Spain Seeks $4.3 Billion Investment to Meet EU Energy Goals

Spain sought to lure investment of as much as 3.9 billion euros ($4.3 billion) in its biggest auction yet for contracts to supply electricity from clean-energy sources, part of an effort to meet European Union targets.

The government on Wednesday took bids to supply at least 2 gigawatts and as much as 3 gigawatts of power in time to meet the its EU goals for 2020. This is expected to cost 2.4 billion euros to 3.9 billion euros, according to estimates by Bloomberg New Energy Finance. Bidders offered wind, solar or other forms of electricity generation so long as it’s a form of supply that doesn’t increase carbon emissions.

Gas Natural SDG SA, Siemens Gamesa and Endesa SA all won contracts in the auction, according to people familiar with the bids who asked not to be named ahead because the decision isn’t yet public. Iberdrola SA bid but didn’t win contracts, one of the people said. Forestalia Renovables SL confirmed it won work in the auction.

The contest marks a resumption for the renewable energy business in Spain, which was at the forefront of spreading the technology until generous subsidies it granted led to a run-away boom in installations and forced the government to ratchet back the program. The government plans to announce the results on Thursday and said the contest would lower the price of renewables.

“The first thing to say is that is has been a great success,” Energy Minister Alvaro Nadal told reporters in Barcelona on Wednesday. “It has been done with zero premium, that’s to say the consumer doesn’t have to pay an extra cost for this renewable energy.”

Green Leader

Spain had one of the continent’s most active renewable energy industries until the government enacted a wave of retroactive subsidy cuts beginning in 2008 with the financial crisis. It slashed payments for green electricity that were granted in the form of a feed-in tariff guaranteeing above-market power prices for all projects that qualified.

Some solar and wind plants stopped getting paid entirely even though they had long-term contracts that fixed the price. That move brought installations to a halt, and the government has only recently allowed new support measures to go forward.

“This auction is about moving towards the EU renewable energy target,” said Briony Bennett, policy analyst at Bloomberg New Energy Finance. “Spain actually has significant oversupply in power generation and still subsidizes coal power plants. More renewables in the mix should see Spain meet target.”

Investment plummeted 56 percent from $23 billion in 2008 to $10 billion the following year, according to Bloomberg New Energy Finance. Last year it was about $800 million.

Under existing rules set out in 2013, developers bid for power contracts. It’s a structure that forces companies to compete to supply at the lowest price possible and leaves control over the total scale of installations — and the subsidy paid out — in government hands.

Lingering Concerns

Developers remain concerned the government is saying little about the outlook for future auctions. The last one in January 2016 was for 500 megawatts of capacity, a sixth of the size of this week’s contest. This round resulted in bids that were so low that they were essentially subsidy-free. Industry groups criticized the way it was run, saying that it lacked transparency and the projects were awarded to companies that may not actually build them.

Concerns also linger about the legal framework for payments under Spain’s system following the collapse of the feed-in tariff system. Under existing rules set by a 2013, projects under construction could be made ineligible for production by Dec. 31, 2019 for a number of reasons, such as failure to be connected to the network — with rights for projects to access the grid hinging on government permission. 

This means winners of this week’s auction could suddenly find themselves without power purchase contracts for their plants in just over two years. While the government has said it will change these rules, it hasn’t yet done so.

Another uncertainty for companies stems from the government’s periodical revision of the price it’s paying for power. Spain resets rates at intervals of three and six years, with the latter one being more far reaching.

The combination of uncertainty over whether projects will be still be eligible for contracts in 2019 and the tariff revision framework means many companies may be more careful in their calculations about what sort of profit they can make from the projects.

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