New renewable energy auction to be held in Spain on 17 May 2017: Are you ready?

The Spanish renewable market has been capturing headlines during the last few weeks. Following the publication, on March 31st, of the “Real Decreto 359/2017 that announced the auction of 2,000 MW extendable to up to 3,000 MW of new renewable energy installations, the government has published the Ministerial order (ETU/315/2017) and the resolutions that approve the auction procedure and rules and the call for the auction. The auction will take place on 17th May 2017 and the deadline for submitting the prequalification and qualification documentation and the financial guarantees is 11th May 2017.

Last February, the announcement of Spain’s Energy Minister Nadal about the delay of the renewable energy auction from the first to the second quarter of 2017 rekindled the debate around these rules. In fact, the Minister justified the deferral by the intense "discussion" among the different actors on how the auction process should be designed. Industry associations welcomed with caution the postponement hoping that the delay meant that the Ministry will consider some of their suggested improvements for the auction structure. Nevertheless, the finally approved mechanism does not differ from the initial suggestions in terms of auction type, selection criteria or pricing rule.

The auction model in Spain distinguishes from the approach followed by other countries due to its unique and complex design. The auction is not project specific and the mechanism for assigning the capacity is based on the investment.
Under the ruling legislation, renewable energy plants in Spain receive the market price plus a "specific complementary remuneration", mainly composed of two elements: a remuneration for the investment (Rinv) - a payment per kW - and a remuneration for the operation (Ro) - a payment per kWh. The setting of both components of the remuneration is based on several parameters for each plant category. The auction will be used to assign the Rinv to the awarded new installations as the Ro is no longer applicable for new installations. The auction rules set the remuneration parameters (COD, regulatory lifespan, equivalent hours of average annual production, standard value of initial investment, Rinv, etc) for new wind, solar and remaining technologies reference installations. The bidders have to offer a percentage of discount to the standard value of the initial investment of the applicable reference installation. Based on this discount, the offers are sorted by the resulting marginal extra cost to the system, calculated as the ratio between the Rinv obtained with the discounted standard value of the initial investment and the equivalent hours of average annual production. In case of tie, the technology with more equivalent hours will be assigned. All awarded capacity should be connected by 31st December 2019.

Though the auction design for the upcoming bidding is similar to the one held in 2016, some amendments have been considered, such as:
• While the 2016 auction was technology-specific, the upcoming auction do not define any technologic-specific quotas.
• Each bidder can offer between 100 kW and 200 MW in indivisible tranches.
• Maximum discounts for each technology have been established: 63.43% for wind and 51.22% for PV
• Average production, expressed in annual production hours by reference farm, relevant for the calculation of the remuneration which the plant owners will receive, have been increased to an average production of 3,000 annual hours for wind and an average production of 2,367 annual hours for solar PV power projects;
• Guarantees have been increased to EUR 60 / kW and will be put into effect if the established schedule of milestones is not met.

Given the complexity of the auction mechanisms and the particularities of the Spanish remuneration regulation, great knowledge of the Spanish market is required when preparing the financial model and calculating the percentage of discount to be offered.

The main motivation of the auction is to end up the moratorium of support for new renewable energy plants in order to comply with the Spanish target under the European Directive for 2020 and do so at the lowest possible costs for consumers. However, the National Authority for Markets and Competition (CNMC) has been claiming - among others - that even with the initially announced 3,000 MW of new renewable energy capacity the government’s 2015-2020 plan wouldn’t be fulfilled.

Spain is undoubtedly one of the key European markets to watch in the following years. Beyond the auction, the highly attractive spot market prices are also drawing the attention to alternative merchant risk hedging mechanisms such as bilateral power purchase agreements (PPAs) and swap contracts. Although the set-up of these mechanisms is different, both seek to set stable prices and reduce price volatility risk. The main drawback of PPAs and swaps is that the financing is more challenging. These agreements are usually short-term contracts and lenders request at least 15 years hedging to grant a Project Finance. Therefore, even if the contract term reaches the ten years that are expected to be the trend for the following years, different alternatives for financing should be sought. In addition to the new development opportunities arising through the announced auction as well as on a described unsubsidised basis, a great activity expected in the secondary market.

Vector Cuatro entered the renewable energy market about ten years ago, supporting industry players through its different business lines along the entire value chain of green power plants. The team is composed of highly qualified professionals with various engineering and financial backgrounds and a proven experience in the renewable energy industry, who always aim to respond best the specific needs of each of their clients, in accordance to local characteristics. In the Spanish renewables market, Vector Cuatro is one of the most recognized and experienced independent service firms, with a strong network in the industry. Today the company has over 250 MWp of solar PV and wind power plants under management in Spain. In addition, Vector Cuatro counts on a considerable track record as Technical and Financial advisor providing a great variety of services that include market studies, specialized consulting services, owner’s engineering services, on-site audits, technical due diligences, support in financing or refinancing processes or elaboration of financial models, among others.
Concerning the new evolvements within the renewable energy market in Spain, Vector Cuatro’s professional team is available to render any kind of support to interested market players, in terms of legal, technical and financial assessment, for any new solar PV or wind power plants during the bidding process as well as their subsequent design and development, construction, selling, financing and operation phases. That may include support in the understanding of the auction and its alternatives (PPAs, spot market…), the technical and economic analysis of the projects, the project management during the development phase, the elaboration of financial models for the auction, the preparation of the basic and detailed engineering or the support during the financing and subsequent construction and operational phases.