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Bursting Spain's renewables bubble to drive out speculators

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Bursting Spain's renewables bubble to drive out speculators

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A photovoltaic plant in central Spain.
Source: Associated Press

Regulators are preparing to burst the speculative bubble that has grown around Spain's accelerating renewables market, in a move that could transform the competitive landscape in the country only a decade after a previous green energy boom was cut short by retroactive subsidy cuts.

Spurred by a steep drop in costs for renewable technology, ambitious climate targets and plentiful wind and solar resources, Spain has become one of the hottest markets for renewables in recent years. Large utilities and smaller independent companies are developing projects at a record pace, while international investors are also looking to spend money, despite some having painful memories of previous governments' scorched-earth policies towards renewables.

But now regulators are itching to put a dampener on the booming market. The Comisión Nacional de los Mercados y la Competencia, or CNMC, in July proposed new rules to slow a surge in grid access requests and clamp down on speculators, arguing that a flood of permit requests is creating a secondary market and holding back the country's green energy expansion.

High demand for grid permits has also inflated the price of ready-to-build projects, which are now offered in the range of €80,000 to €150,000 per megawatt, but can go as high as €200,000 per megawatt, according to several industry sources. The competition watchdog wants to force permit-holders to show they are able to reach certain milestones in order to weed out projects that are unlikely to get built and increase the overall transparency of the application process, which currently requires little more than a financial deposit.

As a result, "there's now a bubble in connection points," said Roger Font, who heads the project and specialized lending team at Banco Sabadell SA's structured finance division in Spain.

The market needs "proper, mature regulations in place that mean that people can't just speculate" and flip grid permits at inflated prices, said Conor McGuigan, director of business development for Europe at Lightsource BP Renewable Energy Investments Ltd., a U.K.-based solar developer active in Spain. "It's just not working. It may destroy the market before it even gets on its feet," McGuigan added.

The Spanish energy ministry has prepared legislation to deal with the issue but is hamstrung by caretaker prime minister Pedro Sánchez's inability to form a coalition following elections in April that saw his Socialist party emerge without a governing majority. The market is expecting that the measures could come into force before the end of the year, but another general election could be called if Sanchez is unable to form an administration by late September, which could push back that timeline.

"At the minute there's a bit of a vacuum," said McGuigan. "And the longer we leave it, the longer this bubble is growing."

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Growing bubble

In the meantime, a huge backlog of grid access requests has piled up. At the end of May, over 37 GW of solar photovolatic projects were in various stages of the permitting process, according to data from Spanish transmission grid operator Red Electrica de Espana S.A.U. Meanwhile, almost 70 GW of additional solar capacity had either applied for access or been denied. By comparison, Spain's installed solar capacity totals only around 5 GW, far behind other European countries like Germany and Italy.

For wind projects, the picture is less pronounced, with just over 18 GW in the permitting process and almost 13 GW of pending and denied applications. Spain already has a higher share of wind generation, with installed capacity of 23.5 GW, and fewer suitable sites for new turbines than for solar panels. In total, Red Electrica says it has already rejected 18.6 GW, meaning most of the applications from solar and wind projects are still pending.

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It is impossible to say how many of those projects are actually "serious", said José Donoso, director general of Spanish solar industry association UNEF. But, "at the end of the day, many of these projects are not real projects," he said.

One executive at a large developer said he expected up to two-thirds of all the developments in the pipeline right now to never reach construction.

Although some degree of attrition is expected, other market players agree that an unusually large proportion of projects will eventually go up in smoke, considering that the government is only looking to tender 3 GW per year through the 2030s. And even though some solar projects are now proceeding on an unsubsidized basis, overall grid capacity will be limited, even with nuclear and coal plants coming offline over the coming years.

"Everybody knows that 200,000 MW are not possible to connect," said David Diez, a partner at law firm Watson Farley & Williams in Madrid, who advises companies and financial institutions on renewables asset deals. Diez said the eventual elimination of the speculative market will likely thin the ranks by squeezing out mostly inexperienced, smaller developers and the most risk-taking international investors.

Price effects

During Spain's briefly booming renewables market roughly a decade ago, prices skyrocketed when speculative side businesses bought up permits and created administrative bottlenecks, according to Paula Mints, chief analyst at analytics firm SPV Market Research.

Once the current bubble bursts, market players expect that prices for projects will normalize again over the course of next year. McGuigan said pre-construction projects have already become cheaper over recent months, with hoarders "panicking" and attempting to get rid of their permits before the new rules kick in.

"You'll probably see a glut of applications come to the market as people try to offload these things," he said. "The government are not going to sit back and watch this explode in their face."

A more regulated environment will also make it easier for developers to raise funds, he said, because banks and other investors are also struggling to make sense of the market.

"If you haven't got a slow, maturing market ... then you're in trouble. It takes us a lot longer to choose a project and get it through our investment committee because of the volatility," he said.

Even while those wrinkles in the regulation are ironed out, the largest developers are unlikely to be deterred in their drive to develop. That also includes major utilities like Iberdrola SA, which is building some of the largest solar projects in Spain and has budgeted billions to double down on the market.

"I doubt that this is going to be built," Iberdrola Chairman and CEO Ignacio Galán said on a July 24 earnings call, referring to the massive development backlog in Spain. "But I think if people are ready to throw away their money, they can do that."