Industry Trend Analysis - Upgraded Renewables Auction To Accelerate Sector Momentum - OCT 2017

BMI View: Spain ' s decision to upgrade its second renewables auction from 3 GW to 5GW aligns with our upbeat outlook for a rebound in sector growth over the next three years. The lack of visibility into tendering schedules and government aims post-2020 elevates the risk that the sector will stagnate again into the 2020s.

Our view that competitive auctioning capacity procurement would restart growth in Spain under the auspices of the country's new minority government is playing out (see table below). After years of stagnation due to retroactive subsidy cuts, the country's renewed push to kick-start growth has translated into a total of 8 gigawatt (GW) being auctioned in 2017 - bolstering our growth outlook for the market for the next three years. Being a component of the government's aim to bolster renewables growth leading up to 2020, we stress that no renewables capacity is scheduled for commissioning post-2019 and there is limited visibility for when new tenders are to be held, if at all. This heightens the risk that the sector could stagnate again into the 2020s.

Steadily Improving Renewables Narrative In Spain
BMI Analysis Date
Source: BMI
' Minority Government Formation Improves Renewables Outlook ' November 30 2016
' 3GW Auction Aligns with improving Renewables Outlook ' December 15 2016
' Auction Framework To Revive Dormant Wind Sector ' June 2 2017

Second Renewables Auction Supports Bullish Near-Term Outlook

The Spanish government's decision to increase the size of its second renewables auction in 2017 from 3GW to 5GW - due to the competitive bids and level of interest registered - supports our upbeat growth outlook for the renewables sector. The tender was finalised in July 2017 and saw solar dominate by winning 3,909MW - compared to wind power developers winning 1,128MW. This takes the total of capacity awarded over 2017 to 8,037MW, with wind having contracted 4,107MW and solar 3,910MW.

The procured capacity is scheduled to go online by start-2020, in order to support Spanish efforts to meet 2020 carbon emission reduction targets. As such, we forecast non-hydropower renewables capacity in Spain to expand by an annual average of 8% between 2017 and 2019 as developers race to meet the project development deadlines imposed under the recent two auctions. In 2019, the capacity growth rate will go as high as 16%. This is a notable increase from historic levels, where capacity growth averaged 0.2% between 2014 and 2016; a reflection of the negative investment environment amid retroactive subsidy cuts.

Near-Term Growth Kick-Started By Auctions
Spain - Non-Hydropower Generation Capacity By Type, MW
e/f = BMI estimate/forecast. Source: EIA, REE, BMI.

The second auction also evened the playing field between wind and solar, after wind power completely dominated the first 3GW auction held earlier in 2017. This dominance was in large part due to all developers bidding to the price floor under the auction, with wind power being favoured given that the technology enables more power generating hours annually. In the second auction, which again had developers bidding to the price floor, the size of projects became a more important variable. Given that projects are to be developed by end-2019, we believe the typical quicker turnaround of large-scale solar projects versus large-scale wind projects favoured the solar power in the auction.

Large-Scale Developers Dominating Solar Auction
Spain - Winning Bidders For Solar Project Development For Second Auction, MW
Source: Spanish Ministry For Industry, Energy & Tourism, BMI

Limited Capacity Tender Visibility Heightens Risk Of Long-Term Stagnation

While the recent auctions will stimulate substantial wind and solar capacity growth in Spain over the next three years, we caution that growth could stagnate again once auctioned projects are commissioned. There is currently no visibility into future capacity tendering schedules, which will concern the Spanish renewables supply chain which is reliant on steady multi-year demand for equipment and services.

We also note that Spain also restricts internal rate of returns (IRR) for renewables projects to 7.4% in order to service the country's electricity tariff deficit. The government is scheduled to assess what it considers a reasonable return in 2019, and there is a risk that the government will deem returns too high and/or new projects unnecessary. This lack of long-term policy visibility in turn feeds into our cautious outlook for long-term renewables growth, as we forecast annual average capacity growth to average 0.9% between 2020 and 2026.