Remuneration for new renewables is changing dramatically in Spain with the end to subsidies and the exposure of the sector to market pricing. It used to be that the huge investment required to develop renewable power plants was not financially feasible if the remuneration was limited to standard power prices, which created the rationales for subsidies.
Today, the drop in production costs across the supply chain has led some governments to believe renewables are competitive without subsidies. As a result, they are structuring auctions with a reduction in subsidies.
Spain has taken this approach one step further and has awarded 8.7 GW of new renewables in 2016 and 2017 that may not receive any government subsidies.
These new renewable projects are mostly merchant projects exposed to pool prices. Their cash flow profile is therefore less predictable and relies on each market participant's long-term view of power prices.
Financing the new renewable assets will be challenging due to the merchant exposure of the new plants and the tight timeframe and size of the investments. The auctioned 8.7 GW will need to be in operation by January 2020.
Project financing may be more challenging to structure, due to the implied volatility of earnings and the limited leverage potential, unless they manage to sign solid and long-term PPAs with third parties.
"We see the shift from a subsidy-based remuneration model to one more exposed to market dynamics as a sign of an industry entering a more mature phase, where costs of production decrease as technology matures and gainsscale," said S&P Global Ratings credit analyst Gonzalo Cantabrana Fernandez.
"Although managing market risk exposure today appears as if it is a major shift for the asset class, more conventional generation technologies have managed and financed this risk before," said Fernandez. "Ultimately, the challenge will be finding the right balance between risk and return for all stakeholders."
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