Spain’s renewable energy assets are producing more power than ever. However, as energy prices flatten out, refinancing renewable energy infrastructure could prove to be tricky
Spain’s renewable energy industry is performing better than ever. According to Redeia, the country’s grid operator, Spain generated nearly 60 percent of its electricity from renewable energy over the first six months of 2024, an increase of almost 10 percentage points year-on-year.
The exceptional operational performance of Spanish wind and solar power has been great news for consumers, with energy bills plummeting over the past 24 months. After peaking at €293 per megawatt hour (MWh) in March 2022 after Russia’s full-scale invasion of Ukraine, the growth in renewable output has seen power prices drop by more than 90 percent, to a multi-year low of around €14 per MWh in April 2024, according to data provider LSEG. But while households have benefitted from falling prices, lower energy costs have posed challenges for investors, contractors and energy companies involved in renewable energy power generation and development.
Pricing pain
Spain’s installed renewable power generation capacity has skyrocketed this century. Its total wind capacity has doubled since 2008, while its solar energy capacity has risen eightfold over the same period.
Investment in energy transition, a package of government subsidies and deregulation to encourage installation have helped to boost capacity over the past few years—but in today’s lower-price environment, investors are pausing and some of them are having second thoughts before deploying capital to new projects which they fear may not generate sufficient returns.
According to UNEF, Spain’s solar photovoltaic association, a combination of lower prices and higher costs (of materials and labor) contributed to a 26 percent year-on-year decline in installed capacity in Q1 2024.
These conditions have put contractors under financial pressure. Most will be building new assets through engineering, procurement and construction (EPC) contracts, a contract where contractors agree to deliver a turnkey site at a fixed price on a set date. But many of these contracts would have been signed when energy prices were higher and material costs lower. As market dynamics shift, there are fears that green projects will become uneconomic and one of the consequences of this would be that EPC contractors may be left at risk and facing potential restructuring.
Scaling the maturity wall
New development is not the only section of the industry to have been impacted by falling prices. Existing wind and solar assets have also been stretched financially, and many operators may find it challenging to refinance existing balance sheets as they approach maturities. Hence, some projects may require deeper restructuring.
The combination of lower power prices and still-high interest rates will require renewable energy companies and sponsors to rethink capital structures and leverage levels. The market today is very different from the low-interest rate environment five years ago, when liquidity was abundant and debt servicing costs were minimal.
In addition to impending refinancings, renewable energy companies also require additional capital to improve the efficiency of wind and solar sites with new technology—and through revamping, repowering or hybridization—that will lower production costs and protect their margins against lower power prices.
Silver linings
As challenging as the financing backdrop for renewable energy projects may be, the sector’s strong underlying fundamentals and supportive banking and investor community mean the industry is well-placed to navigate current headwinds.
Spain’s geography and climate grant it incredibly favorable conditions for renewable power generation. The country can produce renewable power at very low costs, which, when combined with improving technology, puts the sector in a position to remain viable even through occasional price dips.
Many renewable projects will also be backed by supportive sponsors who are willing to inject additional equity into good assets if required. The domestic banking space has a lot of experience with the sector, generally taking a long-term view to projects and is capable of providing capital throughout the economic cycle. For instance, earlier this year, Germany-based renewable energy company Encavis secured a €203 million refinancing package for its Spanish solar parks from a consortium of banks, including Bankinter.
Capital has also been made available for new projects, both from private and public sector providers. For example, Cero Generation secured financing support for the development of five new solar parks in the Palencia region of northern Spain from a consortium of lenders, including Banco Sabadell.
The sector also continues to receive financing support from the European Union, which sees renewable energy as crucial to the region’s long-term energy security and net-zero carbon emissions objectives and is investing accordingly.
The European Investment Bank, for instance, in August provided a €50 million green loan to Matrix Renewables, a Spanish company backed by TPG Rise, the impact investment arm of private equity firm TPG Capital, to build five new solar photovoltaic plants in the regions of Castile and León and Extremadura.
Low power prices may remain a challenge for Spain’s renewable energy industry for the foreseeable future. But even in tough circumstances, operators, developers, investors and lenders are working together to find a way through.
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