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Solar developers playing long game with record low bids in Portuguese auction

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Solar developers playing long game with record low bids in Portuguese auction

Record low prices in Portugal's first solar photovoltaic auction earlier this month highlighted strong competition for grid connections and underlined the value of regulated incomes, according to local market participants.

The awards also hinted at the longer-term expectation that, once 15-year fixed price contracts were up, unconstrained earnings in the wholesale market would greatly enhance the value of the assets and their grid connections.

The auction saw one bid of just €14.76/MWh awarded for a 150-MW lot to be built by French group Akuo Energy, the largest single winner in the sale. This was a 67% discount to the starting price and compared to a prevailing market range of €45.28/MWh to €53.18/MWh for forward prices in Portugal for 2021-2025.

A previous record low was set this summer in Brazil with a price of US$17.50/MWh, while in Europe, the most recent auction in France resulted in an average awarded price of €64/MWh.

Power purchase agreements, or PPAs, in Spain for similar periods have been signed for nearer the €30/MWh mark. Crucially in Portugal, however, only auction-awarded solar can be connected to the grid — there is no merchant option.

Strategic play

"We took a very long-term position," Akuo told S&P Global Platts. "We consider [solar photovoltaic] as the pillar of the Portuguese energy mix over the next decades."

The company was awarded 370 MW in the auction, characterized by "fierce competition until the closing," with bidding for some auction zones taking eight hours to conclude.

The overall sale was nine times oversubscribed, according to the Portuguese government. For Akuo's win in lot 3, it faced off against 14 competitors who bid for 2.06 GW over 10 rounds, auction data showed.

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Winners of the capacity are locked in to a fixed rate for a 15-year period, after which assets switch to merchant status, either via placement on the wholesale market or via direct sale under a PPA.

Bids could be for a fixed-rate tariff — which had to be at a discount to a market-based start price — or for a system contribution on a start price.

Post-control gains

The potential of reaching sunny wholesale price uplands after 15 years of sub-market returns likely helped attract investment. According to Pedro Jorge, president of Portuguese renewable group APREN, the longer-term game is where the profits are to be made.

"If the tenor of the investment is above 25 years and it will start construction in 2021 then this tariff might be feasible and bankable," Jorge told Platts.

Research group Aurora also saw profitability at the back end of the curve. Bidders may have been lured by "expectations of high prices beyond the 15-year regulated period," it said in a report earlier this month.

"Although we would expect a heavy discount for revenues beyond this initial period, high long-term revenue expectations could have a significant impact ... given that securing a contract is a requirement
for grid connection," the group said.

"It depends in what companies are looking for in terms of investment," Jorge said. "If a company is looking for projects with no market price risk, then that is one advantage. Having no price risk, in certain conditions, might facilitate the financing of a project by investors and debt providers."

For Akuo, an auction-awarded fixed return enabled it to secure financing for its three projects and insulated them from any possible change to the wholesale market design, which was a possibility in the medium-term, it said.

Market share

Aurora thought other factors influencing bidders' decisions might be sunk development costs from projects that were in an advanced development stage and were held back to be submitted to the auction, and the strategic behavior of developers who might be willing to accept low prices in order to secure market share.

This was no doubt a consideration for the other large winner, Iberdrola SA, which has operated in Portugal since 2002 and has invested €1.5 billion in a new hydro pumping facility at Alto Tamega, due online by 2023.

Iberdrola said the new solar awards "consolidate its crucial role in the Portuguese energy market, where it is already leading the large consumer commercial sector with an almost 33% market share and a portfolio consisting of 300,000 electricity and natural gas customers."

Italy next

The next southern European market to hold renewable energy auctions will be Italy, where the government formally approved a decree earlier this month prior to the breakdown of the ruling coalition.

The country intends to auction 500 MW of wind and solar capacity in a first sale Sept. 30 from a total of 5.5 GW to be awarded by September 2021.

Enel SpA CEO Francesco Starace expects the first Italian auction to "stun" the market. On Aug. 1 he said prices in a second auction could go even lower but that the market would pick up thereafter. This could conceivably happen in Portugal now the first rush for connection agreements is over.

Fixed tariffs of around €20/MWh resulted in modest internal rates of return between 3.5% to 4% even under "optimistic load factor and revenue assumptions post-subsidy period," Aurora said.

In the case of Portugal, which is lining up a second auction for 700 MW next January, this could "ultimately undermine the appetite for future renewable investment, risking the likelihood of meeting the government's [renewable energy] target," it said.

Henry Edwardes-Evans and Gianluca Baratti, who contributed to this article, are reporters with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.