Will Spain´s PPA bubble burst?

Spain´s PPA boom could be a bubble that could burst in the coming years. This week´s pod comes from Madrid, where we discuss the upcoming election and the impact on energy policy. 

Will the next government be able to push through the necessary legislation in order for Spain to meet its decarbonisation targets? 

Host:

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guests:

• Andrés Cala, Editor Spain, Montel, 
• Pedro Linares, Professor of Energy Policy, Comillas Pontificial University.

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring you the most topical energy matters in an informal setting. My name is Richard Sverrisson, and today I'm joined in Madrid by my colleague Andrés Cala, who's editor for Spain and by Pedro Linares, who is a professor of energy policy at the Comillas university here in Madrid. A warm welcome to you both. Thank you. We are gonna be discussing mostly regulation and policy. I wonder, Pedro, if you could give us a bit of the background here in Spain. You recently had an election. There wasn't really a clear outcome. What was going on Now, you know, where does it leave energy policy in this country?

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 0:40

Well, I think we have been. Riding like a rollercoaster in terms of energy policy. In the last, I would say four years, we had right-wing governments that had a particular energy policy, which was basically focused on keeping energy costs low. As low as possible. That resulted, for example, in a moratorium for renew energy fit in tariffs and, and, and basically on a revival of, of some of the traditional power plants. Then we changed government last year and the focus shift completely. So now we are absolutely focused on decarbonization. The government came in just in time to prepare the National Energy Plan, which has set very ambitious and objectives in terms of decarbonization, and that is aan basically by strong increase in, in renewable energy building. But the problem is that there are no yet policies that kind of materialize. All these change in direction. And the second problem is that we are having elections next Sunday. Okay. So we don't know what is going to happen, but probably it seems that we would possibly have a similar type of government, like the one we have now, but in a minority. So we are not sure about their. Capability of getting strong policies passed by Parliament. I think there's a lot of uncertainty right now. We have a very strong sense of direction. All the backs also by the European Commission. But we don't know yet what will be the actual policies that will be implemented.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:08

Okay, but you have the targets and the objectives and such, but not the roadmap or how to get

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 2:13

there, right? Not the instruments. I would say we have long-term targets which to some extent I would say are widely shared by industry and by society. So people in general are. Happy with progressing towards ization. So in general sense, I would say that the targets are widely shared. But as usual, devil is in the details and, and we don't have yet instruments. And, uh, I guess there will be much more discussion about instruments.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:42

Just for those who have not so familiar with Spanish policy. What, what are those target for renewables and

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 2:47

Yeah. So, uh, basically the National Energy Plan says that we should reduce our emissions. 20% compared to 90, 90 levels by 2030. By 2030, given the trajectory of Spanish missions, that is equivalent to a 45% reduction compared to 2005 levels, which were our peak. So it's a very drastic reduction. I think we are heading towards 42% renewables. Although there is a trick there because of accounting rules. So the actual share of renewable energy, electricity is a bit lower. But not lo, around 40% is that, that is higher than the European objectives. For example, the European target is 32%.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:27

So is it electricity produced or part of the energy consumed?

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 3:31

Yeah. Yeah, it is. Final energy. Final energy. It's the share of final energy. And the European target is 32%. And we are going for around 40%, which is basically equivalent to around 80% of the power of the electricity produced with renewables. 80% right. Including hydro, including we do have a significant amount of hydro, but by 2030, I mean that by 2030.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:54

And is there in terms of. You know, the political consensus is this sort of, you say there's a lot of agreement on this, so is, is this kind of shared between the parties of the right and the left really?

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 4:05

Uh, I think there's significant amount of agreements. I mean, the last government, for example, the right wing governments. Was happy with a report that was issued by a panel of experts that said that we could go for 72%. So I would say between 70 and 80% maybe there's a bit of discussion. And it all depends of course, on the cost, on the evolution of the cost of removals. But I would say everybody. Across the political spectrum is happy to go beyond 70%. Maybe not up to 80%. So maybe there's some discussion there, but no less than 70%. So, so I think that's, uh, a quite wide concern.

Andrés Cala, Editor Spain, Montel: 4:43

And earlier you were saying that, of course, the devil is in the details and specifically we, you mentioned transport. And industry. And these are key issues, not just in Spain of course, but in the eu there are the possibility of border taxes of other ty types of fiscal measures. But at the end, those details mean that even if there's agreement. On the, yeah, on the, on the bullet points, so to speak. It's not altogether certain that they will actually be aggressive enough to pass the legislation, the real practical legislation Yeah. To reach those targets. And, and, and one of the interesting parts that I. Parts there that you mentioned is of course, uh, the, the money. I mean, how do we attract the private investment to do all this? Yeah. If this is not gonna land on the states, on the, on, on the, on the different governments, how likely is it that even if we agree on the, on the bottom line

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 5:37

that we actually get this? So, uh, so yeah. I mean, we have then talking about the electricity sector, right? And the electricity sector. I was saying that just some minutes ago. I think it's probably. The easiest one, and I'm probably oversimplifying that. I mean, the electrician sector is about investing in renewables, and all political parties think that that provides a certain opportunity and given that the cost of renewables is going down and down, it's probably not expected to be a large cost for the system. So that's where I see a lot of agreements in increasing significantly the amount of renewals in the system. Now, if you go beyond the electricity sector. This is where the real problem starts. So as you correctly pointed out, if you want to progress, if you want to achieve this 20% reduction of emissions you need to do drastic reductions in transfer, in buildings and in industry, probably industry, not until a bit later, because it's probably more expensive. So for example, if you look until 2030, the big challenge is buildings and trunk food. And this is where I think there's not that much agreement. I mean, people share that we should decarbonize, but I think people are not aware of how costly that might be. If we address buildings, rehabilitation, refurbishing buildings and energy refurbishing is quite expensive. Although, of course it has many side benefits, but it is quite expensive in terms of transfers until electric vehicles become competitive, which this may happen, I don't know. 20 22, 20 25, who knows? Mm-hmm. Until they become competitive. If you want to push farther for them, that is going to be, again, very costly. And also more importantly, probably the only way to reduce transport emissions significantly is to reduce mobility, to reduce demand. And that means changing behaviors, and that means telling people maybe you cannot access Madrid as, as happens in London, nor in Oslo. Or maybe you have to pay a very big penalty if you want to enter the cities. Or, uh, maybe you are going to be having. To pay a lot more for your car, like happens in, in the northern countries. Right. And those are the measures where I think are going to prove very unpopular and we're not even there. Um, the leftwing parties may be willing to get into that 'cause it's, uh, it's, it's tricky electorally. Right. It's probably quite a big vote. Loser. Right. And if you follow the electoral campaigns, the one that we are having right now the one we had in April. Everybody was talking about climate change is a big concern. Nobody talked about taxes. About carbon taxes. Nobody pronounce that word of course.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:17

Or how to pay for decarbonization.

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 8:19

Right. And the problem is that I think when you're dealing with transfer and buildings we are actually talking about money that has to be paid by households in order to do that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:28

Is there another way to, you know, like some countries, I mean, you've got a huge explosion of, for example, electric vehicles in, in Norway. Yeah. And the way of incentivizing that is to, uh, you know, is to, to subsidize, to sub subsidize em heavily, but also allow them to enter the city's free of charge, which is, and also, which is also kind of subsidy of course, but is that an option for Spain for example? Because if you have solar panel on your roof, you have a battery and an ev I mean, surely that's the perfect, uh, perfect idea of, of a. You know, but Decarbonized worlds you mean?

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 9:00

Well, I don't know because, um, I mean the electric vehicle, I think it's the future and nobody doubts that. Of course it depends on, on how it's going to be the evolution of the cost of batterie, and I'm sure it's going to be competitive very shortly until that happens. That is going to be costly. Solar panels on the roofs, of course, they are getting cheaper and cheaper and, and we have grid parity, but grid parity is not competitive now. The real competitiveness is generation party. And that has not been achieved yet. Although we're very close. And also the point is whether, for example it makes sense to build solar panels in all roofs, or it makes sense to build them in the middle of Castile with a lot of open spaces and, and profit from economies of scale. So what I mean is that I think there are many, many possibilities, many Aries for achieving death. And there are two big questions here. Is. The big, the bigger one is how much are we willing to pay for this? And last week at institute they published a survey, a big survey on opinion policy and Spain. And it seems that a majority of Spanish people are willing to pay something or another, a huge amount of it, at least something for that. So I think that the, the, the sweet spot is going to be how do we find the right measures that actually make us advance in this? Trend towards the carbonization that is acceptable at a sustain level, level in terms of cost or how are we be able to, to somehow finance that cost or provide the right warranties so that investors will come in and do the investments, which in the case of renews, I think is fine. In the case of buildings, maybe the trick lies in finance. Chief finance as a way to, to give this incentive, which is again, a better way instead of just giving subsidies away. I, I think there are some, some instruments that might be acceptable. I think there are some other instruments that are going to be very costly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:51

Yeah. Sitting in Northern Europe and looking at sort the massive expansion of, of solar power in. You know, in Germany, even in the Netherlands, now that they're open a big floating solar park, you think, you look at Spain and think, why, why isn't there more here? You know, you've got the sun, you've got, you've got the wind as well. Right? Right. And why, why is, and the wind

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 11:11

has been really strong, I think.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:12

But on the solar front, because you think, you know, the, the so-called presumes who could both produce and consume power. I mean, that could, couldn't that revolutionize in a sense the country's energy system. I think it might.

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 11:24

I think it might, but I think we should compare centralized versus de centralized and, and see whether economies of scale compensate. The potential reduction in losses, which is basically the discussion here. You also have this philosophical empowering effect, which is also valuable, and I think it has to be considered. Also, the problem right now is that the current regulation we have for example, for setting solar panels and, and households is, is full. Basically the tariff is not well designed, so we are cross-subsidizing through the fixed part of the tariff. We are cross-subsidizing this installation. So the problem is right now with the, with the current context, I cannot say whether it makes sense to go for one option or the other. I think we should first set the right setting the fair distribution of costs. And then allow all of them to happen. And if somebody wants to build this solar panel in their home, that's great. And maybe they're making money for everybody. The, the problem is how do you align the incentives? With the social benefits, right? And, and I think there's a lot of potential. But that said, we have one problem here in Spain, and again, this is a, an interesting discussion. If you are considering, for example, decentralized solar energy, which is that in Spain, whenever you talk about. Giving locational signals in electricity markets. They tell you you're crazy. They tell you that goes against the unity of the markets. Uh, so, uh, the tariff has to be the same one all across Spain. And that's a problem because it makes sense, for example, to build solar panel in Madrid where the, uh, network is heavily loaded. Right. And it wouldn't make sense to build 'em in, in the middle of the countryside, right? But we are not able to. Gets householders in, in Madrid, get those benefits because the chart is the same for everybody. Right. So. Uh, I'm not sure whether we will be able to actually see that happening in the absence of the right signals.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:17

Again, what you're saying with the, it's in the details. That's why the details need to be sorted out. Right.

Andrés Cala, Editor Spain, Montel: 13:22

And of course, any of these measures, even if they make all of the common sense that they do, even if there's agreement, it requires, well, some political courage. The most likely scenario as, as we've talked about, is that Spain will. Have a government we don't know what what color it'll be, but it'll be a weak government. It will not be a government in the majority it's even any of

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 13:43

these. My concern is not with the governments. My concern is rather with the opposition, if the opposition thinks that there are high chances that we will have an election again soon, then of course they have the incentive to behave. More electorally and less responsibly as to say less long term and more short term. So I think the government I think current minister, she has a lot of courage. So I think she, she has what, what, what we need to, to do this. But we also need the responsibility from the part of the opposition parties to say, okay, this makes sense. This doesn't make sense. Let's vote for what makes sense. Let's don't vote. Let's not vote for what doesn't make sense. Not with an electoral approach, but with a responsibility, long-term approach. So I think I'm more concerned about the attitude of the opposition in this setting. Is this going to be taking as an opportunity to break down the governments? Or is this going to be taking as an opportunity to get into consensus? And, and try to progress. And I think that's a big

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:45

question.

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 14:46

Yeah.' Richard Sverrisson, Editor-in-Chief Europe, Montel: political point scoring, as you say, rather than, you know, very short term basis. Right. Right. This days, for example, I, I remember a couple of days reading Martin Wolves in the financial term saying, I, I, I would like to have a hum parliament. Mm. Because that ensures that the, the policies that come out are going to be consensual. Mm-hmm. Right? Mm-hmm. You might think the same, um, in the Spanish setting, you could say, uh, a Hong Parliament may be more interesting in order to produce. More consensus based policies. Mm-hmm. That would be more stable. Right. But that depends on the, on the attitude of the political parties to engage into long term view rather than into. Short term, joking around and, and trying to bring on the

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:27

government. I mean, if we come back to the element of private investments, and one of the ways in which, or some of the, the large investments into Spain that we see is, is in the PPA market, right? So, so Spain has, has, has quite seen quite boom in these, do you expect that to continue? This is for wind and solar. I mean,

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 15:47

there's a, there's a lot of movement right now. In fact, I'm a bit concerned about repeating a bubble. Because there is a scar signal from the point of view of access to network. And also so on the one hand we had like big expectations drawn by the government about this new auction. So the conditions will be there for private investment. I'm sure about it. There will be plenty of demand for new investments, certain stability, but I'm a bit concerned about scar signals through by network and also by tongue councils and all that. I'm a bit concerned that all these expectations might drop above the line and we might end up with higher prices than we expect. I don't know.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:25

And the bubble could burst then. Yeah. Yeah, of course. That's the problem. That's burst. They burst, absolutely. But there are some ambitious programs in place at the moment. What are the auctions for for wind in Spain? Is it six gigawatts a

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 16:41

year? Year? Well, yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:41

So

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 16:41

the national plan says that if we are to achieve these targets, we would need 6,000 gigabytes. Okay. Renewables per year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:49

Okay. To achieve

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 16:50

the targets? Yeah, to achieve the targets. The drafts of our low on climate change, which has not yet been approved, says that it will be a minimum of 3000 gig. Options. Something between three and six is probably because some people expect that probably you don't need to auction the full six gigabytes. Maybe a part of it will go through auctions, but maybe another part will go merchant. We don't know. But yeah, I mean this three GTS minimum during 10 years. That, that's a lot of investments. That's a lot of private money that can come in three gigawatt a year. That's, that's, that's, well, that's, I mean, the maximum capacity we have installed in Spain is four.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:29

Yeah, exactly. So, yeah.

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 17:30

So you, you know, and in fact, I remember we, we are having, having this discussion here in Spain. And for example, if you look at there are some numbers out there by Bloomberg who say that the pipeline. He is able to provide this six gigabytes, but only after some use the pipeline has been dead. So they expect that at the beginning that that could be, and the pipeline seems to be bigger right now for wind than for solar. Of course you never know. But the point is that some people question whether we might be able to go for three, dig about solar 2020 and 2021. Probably after 2025 we'll be

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:05

happy easy to do that. Spain was, you know, a few years ago, made some controversial changes to some of its laws, sort of retroactive changes to subsidy schemes. Is there any danger that that could happen again?

Pedro Linares, Professor of Energy Policy, Comillas Pontificial University: 18:17

I don't think so. Basically because in the past, these retroactive changes. Were due to the realization that the money that was being paid, which was a fit tariff, was probably excessive because the fit tariff had not been adjusted to the changes in technology. Now, if you do that through an auction, there's less risk, right? Because there is the competitive pressure. So probably the price resulting from the auction will be better adjusted and therefore there will be less brands for retroactive. Corrections. So yeah, I'm, I'm less concerned about that. I'm still a bit concerned about this bubble and this scarcity that might drive prices higher than they should, but I'm less concerned if the mechanism is an auction that, that there will be this, uh, sunk cost that has to be paid.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:09

Yeah. Pedro, an res thank you both very much for joining the Weekly podcast. We are back next week in London, and then we'll be talking Carbon, mainly Carbon matters. Once again, thank you and please, listeners, keep up to date with all our stories on Montel News. Follow us on Twitter, LinkedIn, and you can subscribe on Apple Podcasts and Spotify. Thank you. Goodbye from Madrid.