Spanish grid extension positives are tempered by systemic concerns
Mint Selection and energy transition news service Energy Rev take a look at Spain’s recent move to extend the grid connection deadline for new renewables projects, and how this has been received by market players.
The Spanish renewables market faced substantial regulatory uncertainty over the course of 2023, with project developers continuing to face delays in receiving the permits necessary to proceed to ready-to-build.
With much of the country’s project pipeline facing a looming July 2025 grid connection deadline, with connection offers to be rescinded if the deadline wasn’t met, this meant that even those onshore wind and solar PV projects which achieved RTB by H2 2023 were faced with the risk of neither securing the necessary supply chain to build, nor investors or lenders that would be comfortable backing them. This in turn led to the market starting to freeze up late last year. However, as long hoped for, the Spanish government finally moved to address the issue at the very end of 2023 with confirmation that it is pushing out the grid connection deadline for the most advanced development-stage projects by three years to mid-2028.
In addition, early-stage schemes which are successful in securing grid connection offers will now have up to eight years to commission, rather than the five years that had originally been set out.
In essence, this is good news for the Spanish renewables market, as it means that solid projects which have faced delays in receiving the necessary environmental impact assessments (DIAs), prior administrative authorisation and administrative construction authorisations from overworked and understaffed public bodies, will now have much more time to get this point. Those that have already received the required permits will also now be able to proceed with financing and or project sales talks with far greater certainty. Indeed, the Spanish renewables M&A market is forecast to see a spike in deal flow over the coming months as a result of the grid deadline extension. “Less risk on deadlines will make delayed developments attractive again,” says one international developer active in the Spanish market.
Falling valuations
This greater supply of projects means valuations could go down. “Many projects that were on a razor’s edge before are now in a safer position, so there are more opportunities in the market,” one legal advisor specialising in the energy sector says, although projects which are already under-construction, and which, better still, locked in long-term PPAs in the mid EUR 40s/MWh or higher before prices started to fall in H2 2023, will likely remain in demand. The grid deadline extension also means that the multiple tens of GWs of projects which are passing through the permitting system will now come to market over a much longer period of time, in doing so easing the supply chain bottleneck which has been further delaying project delivery. However, the deadline extension should not be seen as a panacea, with market players still concerned that public bodies are not sufficiently equipped or staffed to process project applications in an efficient manner.
“The deadline extension will help with the supply chain bottleneck provided that the public administrations duly dimension the relevant permitting bodies…otherwise, we may end up having the same bottleneck problems in the future,” one advisor warns.
More administrative resources required
The whole rationale for bringing in a grid connection deadline in Spain in the first place was to help weed out all the speculative, poor quality projects which their backers had no intention of building but which had been clogging up grid access queues. However, administrative bodies have subsequently provided favourable environmental impact assessments to numerous projects which really shouldn’t have made the cut, with approvals for such schemes often coming with conditions that are unlikely to be able to be met, according to Spanish industry contacts. These zombie projects could have fallen on their swords honourably if they had failed to meet successive project permitting deadlines, ideally due to administrative delays, as this would have allowed them to receive back their grid bonds (in the tens of thousands of euros per MW) and further development to be discontinued.
However, with the deadline extension “not having been complemented by a voluntary withdrawal of these projects, such projects now have no such exit route, which has "de facto" increased the risk of them eventually losing lose their bid bonds when they ultimately fail to progress…the extension has also therefore not served the initial purpose of relieving public authorities from processing unnecessary files,” one Madrid-based financial advisor says. And time is still of the essence, with transformer orders currently understood to be taking up to 18 months to be delivered, for example. This bottleneck could potentially become even more acute in the short-term, given that developers with RTB projects have in recent months been holding off putting down transformer orders due to the previous July 2025 connection deadline. With the deadline now extended orders could conceivably flood in. So, while developers could be forgiven for thinking that they now have a lot more time to negotiate supply chain, they could ultimately all find themselves back fighting for components if they do not move to secure these as soon as possible, sources say.
Related to this, cannibalization and curtailment fears - most pertinently in the solar PV space - still pervade the Spanish renewables market, with the ever-greater volumes of renewables coming online, likely to only put further downward pressure on capture prices and projects’ profitability. “Electricity demand is slowing, so concerns about canibalisation are increasing,” one developer says. The regulatory landscape for battery storage, which could mitigate some of these concerns, is also still not clear, although there are expected to be developments over the course of 2024.
Aside from this, industry players in Spain are also placing hopes on the eventual evolution of the green hydrogen space, as this could help provide a greater source of demand, and thus create higher prices, for renewables supply.
In the meantime, mature operational Spanish onshore wind portfolios remain most in demand in the current market, given their differing generating profile from solar PV, and corresponding greater likelihood of achieving higher PPA prices. Statkraft’s headline-grabbing acquisition of Elecnor’s Enerfin business in November 2023 is likely to be followed in 2024 with a competitive auction process for the 300MW-plus tranche of onshore wind portfolio recently put up for sale by Acciona, among other disposals, for example.