PPAs: A new trend in the Iberian renewable energy market

The era of subsidy-free renewable energy projects in the Iberian region is here.


February 8, 2019

The era of subsidy-free renewable energy projects in the Iberian region is here.

In the last quarter of 2018, Allianz Capital Partners signed power purchase agreements at two subsidy-free solar power plants in Portugal totalling 265MW. These are the 219MW Solara project, which would be the largest solar project without public subsidies in Portugal, and the 46MW Ourika solar plant.

Subsidy-free wind projects in the region have also been progressing.

A Word About Wind is hosting a breakfast networking event about PPAs in Europe in London on 21st March, in partnership with Augusta & Co. Click here to attend

For example, in May 2018, French utility Engie signed Spain’s first wind power purchase agreement. The utility agreed to buy the entire output produced by the 300MW Goya wind complex in Zaragoza, which is owned by Mirova (51%), General Electric (25%), Engie (15%) and Forestalia (9%).

In addition, independent energy supplier Fortia Energia signed in January an agreement with Statkraft for 3TWh of wind and solar power to supply its large industrial customers in Spain and Portugal; and Spanish firm Telefónica agreed a power purchase deal with Acciona in February for 345GWh of renewable energy, including from wind farms and solar power plants, to power 72 of its facilities.

The Iberian renewables sector is witnessing a change in market dynamics, and Spain and Portugal are set to become the next hotspots for wind and solar PPAs in Europe.

One of the main attractions of PPAs in the region is wind and solar’s low levelised cost of energy. A significant LCOE reduction over the past few years has been mainly driven by increased technology efficiency and reductions in capital and operational expenditures. This, in addition to good wind and solar resources in Spain and Portugal, is set to make a growing number of projects viable without government support.

The benefit for corporates and utilities to sign power agreements here is clear.

PPAs allow them to purchase power at a fixed price, and as a hedging instrument against the volatility of electricity prices. Also, the longer the PPA’s term, the larger the benefits. This is because the longer the duration of a PPA contract, the more discount companies are able to lock in, compared to what may be the market price in the future.

Long-term PPAs offer an important element for investors too. With their fixed-price nature, they can give a clear view to investors of how the initial revenue line will develop, playing a very important role here in reducing volatility and uncertainty.

However, there is currently only a very limited appetite from off-takers in Iberia for very long-term PPAs. There are some projects on the market with PPAs up to 10 years, but PPAs with a duration of 15 years or more are scarce and competition is tough.

In our experience, the reason for this limited appetite is threefold. First, in every market there are, by nature, only a few counterparties willing to enter into substantial long-term commitments of 15 years or more. Second, in Spain and Portugal the forward market is not very liquid beyond the short-term horizon which makes it difficult for any off-taker to hedge its exposure. Finally, not all of the multinational traders have a significant trading book in Iberia, and this limits their appetite further.

The question then is: can we find enough volume to drive the envisaged growth in these markets?

Long-term fixed-priced PPAs are a relatively new feature of the Iberian market and volumes offered are still small compared to development aspirations.

However, increased liquidity in Iberia’s long-term electricity forward markets, entry of new players and raising demand from corporates for clean energy are set to become key drivers to increase the volume.

The boom of PPAs in the unsubsidised renewable energy sector in Iberia has just started and it is set to drive a new era of growth.


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