Webinar: Trends in renewable energy support

Webinar: Trends in renewable energy support Is the Spanish case a forerunner for the rest of the EU? Matthew Jones Senior Analyst EU Power & Carbon Anise Ganbold Senior Analyst EU Power & Carbon 12 July 2018

Housekeeping This live webinar is being recorded If you have technical problems please use the Raise Hand function If you would like to ask a question at any point during the presentation, please submit via the Q&A function at the bottom of your screen We will try to answer as many questions as possible at the end of the webinar The recording and the slides will be available after the live event copyright 2018 ICIS analytics.icis.com 2

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Historical developments

GW Renewable development in Spain slows: What went wrong? 120 Installed RES capacity by country 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IRENA Spain Germany Italy France UK copyright 2018 ICIS analytics.icis.com 6

Number of cases to date 41 complaints by foreign companies under the ECT so far ECT cases against Spain involving renewable scheme reform 40 35 35 30 25 20 15 10 5 0 Source: ICIS 2 3 In favour Spain In favour claimant Dropped Pending 1 copyright 2018 ICIS analytics.icis.com 7

Renewable Auctions

Spanish renewable auction design The government sets a starting price for each technology type The starting price considers expectation of market prices, capital costs, operating costs, running hours and other factors Government reserves the right to review the starting prices every three years next review is due end-2019 Companies bid a percentage discount to the starting price Deadline for commissioning is 31 Dec 2019 Penalties for 2016 projects that miss deadline, up to 20/kW and for 2017 projects up to 60/kW copyright 2018 ICIS analytics.icis.com 9

Renewable auctions resulted in 8.6GW of new RES capacity Auction Date Technology Capacity target (MW) Capacity awarded (MW) Weighted average subsidy price ( /MWh) Jan 2016 Onshore wind 569 0 700 in total Biomass 200 0 Onshore wind 2,780 39.9 May 2017 Other RES 3000 in total 19 41.6 Solar 1 42.2 Jul 2017 Onshore wind 1,128 28.2 3000 in total Solar 3,909 32.7 Total 6700 8,606 Source: ICIS, OMIE copyright 2018 ICIS analytics.icis.com 10

/MWh (nominal) Auction strike prices in Spain are lower than in other EU countries 160 Prices at auctions - Spain vs other EU countries 140 120 100 80 60 40 20 0 May-13 Nov-13 Jun-14 Dec-14 Jul-15 Jan-16 Aug-16 Mar-17 Sep-17 Apr-18 Oct-18 Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France Source: ICIS copyright 2018 ICIS analytics.icis.com 11

/MWh (nominal) Spain has lower auction prices but higher market prices, though volatility is high 70 Lowest subsidy price vs. 2020 market price 60 50 40 30 20 10 0 Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France Colourful bars = Lowest subsidy 2020 power price Source: ICIS, EEX, OMIE copyright 2018 ICIS analytics.icis.com 12

/MWh (nominal) Spain has lower auction prices but higher market prices, though volatility is high 70 Lowest subsidy price vs. 2020 market price 60 50 40 30 20 10 0 Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France Colourful bars Colourful = Lowest bars subsidy = Lowest subsidy 2020 power 2020 price power Revenue price received Source: ICIS, EEX, OMIE copyright 2018 ICIS analytics.icis.com 13

/MWh (nominal) Spain has lower auction prices but higher market prices, though volatility is high 70 Lowest subsidy price vs. 2020 market price 60 50 Daily average price - Range in 2018 to date 40 30 20 10 0 Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France Colourful bars Colourful = Lowest bars subsidy = Lowest subsidy 2020 power 2020 price power Revenue price received Source: ICIS, EEX, OMIE copyright 2018 ICIS analytics.icis.com 14

/MWh (nominal) Spain has lower auction prices but higher market prices, though volatility is high 70 60 50 Lowest subsidy price vs. 2020 market price Intra-day price - Range in 2018 to date Daily average price - Range in 2018 to date 40 30 20 10 0 Onshore wind Spain Solar Spain Onshore wind Germany Solar Germany Onshore wind Italy Solar France Colourful bars Colourful = Lowest bars subsidy = Lowest subsidy 2020 power 2020 price power Revenue price received Source: ICIS, EEX, OMIE copyright 2018 ICIS analytics.icis.com 15

/MWh More renewable capacity cannibalises the capture price Renewables can be a victim of their own success through price cannibalisation Capture prices reflect the actual income that a generator achieves in the market A rapid build-out of renewable capacity could depress capture price as projects will have the same production profile Capture price declines with more RES generation 2018: fewer generators capture an average higher price Income for RES in 2018 RES generation MWh/h copyright 2018 ICIS analytics.icis.com 16

/MWh More renewable capacity cannibalises the capture price Renewables can be a victim of their own success through price cannibalisation Capture prices reflect the actual income that a generator achieves in the market A rapid build-out of renewable capacity could depress capture price as projects will have the same production profile Capture price declines with more RES generation 2030: more generators capture an average lower price Income in 2030 RES generation MWh/h copyright 2018 ICIS analytics.icis.com 17

2020 Targets

% Spain s RES target is 20% of final energy consumption 25 Spain RES share in final energy consumption 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Heating & Cooling Transport Electricity 2020 Target Source: Eurostat copyright 2018 ICIS analytics.icis.com 19

GW In an ideal scenario auctioned capacity could be enough In a high case assumption where all successful capacity comes online, total installed RES capacity reaches 56.7GW in 2020 70 60 50 Spanish RES capacity with auctions +8.6GW of auctioned capacity 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: ICIS, Eurostat copyright 2018 ICIS analytics.icis.com 20

TWh GW In an ideal scenario auctioned capacity could be enough When you take into account the load factors used by the government* during the auctions, you can convert the auctioned capacity into generation *27% solar, 34% wind, 57% other. We assumed 69% for biomass 70 140 60 120 50 100 4080 3060 2040 1020 +8.6GW of auctioned capacity auctioned capacity Spain Spanish RES RES E-generation capacity with auctions +24TWh from 00 2008 20082009 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: ICIS, Eurostat copyright 2018 ICIS analytics.icis.com 21

TWh What is needed to reach the 2020 target? In a scenario where 1. energy demand is flat between 2016 and 2020 and 2. RES in heating & cooling and transport is also flat The auctioned RES capacity of 24TWh would bring total RES generation to 19.7% of energy demand 250 200 150 100 50 Spain RES output scenario with auctions - assume other inputs flat between 2016-2020 0 2016 2017 2018 2019 2020 Heating & Cooling Transport Electricity 20% Target Source: ICIS, Eurostat copyright 2018 ICIS analytics.icis.com 22

TWh What is needed to reach the 2020 target? If In instead a scenario renewables where in heating & cooling 1. energy and demand transport is flat grow between at modest rates 2016 and 2020 and The 2. RES share in heating of renewables & cooling would and be 20.3% transport by 2020 is flat between 2016 and 2020 Therefore there is some margin for key variables The auctioned such as RES capacity of 24TWh -would Load factors: bring total the government RES generation used to 19.7% relatively of energy high load demand factors in its auctions - Energy demand development - RES closures - RES in other sectors, H&C and Transport 250 200 150 100 50 0 Spain RES output scenario with auctions - with growth in H&C and Transport sectors 2016 2017 2018 2019 2020 Heating & Cooling Transport Electricity 20% Target Source: ICIS, Eurostat copyright 2018 ICIS analytics.icis.com 23

The auctioned projects which are likely to come online? TOTAL PROJECT SIZE BY PARENT COMPANY Other, 1.4 GW Forestalia, 1.9 GW Jorge Group, 0.1 GW EDP, 0.1 GW Greenalia, 0.1 GW OPDE, 0.2 GW Siemens Gamesa, 0.2 GW Solaria, 0.3 GW Alfanar, 0.7 GW ACS Group, 1.6 GW Naturgy, 0.9 GW Source: ICIS Enel, 1.1 GW copyright 2018 ICIS analytics.icis.com 25

Capacity (GW) The auctioned projects which are likely to come online? 2.50 2.00 1.50 1.00 0.50 0.00 Most of the progress reported in 2018 comes from the largest parent companies Source: ICIS Yes Unknown Projects owned by local companies have regional expertise and links but have limited funds Projects owned by large parent companies could afford to pay the penalties if they miss the target Iberdrola is noticeably missing possible it is waiting for better auction conditions next time? copyright 2018 ICIS analytics.icis.com 26

Developments up to 2020 The results of the 2016-2017 renewables auctions are promising All of the successful capacity bid subsidy-free Spanish prices can be volatile Almost 60% of auctioned capacity has reported some progress this year, we expect the same share to meet the end-2019 deadline We think the government will take a wait-and-see approach this year copyright 2018 ICIS analytics.icis.com 27

Developments to 2030: targets, capacity and support systems

Spanish 2030 RES target in the EU context EU 2020: 20% (binding) 2030: 32% RES (binding) Spain 2020: 20% RES (binding) 2030:?% RES (non-binding) Spain s plans to 2030 need to be drawn up by the end of 2018 The government is aiming to release its climate change law by August copyright 2018 ICIS analytics.icis.com 29

GW What 2030 renewable target will Spain go for? Spanish Commission of Experts released a baseline scenario, which would lead to a 29.7% RES share in final energy consumption In light of the EU agreement on a 30 20 32% share, will Spain attempt a 10 higher share? 0 100 90 80 70 60 50 40 Solar/wind capacity scenarios (GW) 2016 (17% RES share) 2020 (20% RES share) 2030 (29.7% RES share) 2030 (32% RES share) Wind Solar Source: ICIS/Spanish Commission of Experts copyright 2018 ICIS analytics.icis.com 30

GW Capacity additions 2021-2030 At a target of 29.7% RES, Spain would require 39.4GW of additional wind and solar 2021-2030 At a target of 32% RES, this would rise to 50.5GW According to Spanish solar association UNEF, there are already 24GW of solar projects in the approval process 7 6 5 4 3 2 1 0 RES capacity additions vs. capacity required 2021-2030 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 RES Capacity additions RES required p.a. 2021-2030 (29.7%) RES required p.a. 2021-2030 (32%) Source: ICIS/IRENA copyright 2018 ICIS analytics.icis.com 31

How can Spain bring this capacity online?

/MWh Full merchant risk Merchant projects are risky given uncertainty over future prices and volatility While we expect wholesale prices to increase, downside risk remains Will lenders be scared off by the scale of the risk? What rates of return will they expect on investments? 100 90 80 70 60 50 40 30 20 10 0 Hourly prices Average price Source: OMIE Spanish hourly prices July 2017-July 2018 copyright 2018 ICIS analytics.icis.com 33

/MWh Full merchant risk Merchant projects are risky given uncertainty over future prices and volatility While we expect wholesale prices to increase, downside risk remains Will lenders be scared off by the scale of the risk? Will large utilities be willing to invest in Spain or will they prefer less risky markets? 70 60 50 40 30 20 10 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: ICIS Uncertainty over future direction of Spanish prices +/- 2 p.a. Forward curve copyright 2018 ICIS analytics.icis.com 34

Power Purchase Agreements (PPAs) PPAs de-risk projects by locking in long-term prices We are starting to see the first PPAs signed for RES projects in Spain Corporate Wholesale reseller PPA copyright 2018 ICIS analytics.icis.com 35

GW Power Purchase Agreements (PPAs) PPAs de-risk projects by locking in long-term prices We are starting to see the first PPAs signed for RES projects in Spain The question is whether there will be enough demand for PPAs to enable large-scale subsidy-free rollout? Spain is likely to set up a trading platform for PPAs 6 5 4 3 2 1 0 European corporate PPA demand vs. Spanish RES capacity requirements 2010 2011 2012 2013 2014 2015 2016 2017 Source: ICIS/WindEurope European RES capacity sourced through PPAs RES required p.a. 2021-2030 (29.7%) RES required p.a. 2021-2030 (32%) copyright 2018 ICIS analytics.icis.com 36

/MWh Minimum price floors The implicit floor price from the previous auctions is of questionable relevance If merchant projects struggle to obtain financing on sign PPAs, the government may have to rethink this model Will they introduce a higher floor price to improve project bankability? 70 60 50 40 30 20 10 0 Recent minimum prices vs. forward curve and price uncertainty 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 +/- 2 p.a. Forward curve Wind price floor Solar price floor Source: ICIS copyright 2018 ICIS analytics.icis.com 37

Conclusion: Is the Spanish case a forerunner for the rest of the EU? Subsidy-free projects are beginning to emerge in a number of EU member states However, Spain will be the first EU country to attempt to roll out subsidy-free capacity at scale Spain will therefore provide a test case to the rest of the EU as to what is possible Investor appetite for risk given market price uncertainty will remain the greatest challenge going forward Given the quantity of capacity that needs to come online to meet targets, the government will need to provide better terms than those on offer in the recent auction copyright 2018 ICIS analytics.icis.com 39

Contact information Matthew Jones Senior Analyst EU Power and Carbon Markets Matthew.Jones@icis.com Anise Ganbold Senior Analyst EU Power and Carbon Markets Anise.Ganbold@icis.com ICIS Power Perspective is an online tool designed to put power market developments into perspective regarding their price impact Our experts analyse the cross-border impact of national developments and provide you with a roadmap of market drivers throughout Europe ICIS Power Horizon features a power price forecast for the EU 28 as well as underlying data on demand, supply and cross-border flows Our regularly-updated model forecasts hourly prices up to 2040, building on our strength in forecasting carbon, renewables and changes in supply and demand copyright 2018 ICIS www.icis.com 40

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