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Spanish renewable auctions seen adding pressure to PPA market: Endesa

Highlights

Market already illiquid on COVI-19, weak demand: Passa

Endesa says plans to participate in new auctions

New plan will likely boost capex, focus on renewables, grids

Barcelona — Spain's announcement of a new series of renewable auctions will add pressure to an already depressed power purchase agreement market in the country, Endesa Chief Financial Officer Luca Passa said Nov. 4, with appetite for deals already lower due to current market circumstances.

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A Spanish government announcement that it plans to auction as much as 5 GW/year under a pay-as-bid model has compounded reduced liquidity in the PPA market caused by coronavirus restrictions and resulting lower power prices, Passa told analysts on a conference call.

This has led to a price below Eur40/MWh, which compares to levels nearer Eur45/MWh pre-pandemic, although the market should recover once the emergency period has ended, he said.

Spain has declared a state of alert that will last until May 2021 and which has scope for different rates of restrictions on activity and movement depending on the evolution of the sanitary situation.

As a buyer, the low PPA prices could present an opportunity for Endesa, which has a long customer, short generation position, with Passa noting that Endesa always negotiates an option to buy an installation when the associated PPA concludes.

On the sell side, the company has already received interest from its customers in the B2B market for around 5 TWh from its 65 TWh of fixed price annual sales, Passa said, with buyers seeking a 10- to 15-year deal with customized demand profiles.

Endesa said it welcomed the government's new auction system, in which the first sale process is expected to start this year, after the publication Nov. 4 of the auction framework.

A shift to the pay-as-bid model as well as other changes which include scope for storage, grouping for different tech types and repowering, among others, are changes "in the right direction", Endesa CEO Jose Bogas said.

The company is preparing to participate in the auction, but is not dependent on them to carry out its growth plans, he said.

Endesa's sister company Enel Green Power (EGP) recently participated in a similar auction in neighboring Portugal where it was awarded a project that includes 99 MW of PV and 20 MW of storage -- a first of its kind for the region.

Through the auction's contribution mechanism, EGP will pay about Eur3 million/year with which it then has the freedom to either sell its output into the pool, sell via PPA, or sell into the ancillary market.

A return on equity of around 10% is forecast from the project, Passa said.

Expansion plans

The new set of Spanish auctions should give Endesa the opportunity to build on its existing targets, Bogas said.

At present, the company has a Spanish pipeline of 25.7 GW which it intends to install by 2026, including 4.2 GW due online before the end of 2023.

Of the 25.7 GW total, 30% already has grid connection rights and 60% is solar PV.

However, Endesa could increase this total later this month, on Nov. 25, when it reveals a new strategic plan to 2023 in which Bogas said he expects to announce an acceleration in renewable capital expenditure from its current targets of Eur2.8 billion by 2022.

In general, the new plan will focus on organic and inorganic growth in renewables and networks, he said. This means the company would be open to potential acquisitions to grow its business.

The company also welcomed recent legislation passed by the Spanish government to manage connection points to the grid. The new measures establish a set of milestones to be met and will help the market avoid speculation, Bogas said.

This will help rationalize the process of increasing new capacity and also provide an exit window for those promoters that have been sat on grid connections but will not be able to meet the milestones.

Through the legislation, that capacity can be returned to the system and re-allocated, he said, noting that to date 9 GW has been freed up in this manner, including 1 GW from EGP.

However, the company is also bracing for increased competition in the renewable market from cross-over entrants from the oil and gas business such as Repsol, Cepsa and Total, which have all set ambitious growth targets in the Spanish market.

With the financial muscle they have, Endesa sees them as their biggest threat to its position as retail market leader, particularly with their appetite for acquisitions of customer portfolios and capacity.

For 2020, Endesa has sold 100% of its expected generation at an average all-in price of Eur74/MWh and sees 2021 reaching a similar level, with 92% already placed at an average Eur72/MWh.

For 2023, 43% of its expected generation has been placed between Eur71/MWh and Eur72/MWh.

For the nine months to date, the company's unitary power margin has increased 19% year on year to Eur33.20/MWh, partly due to its flexibility in procuring cheaper gas on the spot market.