to grid connections. Many developers are currently awaiting new regulations that will tighten grid access rules, which could rein in inflated prices on the secondary market.
Pietro Radoia, a solar analyst at BloombergNEF, said while there is indeed a bubble in grid permits, the fundamentals for solar investments in Spain are solid. And, partly because many investors in unsubsidized projects believe power prices will stay high enough to pay off, he expects the country to remain "a hotbed for renewable energy investments."
"The Spanish bubble is unlikely to 'pop' the same way as those markets which in the past were driven by feed-in tariffs," he said in an email. "The project economics make sense, provided electricity prices will not collapse in the future."
As a result, "Spain is far from cooling off," Radoia said.