By Bryony Collins, BloombergNEF. This interview first appeared on the Bloomberg Terminal.
Developing renewables subsidy-free in mature markets is a “new reality”, and the 300-megawatt Goya wind project in Spain will set the standard for how developers can counterbalance “increasing exposure to market prices”, said Loreto Ordonez, chief executive of Engie Spain, in an interview with BNEF.
Engie has signed a power purchase agreement for a proportion of Goya’s wind generation and has also taken a 15% equity stake in the project to “show commitment” and because the utility sees “value in the performance of the share”, said Ordonez. The project shareholders hope to benefit from an increase in market prices by selling part of the wind farm output on the wholesale power market, she explained.
Additionally, Engie will be responsible for managing the civil and electrical work for the project in partnership with local companies. It’s a new industrial model of “joint value creation” where Engie is reducing risk in project development by overseeing numerous elements of the project. “The framework is an inspiration for us to take into other markets”, particularly those with increasing exposure to market prices, said Ordonez.
Project developer Forestalia won the contract to build the Goya wind farm in Spain’s first renewables auction in early 2016. Some 900 megawatts of capacity has been allocated in Spain’s energy auctions in the last two years, which will be split between balance-sheet financing and project financing with debt, said Ordonez. There is little time for the projects to be developed given the timeline of the auction, and there will be opportunity for further PPAs to be signed to offset exposure to power price risk, she said.
Ordonez was interviewed by BNEF analysts Bryony Collins, Helen Dewhurst and Oliver Metcalfe in the following interview on September 17.
BNEF: It is unusual that financing was secured for Goya while the project was still under development. Is there any particular reason for this?
Ordonez: For us, the 300MW wind farm, Goya, is an innovative way of developing renewables. Goya is a way to make compatible the Group ambition to scale up in renewables with the new reality of the Spanish market, and other markets too, of increasing exposure to market prices. We are implementing Goya through an industrial business model – to create competitive advantage by bringing together our know-how in the renewable value chain. In Goya, we are not just putting together a PPA – which is making the project bankable –we are also participating in the equity; we arethe energy offtaker; the green energy manager; and we build up part of the project – so we are doing all the civil and electrical work (balance of plant), in a joint venture with local partners.
So we are not only signing PPAs in the market, but we are trying to develop industrial models. At Engie, we strongly recommend our potential clients to sign PPAs at the same time as financial agreements in order to ensure that all business development phase is closed. Ultimately, a PPA supports the bankability of a project –so it makes sense to sign it at the same time as arranging bank financing.
BNEF: What is the advantage for Engie of acquiring an equity stake in the project?
A: We have a 15% equity stake in the project, so it is minimal. This is part of the global deal with Forestalia, the developer. Having a portion of the equity shows our commitment to the project, and we also see value in the performance of the share.
BNEF: Is this something you want to do more of?
:The renewables market is moving to a new reality of increasing exposure to market prices. Goya is an innovative pilot that will set a new path to develop renewables in mature markets. This is not just a one-off in Spain –the framework is an inspiration for us to take into other markets.
BNEF: So you will continue to buy stakes in the projects that you’re involved in?
A: We are looking at additional opportunities in the market under the same industrial philosophy –of joint value creation. I’m speaking about engineering, equity, energy market, green certificates etc. We are looking at it in Spain, but this can be exported to other geographies with the same market exposure in energy.
BNEF: How is the transaction structured? What proportion will be held by each party?
A: In Goya we have four different shareholders – Mirova with 51%, GE with 25%, Forestalia with 9% and Engie with 15%. It brings together financing expertise from Mirova, the engineering experience of GE, developer know-how from Forestalia with Engie’s perspective as a utility.
BNEF: Which investment banks are involved in the deal, and what was the debt-equity split?
A:The European Investment Bank, BBVA, CaixaBank and Banco Santander. In today’s market, banks don’t provide more than 70% of a project’s overall cost. The project financing structure determines what proportion of total Capex is provided by debt financing.
BNEF: Is there a minimum amount of debt you are able to obtain?
A: There is now 9,000MW of capacity that has come from Spanish energy auctions in the last two years –a significant part of the deals will be developed by incumbents and financed on their balance sheet, but the remaining amount will be project financed with debt finance.
BNEF: How much of the 300MW will the PPA account for?
A: It’s for a large portion of the capacity.
BNEF: Will you sell the rest of the electricity on the spot market with complete merchant risk?
A: Yes. The percentage backed by a PPA is a pre-condition set out by the banks. The amount of debt put together by the banks requires certain conditions in terms of how the PPA is structured, including the percentage of capacity that the PPA secures.
So the higher the debt, the more capacity you need under the PPA. If you want more leverage with the equity, you have to secure less capacity under the PPA. It’s a combination of what different parties want in the project financing.
So the part of production of the wind park will be sold under a merchant structure in order to benefit from a potential increase in market prices. Compared with the floor price provided under the PPA. The project shareholders see an opportunity in the fluctuation of energy market prices.
So part of the project output is insured under a PPA, and the other part is open to potential increases in market prices –therefore improving the return of the shareholders.
BNEF: Can you give any detail on the PPA price — from recent conversations we’ve had in the market, 35 to 37 euros per MWh seems like a fair estimate –is that about right?
A: It makes sense. The PPA is a floor price and is not inflated.
BNEF: What is the benefit of handling the civil works for the electrical installations (alongside Copsa).
A: We are looking at this project as an industrial project, so taking on the electrical and mechanical installations is an additional element to value creation. We are trying to counter-balance market risk not only by signing the PPA but also by adding additional levels of value creation into the project.From the beginning of entering into the project, we had this idea of industrial value creation. We want to bring every level of expertise that we have to the project, to capitalize value out of it.In order to do the balance of plant, Engie had to put in place a joint venture with local partners.
BNEF: Do you now think that PPAs are becoming a better route to market for renewable energy projects in Spain than auctions?
A: A significant amount of capacity has to be built before the end of 2019 –the 9,000MW that has been won in Spanish auctions in the last two years. Part of this capacity that is not in the hands of incumbents will need a PPA structure.
The timing of the auction is quite strict and there is not much time for the projects to be put together.
BNEF: It’s a huge amount of capacity to be built before the end of next year –both in terms of the supply chain dealing with that amount of build, and he financing of the projects. How much of the capacity awarded will come online?
A: I cannot tell you how much capacity will be finally built out, but the project financing of Goya is innovative.
Developers and banks are working on financing the projects that won in the auction, and maybe a large proportion will not be in commercial operation before the end of next year.
BNEF: Will the appetite for PPAs from corporates and utilities be sufficient to meet the demand from wind developers?
A: When we started it was difficult to find customers willing to sign a long-term PPA. Now we are already signing PPAs with corporations, but there is a mismatch between what customers are prepared to sign for, and what structure is needed for a generation project.
In order for a PPA to be bankable nowadays, you need a minimum tenor 10 and 15 years. But clients want much less than that –it’s difficult for them to take a position of more than five or six years. This may change but it will take time.