Today on Switched On, we're going to talk about European solar. It's booming. There's going to be a lot of solar on the grid, but can the grid handle it? That's the question We really need to get to the bottom up and help us really figure this out. We have brought in vienna F solar analyst Pietro Reddia, who's actually based out of our Milan office. He's here to explain the solar boom and the conversation will be based on a report titled Europe's subsidy free PV market takes Off.
But first we're going to talk with the head of AMIA Analysis, Tom Roland's Reese, about how the grid might accommodate a bunch of solar and wind, highlighting a recent study that BIENNAF completed in partnership with Axona, and that study is titled Flexibility Solutions for High Renewable Systems and it focuses on Spain, so hyphen Spain if you're searching for it. Bienna F users can act says these reports on bienn f dot com, the BENNF mobile app, and
the Bloomberg terminal. As a reminder, bienn F does not provide investment or strategy advice, and you can hear a full disclaimer at the end of the show. I'm Dana Perkins here with Mark Taylor and you're listening to Switch It on the b F podcast. Tom. Thank you for joining us here today. Hi Dana, thank you for having me. So the big question we have is we've got lots of solar coming in in Europe and we're going to talk about that later on with Pietro, but we want
to know from you can the grid handle it. So the Flexibility Report, which follows on from reports that we did for UK and Germany, was focused on Spain, and obviously every market has its different dynamics, and the particular question we were trying to answer is can we keep supply and demand in balance as more wind and solar comes onto the grid, as opposed to can the network, the wires, the transformers handle it, which is a separate question,
is separate issue, but when we're talking about matching supply and demand, we found that actually Spain has a pretty good chance of hitting its its targets. So we had different scenarios where we sort of made it easier and harder. We made batteries more expensive, we made batteries cheaper, We added lots of electric vehicles, we made them flexible, we made them inflexible, we added interconnectors to France. We tried all sorts of different things in our models to see
what would happen. And the conclusion, one of the big conclusions, was that whatever you do, the lowest cost system in Spain is still one based largely around wind and solar. So flexibility is not a barrier in Spain in in matching supply and demand. And a big part of that is because the country has so much hydro, it has this natural advantage in solving those problems. So hydro serves as the battery. Yeah, to to some extent, they've got
a head start there. Yeah, it's like having tons of batteries on the grid already before they've even started thinking about renewables. So punchline. A lot of solar coming under the grid. But but Spain's in a good position to handle it, at least from supply and demand. Point of of the challenge then, is that word don't flexibility getting away the solar boom. Pietro high mark, Hi Dama, thanks for coming in. We understand the solar market in the EU is going in a bit of a transformation. Can
you describe kind of generally what's going on? Yeah, sure, So we've noticed that there's quite a few announcements in Europe for subsidy free projects which are not backed by feeding tariffs or any kind of subsidies. And most of these projects are getting built or will be built in Spain, Portugal and Italy. So we tracked project level data for quite a few of these projects around twelve kick awats.
If you think about Europe as a whole, next year, there's going to be eighteen kick awats to come online across residential, commercial, utility scale, subsidized and non. So twelve gig a wats out of eighteen is quite a considerable amount. Now, not all of that twelve kick awats will will be built next year, but it does put in context how big this market is. That twelve a watts will will come online via ninety nine projects. Even it's quite precise.
Somebody built one more. I know, Come on, everybody out there, let's do this. These are really sunny countries. So is it just that this is a great place for solars? So on subsidized solars going in there or is there another reason? So it helps if solar I radiation is high and if you have a lot of land available, which is the case in Spain. Some of these projects have been already developed under the feed in tariffs, so back in the boom days in two thousand and eight
and UM. What's important as well is that electricity high prices are high. So the rational now is that instead of receiving feed in tariffs, you sell the electric You generate electricity and sell the electricity onto the wholesale power markets. Or alternatively, you can look into a p p A. So let's go into the p p A s. Then we did an episode on this a little while back with our colleague Kyle Harrison. UM. A p p A is a power purchase agreement to a contract for sale
of power between two parties. Those parties might be a utility who's going to dittribute it to you and I, you know, to our house or to to businesses or whatever. Or it could be direct to a company that's buying power for say big power needs, UM, a data center or an industrial process or something like that. Those used to not be a thing in Europe. Why is it
happening now? Okay, So out of those twelve kick awats that we tracked subsidy free projects, around five gig awats five point five gig a wats are looked into p p A s, so roughly almost half of that volume is looked into pp A s and p p as are quite an important tool for developers to obtain that financing. So it's a prerequisite for banks in order for them to provide financing to these projects. Why that's because they provide long term visibility and the large majority of PPAs
that are getting contracted are for ten year products. But they can range country by country or there are some countries that are shorter, some countries that are much longer. Yeah, we noticed that some countries such as Italy are quite a liquid on the long term products, so off takers are keener to lock into short term pp A. So the five year product is the preferred one in in Italy.
Spain is pushing for ten to twenty year contracts. So just to get that straight, So you sign a p PA for five years, you sell power at the at the agreed rate four or five years, and then after that you're not gonna cut You're not gonna tear down your plant, you're but you're on your own selling the power right to exactly, or you renegotiate and extend the pp A. Do you think you would renegotiate with the same parties or do you think you would reegotiate with
somebody else independence on who gives you the best offer. There you go, Okay, it's a bit like a home mortgage. Does does this transition in Europe mean it's an end of subsidies for solar and could that spread to other markets as well? I think governments in Europe are still going to run auctions which can be seen as a form of subsidy. Now, the revenues from these auctions, I mean auctions are very competitive and you can see the latest results in Spain in Portugal the revenues are very low.
So yes, these projects are locked into some form of subsidy, but it's not that high, so the support from convenance is not considerable. Now, whether subsidy free investments are going to take over as a model, it's too early to say. It might be a pocket of opportunity out there. Um time will tell, And one uncertainty with this kind of
model is cannibalization of revenue streams. So as more of such projects commonline, that might have an effect on power prices because previous and non dispatchable source of electricity, you cannot turn on and switch off your power plant whenever needed, and ultimately you end up with all your projects generating
electricity at the same time. So the price goes lower, the price cons lower, But for the moment, I would say um off takers are keen on on purchasing electricity because power prices in Spain are high and the cost
of generation of PV assets is low. So if you think about the level ice cost of electricity, which is one metric to measure how costly it is to generate electricity from your solar power plant, l c o s are at around thirty five ft US per mega without compared to fifty five years per megawadour is on the wholesale power markets. So there's a quite a widespread at the moment. Now, whether that spread is gonna stay sustained over the next couple or three decades is yet to see.
So this how does that play into maybe the psychology of some of the projects here, because it certainly seems that with so many projects going into Spain within the investment community who are actually helping to fund these assets. Why are these unsubsidized assets more popular than perhaps other
subsidized assets in other locations. So subsidy free assets um are free from restrictions that other projects are subject to projects that apply to the auctions, so they can get built on agricultural land, there's no quotas, and so investors that previously have invested in subsidized projects moving to this new model. Also because competition is slightly lower at the moment, and there are some investors that did invest in in Iberia, in Spain and Portugal and had bad experience with feeding
tariffs and retractive feeding tariffs imposed by the government. So now how long ago was that? That was in two thousand and ten December to be precise, made quite an impression for many of us a country go back and say, because Spain was such a leader for absolutely the early stage of the solar industry, their leader here too. Yeah, they kind of overspent in feeding tariffs and that generated a bubble, and that bubble burst, So that was not
an ideal way of subsidizing sector. You always want to put in place stable support mechanism, just as Germany did over the years, that there is a risk that Spain might have its own smaller bubble this year in two thousand and nineteen, where thanking somewhere in between four to five gig awats to come online because of huge pipeline of projects tendered in two thousand and seventeen and some
of these subsidy free projects to come online. But thanks to the good economics of subsidy free projects, actually we're expecting the Spanish market to continue building, probably not at the same rate. So there's going to be a halving of the market next year in twenty from full gigawats to two gig awats. But the good thing about subsidy free projects is that they don't need government support, and
that's what certain investors like. But you would also assume that when there is a government support mechanism, like an auction, it's planned out right, we can we can accommodate this much capacity to go onto the grid, and so therefore we're going to auction off this amount with subsidy free. It's just kind of a free for all, and you get nine projects, right, or four gigs this year and two next year. Can the grid accommodate this amount of
solar coming on? And what is it doing or what are the TSA was doing or the transmission systems operators doing to manage things. The grid cannot accommodate all of the capacity from these subsidy free projects which are getting
developed at the moment. So if you think about Spain, well, right Electrical SPANA, which is the local transmission system operator, they received around one hundred sixty gig awats of grid filing permits a hundred and sixty gigas as of made from up from thirty kick awards at the end of ten. So that's a surgeon good applications and authorities already said that a lot of that capacity will not make it online. There's no way that the country needs all that capacity.
Note that Spain across all technologies has around one hundred kig awards of generation assets, so that I think puts
things into perspective definitely. So the reason why there's this surge and grit applications is because the economics are getting more attractive and there's expectation of perhaps future tenders, so developers are preparing for this boom and there's actually a secondary market of of permits whereby the lucky developers that obtain the permits sell those onto later stage investors at
a much higher price. And what we what we expect is that that there is going to be a surge in grid applications in other countries, so high requests for notes on the grid. But in we've already seen in Portugal auctions for grid notes. So local authorities ran an auction in July and made available grid connections for those developers who offered the highest spids, and some of these solar developers offered up to twenty seven uros per mega what hours only to use the grid for a fifteen
year duration. Beyond that fifteen years, they become the owners of the note and can sell the electricity on the wholesale market free of any tariffs. To me, that's fascinating, right. You go from a market where the government is paying solar developers to put stuff on the grid because they can didn't have any to the point where developers are
paying to get onto the grid. Absolutely, it's crazy. And in Spain CNMC, which is the competition authority, announced well they're thinking of running similar auctions for any spare grid capacity any note, which is bigger than two hundred megawats. So it's an interesting space. So it seems like a bit of a solar boom, so to speak in Spain. And if you have these changing dynamics, how is anybody
making any money off of it? If everyone's flooding in I would say that developers or investors which managed to get their projects online sell electricity onto the wholesale market, those are definitely making money out of it because the wholesale power prices high and they are not incurring into any of these auctions, at least that's true for Spain, Italy, any country outside of Portugal, so they can sell for the price that works exactly now, more solar on the grid,
the more power prices are going to depress, So that might not be the case in future. But you were saying earlier when we were in the run up to this interview that the biggest beneficiary is actually the consumer. Is that right? The biggest beneficiaries, I would say are the consumers because they no longer have to pay to subsidize clean electricity generation via their electricity bills, which has been the case so far. So if you look into
your bill. At least if I look in my Italian bill, I can see a component which is essentially attacks, which goes to subsidize existing projects, which I imagine will you'll continue to have until those contracts right now and I guess for the twenty years, So we'll take a lot. It'll take quite a while. Is either benefits shake out in this we'll have you back here in the studio.
There you go. I have a particular interest in corporate sustainability and how companies are going about doing that, and within the p p A market, renewables p p A s are a pretty popular way in the US to think about reducing your carbon footprint. However, that doesn't seem to be playing out the same way in Europe. Who exactly in Europe are buying these p p A s because it's actually not that many companies that are looking to use it for their own personal uses it. That's true,
I would say in Europe. So far, large tech companies the likes of Google, Facebook have been the most active in northern Europe, but other companies we haven't seen a lot of traction from other companies across Europe as a whole.
So there's definitely an opportunity for growth. UM definitely the biggest off takers of clean energy for the moment our utilities, and the reason why they do that is because prices are solo cost of generation from solar is is low, and they can sell on that electricity to other consumers, retail consumers who don't necessarily want to look into p p as for ten years and don't want to get into that hassle because it's looking into a p p A and structuring a p p A s quite a task.
It's not a straightforward job, okay. So government subsidies are going away more or less. Utilities are buying this power in p p a s, and corporates are doing the same thing because it makes financial sense, and banks are getting involved in investing in these projects. You know, in the in the development state, it seems like solar is growing up. Is that a fair assessment? It definitely is.
But it's necessarily that these three parties you mentioned work together so that these projects can can actually break the ground. And that's where we're seeing a big hurdle. UM developers working with banks, working with off takers so that they all agree on the terms of the p p A the term on the financing, but it seems like the market is moving ahead and also the party's involved in in the project final structuring are maturing and growing up.
Get sure, thanks for coming in. You're welcome, Mark, Thanks Dana Bloomberg. An EAP is a service provided by Bloomberg Finance LP and its abilitiates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or recommendation as to an investment or other strategy. Bloombergunia should not be considered as information sufficient upon which to
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