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Corporate PPAs in Spain

22/02/2021

Locations

Belgium, Germany, Spain, United Kingdom

Guidance to power purchasing on the Iberian Peninsula.

 
RED II (the EU's recast Renewable Energy Directive, which entered into force in December 2018) should eventually compel national regulatory authorities to align their approach to CPPAs across the EU.

In the meantime, Spain is taking its own steps to encourage CPPAs.

In January 2020, the Spanish government announced that it had increased its already ambitious 2018 targets for renewable energy development under its proposed Integrated National Energy and Climate Plan (PNIEC) 2021-2030.

The plan involves the installation of at least 3,000 MW per year of new renewable energy capacity over the next decade, driven principally by solar power but with contributions from wind, biomass (biogas) and hydrogen.

In recognition of the need to encourage the use of renewable over conventional forms of energy, the Spanish government has implemented measures to help large industrial energy users lower their energy bills by allowing them to lock in stable, predictable prices for renewably-sourced energy.

New measures include:

  • The Electro-Intensive Facilities Statute: A new Reserve Fund for energy (FERGEI)
On 26 June 2020, to encourage the development of renewable energy in Spain, the country's Ministry of Industry passed Royal Decree-law 24/2020 to create a new reserve fund – the Fondo Espanol de Reserva para Garantias de Entidades Electrointensivas (FERGEI).

The Royal Decree 1106/2020 of 15 December 2020 regulating the Statute of Electro-Energy Consumers, which entered into force on 18 December 2020, further developed the provisions of Royal Decree-Law 24/2020.

This decree applies to electro-intensive consumers – specifically, companies that have consumed more than 1 GWh per year in two of the previous three years and consume at least 50% of their energy during off-peak hours.

The decree gives these large consumers certain rights to ensure greater certainty over their energy costs.

To access this privileged regime, these industrial electricity consumers must contract at least 10% of their annual power demand via a renewable energy CPPA (with a minimum term of five years).

Royal Decree 1106/2020 has also developed FERGEI to encourage the development of renewable energy in Spain.

This fund will assume some of the financial risks faced by energy generators/suppliers signing CPPA deals with electro-intensive consumers.

FERGEI is managed by Spanish export credit agency CESCE and will have an annual budget of €200 million, or €600 million over the first three years.

In practice, the law will empower the government to guarantee payments due to suppliers under CPPAs in the event that an offtaker cannot meet its obligations (due to insolvency, for example).

For more information on FERGEI as the CPPA backup mechanism, please see this summary by Fieldfisher JAUSAS.
  • Elimination of CPPA term barriers for public procurement

The EU’s long-term budget, coupled with NextGenerationEU (NGEU) – a funding instrument designed to boost the EU's recovery from the economic impacts of the Covid-19 pandemic – is designed to make more money available for sustainable energy development and consumption.

As part of the NGEU project, Spain could receive up to €140 billion between 2021 and 2026. To help Spain absorb this funding, it was recognised that public procurement regulations would need to be reformed.

Consequently, the Royal Decree-Law 36/2020 of 30 December 2020 eliminated the four-year term limit imposed on power supply contracts by public procurement regulations, extending the limit to 10 years (with no possibility of renewal or extension).

This means that public bodies in Spain may now enter into long-term contracts with power suppliers.
  • Removal of barriers to on-site generation

Prior to the recent energy reforms outlined above, the Spanish government had already shown its intention to make on-site CPPA projects simpler and less costly.

In April 2019, the Spanish government passed Royal Decree 244/2019 regulating the administrative, technical and economic conditions of the self-consumption of electric energy.

This authorised self-consumption by groups of energy consumers and relaxed the regulatory process for small-scale producers.

Effectively, this decree eliminated some of the financial barriers – in the form of taxes and tolls – for on-site CPPAs, thereby lowering the cost of electricity produced on a corporate's premises for its own consumption.
  • Draft bill of the Spanish National Fund for Sustainability Electrical System

In December 2020, the Spanish government agreed to initiate the processing of the bill establishing the national fund – the Fondo Nacional para la Sostenibilidad del Sistema Eléctrico (FNSSE) for the sustainability of the electrical system.

The FNSSE will assume some of the costs associated with investment in renewably-generated electricity in the coming years, and will be financed by contributions from the revenues of all energy sector participants (with some exemptions for certain kinds of businesses) – including oil and gas producers, who were not previously obliged to contribute.

The operation of this bill will add to costs for energy consumers and CPPAs will be included within the scope of the fund's contributors, although details of the bill are pending discussion by the Spanish parliament.
  • Possible removal of power tax

The existing 7% tax on all power generation in Spain (which has been levied since 2013) is factored into CPPA prices, and into market participants' offers in the day-ahead wholesale power market.

Proposals to scrap this tax have been under consideration by Spain's parliament for the last two years and the Court of Justice of the European Union (ECJ) is expected to issue a ruling in early March this year on whether the tax contravenes EU legislation.

Based on the expectation that the tax will eventually disappear, most CPPAs have an adjustment clause stating that if the tax were to be removed, the parties will adjust the value of the CPPA by around 7%.
 
Considerations and challenges for CPPAs in Spain

While Spain is consistently cited as one of the most exciting growth markets for CPPAs, and most of the hoops market participants (domestic and international) have to jump through are the same in Spain as they are in most European jurisdictions, there are some considerations specific to the Spanish market that CPPA parties need to take into account.

These include:
  • Auction prices vs CPPA prices

Competitive prices seen in Spain's renewable power capacity auction in January 2021 caused some consternation for Spanish energy consumers considering comparatively higher electricity prices under CPPAs.

A total of 3.034GW was auctioned in the end of January at a weighted average price of €24.74/MWh, for a remuneration period of 12 years (starting on 30 September 2023 for solar photovoltaic (PV) plants and 30 September 2025 for offshore wind farms).

For more information on these auctions, please see this summary by Fieldfisher JAUSAS.

Pay-as-bid auction prices ranged between €14.89/MWh and €28.90/MWh. This was considerably lower than recent reference prices for CPPAs, which were settled above €30/MWh (c.€33/MWh for pay-as-produced solar PV contracts and €39/MWh for base-load agreements for either solar or onshore wind power) for typical 10-year contract terms.

Strike price negotiations are always difficult for long-term contracts and the recent Spanish auction prices have added pressure to CPPAs that renewable developers were planning to sign with offtakers in the near future.

However, it should be remembered that CPPA prices between private corporates cannot be accurately compared with the auction prices.

Reasons for this include:

(i) Different durations: Auctioned contracts are for 12 years, whereas CPPAs typically last for 10 years or less (although auction winners are permitted to exit contracts early provided they meet minimum volume requirements);

(ii) Offtaker credit ratings: Auctions are to supply entities of the Spanish electricity grid, rather than private companies;

(iii) Contract type: CPPA contracts tend to be bespoke contracts tailored to the corporate's needs, rather than standard supply contracts; and

(iv) Additionality: Corporates are sometimes willing to pay a premium to demonstrate that additonality principles have been met (i.e., CSR and qualify for financial support from the EU earmarked for beneficial projects that would not have gone ahead without the corporate's involvement).

So while competitive auction prices have given Spanish electricity consumers pause for thought, any downward pressure on the CPPA market should only be temporary.

The Spanish government plans to launch another auction later this year, as part of an indicative calendar for at least 19.54GW of renewable capacity to be tendered until the end of 2025.
  • Corporate offtakers

Having corporates, rather than public entities, as offtakers has profound ramifications for how PPA contracts contract are structured.

For example, regulatory requirements in Spain make 'sleeved' models challenging.

Physical/direct CPPAs, also known as 'sleeved' CPPAs, are between a renewable energy generator and an end user and require the generator to sell the electricity produced by a particular asset to the end user.

Because electricity can only be delivered through wires, and operation of and access to those wires is regulated, the end user's obligation to purchase electricity cannot be performed by the end user itself – unless the generator and end user are physically connected by a private wire.

The solution is for the end user to appoint a suitably regulated entity (usually an  energy supplier) to 'sleeve' the electricity from the delivery point at the generating asset to the end user's premises.

For this reason, Spanish CPPAs are often financially settled to avoid, or at least rebalance, some of more onerous regulatory obligations.

It remains to be seen whether combined effect of recent and proposed reforms in Spain will prompt the settlement of more physical CPPAs in Spain.
 
Common obstacles to CPPAs

Many of the barriers to signing CPPAs in Spain are common to all EU jurisdictions.

In particular, these include:
  • Construction risk

Offtakers in CPPAs have historically been very reluctant to share construction risk (this tends to be borne primarily be the generator and/or any third party equity investors in the generating asset).

An offtaker's right to damages in the case of delay/default is quite a difficult balancing act in financial CPPAs, especially given accounting treatment considerations (see below).

In physical or direct CPPAs, the offtaker potentially has more control of the construction of the asset, although this presents its own issues and risks (particularly accounting).
  • Supply risk

There is a clear trend in CPPAs across Europe towards generators having to bear some responsibility for balancing risk – within a margin of tolerance against forecasting of supplied energy volumes.

Forecasting is much more accurate now than it was 10 years ago, so this gives offtakers greater leverage against generators who fail to deliver against expectations.

Generators are not generally set up to manage this risk, however, and usually need to appoint third parties to handle balancing risk, which has cost implications for the pricing of the CPPA.

What happens if there are delays in achieving the stated commercial operation date (COD) for power generation projects, or if the generator fails to deliver forecast volumes, tend to be among the most heavily negotiated aspects of CPPA contracts.

The outcome of these negotiations largely depends on the relative bargaining power of the parties involved in the CPPA.

With larger projects, it is possible to come to an arrangement to cover some of the losses caused by a COD delay – in Spain, for example, this can be achieved through volume clauses and/or the provision of backup power generation installations.

If the consumer's consumption falls, there is usually an agreement that the offtaker will pay the generator a market price for shortfall in consumption – negotiated under a take or pay clause.
  • Accounting treatment

How a CPPA will be classified for accounting purpose is a recurrent issue in CPPA negotiations.

Specialist accounting advice is always essential, but generally in the case of financial CPPAs, these contracts tend to fall within the scope of derivative accounting and the associated costs and burdens can collapse deals.

In Spain, to avoid an asset appearing on the offtaker's balance sheet, the offtaker cannot invest any of its own capital in the renewable energy generation project, among others aspects to keep in mind.

It must also consume all the power it receives itself (rather than selling any into the market), and the contract term should be shorter than the life of the asset.

For more information about common barriers and considerations for CPPAs in Europe, see our Corporate PPAs: FAQs.

These FAQs were answered collectively by Fieldfisher's CPPA specialists, Ramón Vázquez del Rey Villanueva (Madrid), Daniel Marhewka (Munich), Lis Blunsdon (London) and David Haverbeke (Brussels).

For more information on our CPPA expertise, please contact one of the authors or download our thought leadership report and industry survey "Think GIG: The rise of corporate PPAs".
 

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