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Speaker 1: Today on Switched On, we're going to talk about European solar.

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Speaker 1: It's booming. There's going to be a lot of solar

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Speaker 1: on the grid, but can the grid handle it? That's

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Speaker 1: the question We really need to get to the bottom

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Speaker 1: up and help us really figure this out. We have

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Speaker 1: brought in vienna F solar analyst Pietro Reddia, who's actually

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Speaker 1: based out of our Milan office. He's here to explain

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Speaker 1: the solar boom and the conversation will be based on

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Speaker 1: a report titled Europe's subsidy free PV market takes Off.

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Speaker 1: But first we're going to talk with the head of

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Speaker 1: AMIA Analysis, Tom Roland's Reese, about how the grid might

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Speaker 1: accommodate a bunch of solar and wind, highlighting a recent

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Speaker 1: study that BIENNAF completed in partnership with Axona, and that

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Speaker 1: study is titled Flexibility Solutions for High Renewable Systems and

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Speaker 1: it focuses on Spain, so hyphen Spain if you're searching

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Speaker 1: for it. Bienna F users can act says these reports

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Speaker 1: on bienn f dot com, the BENNF mobile app, and

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Speaker 1: the Bloomberg terminal. As a reminder, bienn F does not

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Speaker 1: provide investment or strategy advice, and you can hear a

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Speaker 1: full disclaimer at the end of the show. I'm Dana

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Speaker 1: Perkins here with Mark Taylor and you're listening to Switch

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Speaker 1: It on the b F podcast. Tom. Thank you for

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Speaker 1: joining us here today. Hi Dana, thank you for having me.

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Speaker 1: So the big question we have is we've got lots

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Speaker 1: of solar coming in in Europe and we're going to

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Speaker 1: talk about that later on with Pietro, but we want

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Speaker 1: to know from you can the grid handle it. So

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Speaker 1: the Flexibility Report, which follows on from reports that we

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Speaker 1: did for UK and Germany, was focused on Spain, and

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Speaker 1: obviously every market has its different dynamics, and the particular

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Speaker 1: question we were trying to answer is can we keep

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Speaker 1: supply and demand in balance as more wind and solar

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Speaker 1: comes onto the grid, as opposed to can the network,

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Speaker 1: the wires, the transformers handle it, which is a separate question,

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Speaker 1: is separate issue, but when we're talking about matching supply

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Speaker 1: and demand, we found that actually Spain has a pretty

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Speaker 1: good chance of hitting its its targets. So we had

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Speaker 1: different scenarios where we sort of made it easier and harder.

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Speaker 1: We made batteries more expensive, we made batteries cheaper, We

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Speaker 1: added lots of electric vehicles, we made them flexible, we

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Speaker 1: made them inflexible, we added interconnectors to France. We tried

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Speaker 1: all sorts of different things in our models to see

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Speaker 1: what would happen. And the conclusion, one of the big conclusions,

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Speaker 1: was that whatever you do, the lowest cost system in

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Speaker 1: Spain is still one based largely around wind and solar.

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Speaker 1: So flexibility is not a barrier in Spain in in

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Speaker 1: matching supply and demand. And a big part of that

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Speaker 1: is because the country has so much hydro, it has

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Speaker 1: this natural advantage in solving those problems. So hydro serves

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Speaker 1: as the battery. Yeah, to to some extent, they've got

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Speaker 1: a head start there. Yeah, it's like having tons of

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Speaker 1: batteries on the grid already before they've even started thinking

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Speaker 1: about renewables. So punchline. A lot of solar coming under

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Speaker 1: the grid. But but Spain's in a good position to

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Speaker 1: handle it, at least from supply and demand. Point of

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Speaker 1: of the challenge then, is that word don't flexibility getting

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Speaker 1: away the solar boom. Pietro high mark, Hi Dama, thanks

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Speaker 1: for coming in. We understand the solar market in the

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Speaker 1: EU is going in a bit of a transformation. Can

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Speaker 1: you describe kind of generally what's going on? Yeah, sure,

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Speaker 1: So we've noticed that there's quite a few announcements in

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Speaker 1: Europe for subsidy free projects which are not backed by

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Speaker 1: feeding tariffs or any kind of subsidies. And most of

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Speaker 1: these projects are getting built or will be built in Spain,

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Speaker 1: Portugal and Italy. So we tracked project level data for

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Speaker 1: quite a few of these projects around twelve kick awats.

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Speaker 1: If you think about Europe as a whole, next year,

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Speaker 1: there's going to be eighteen kick awats to come online

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Speaker 1: across residential, commercial, utility scale, subsidized and non. So twelve

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Speaker 1: gig a wats out of eighteen is quite a considerable amount. Now,

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Speaker 1: not all of that twelve kick awats will will be

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Speaker 1: built next year, but it does put in context how

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Speaker 1: big this market is. That twelve a watts will will

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Speaker 1: come online via ninety nine projects. Even it's quite precise.

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Speaker 1: Somebody built one more. I know, Come on, everybody out there,

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Speaker 1: let's do this. These are really sunny countries. So is

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Speaker 1: it just that this is a great place for solars?

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Speaker 1: So on subsidized solars going in there or is there

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Speaker 1: another reason? So it helps if solar I radiation is

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Speaker 1: high and if you have a lot of land available,

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Speaker 1: which is the case in Spain. Some of these projects

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Speaker 1: have been already developed under the feed in tariffs, so

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Speaker 1: back in the boom days in two thousand and eight

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Speaker 1: and UM. What's important as well is that electricity high

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Speaker 1: prices are high. So the rational now is that instead

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Speaker 1: of receiving feed in tariffs, you sell the electric You

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Speaker 1: generate electricity and sell the electricity onto the wholesale power markets.

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Speaker 1: Or alternatively, you can look into a p p A.

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Speaker 1: So let's go into the p p A s. Then

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Speaker 1: we did an episode on this a little while back

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Speaker 1: with our colleague Kyle Harrison. UM. A p p A

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Speaker 1: is a power purchase agreement to a contract for sale

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Speaker 1: of power between two parties. Those parties might be a

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Speaker 1: utility who's going to dittribute it to you and I,

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Speaker 1: you know, to our house or to to businesses or whatever.

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Speaker 1: Or it could be direct to a company that's buying

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Speaker 1: power for say big power needs, UM, a data center

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Speaker 1: or an industrial process or something like that. Those used

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Speaker 1: to not be a thing in Europe. Why is it

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Speaker 1: happening now? Okay, So out of those twelve kick awats

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Speaker 1: that we tracked subsidy free projects, around five gig awats

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Speaker 1: five point five gig a wats are looked into p

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Speaker 1: p A s, so roughly almost half of that volume

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Speaker 1: is looked into pp A s and p p as

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Speaker 1: are quite an important tool for developers to obtain that financing.

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Speaker 1: So it's a prerequisite for banks in order for them

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Speaker 1: to provide financing to these projects. Why that's because they

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Speaker 1: provide long term visibility and the large majority of PPAs

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Speaker 1: that are getting contracted are for ten year products. But

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Speaker 1: they can range country by country or there are some

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Speaker 1: countries that are shorter, some countries that are much longer. Yeah,

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Speaker 1: we noticed that some countries such as Italy are quite

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Speaker 1: a liquid on the long term products, so off takers

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Speaker 1: are keener to lock into short term pp A. So

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Speaker 1: the five year product is the preferred one in in Italy.

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Speaker 1: Spain is pushing for ten to twenty year contracts. So

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Speaker 1: just to get that straight, So you sign a p

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Speaker 1: PA for five years, you sell power at the at

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Speaker 1: the agreed rate four or five years, and then after

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Speaker 1: that you're not gonna cut You're not gonna tear down

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Speaker 1: your plant, you're but you're on your own selling the

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Speaker 1: power right to exactly, or you renegotiate and extend the

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Speaker 1: pp A. Do you think you would renegotiate with the

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Speaker 1: same parties or do you think you would reegotiate with

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Speaker 1: somebody else independence on who gives you the best offer.

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Speaker 1: There you go, Okay, it's a bit like a home mortgage.

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Speaker 1: Does does this transition in Europe mean it's an end

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Speaker 1: of subsidies for solar and could that spread to other

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Speaker 1: markets as well? I think governments in Europe are still

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Speaker 1: going to run auctions which can be seen as a

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Speaker 1: form of subsidy. Now, the revenues from these auctions, I

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Speaker 1: mean auctions are very competitive and you can see the

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Speaker 1: latest results in Spain in Portugal the revenues are very low.

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Speaker 1: So yes, these projects are locked into some form of subsidy,

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Speaker 1: but it's not that high, so the support from convenance

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Speaker 1: is not considerable. Now, whether subsidy free investments are going

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Speaker 1: to take over as a model, it's too early to say.

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Speaker 1: It might be a pocket of opportunity out there. Um

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Speaker 1: time will tell, And one uncertainty with this kind of

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Speaker 1: model is cannibalization of revenue streams. So as more of

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Speaker 1: such projects commonline, that might have an effect on power

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Speaker 1: prices because previous and non dispatchable source of electricity, you

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Speaker 1: cannot turn on and switch off your power plant whenever needed,

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Speaker 1: and ultimately you end up with all your projects generating

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Speaker 1: electricity at the same time. So the price goes lower,

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Speaker 1: the price cons lower, But for the moment, I would

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Speaker 1: say um off takers are keen on on purchasing electricity

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Speaker 1: because power prices in Spain are high and the cost

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Speaker 1: of generation of PV assets is low. So if you

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Speaker 1: think about the level ice cost of electricity, which is

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Speaker 1: one metric to measure how costly it is to generate

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Speaker 1: electricity from your solar power plant, l c o s

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Speaker 1: are at around thirty five ft US per mega without

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Speaker 1: compared to fifty five years per megawadour is on the

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Speaker 1: wholesale power markets. So there's a quite a widespread at

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Speaker 1: the moment. Now, whether that spread is gonna stay sustained

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Speaker 1: over the next couple or three decades is yet to see.

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Speaker 1: So this how does that play into maybe the psychology

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Speaker 1: of some of the projects here, because it certainly seems

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Speaker 1: that with so many projects going into Spain within the

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Speaker 1: investment community who are actually helping to fund these assets.

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Speaker 1: Why are these unsubsidized assets more popular than perhaps other

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Speaker 1: subsidized assets in other locations. So subsidy free assets um

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Speaker 1: are free from restrictions that other projects are subject to

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Speaker 1: projects that apply to the auctions, so they can get

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Speaker 1: built on agricultural land, there's no quotas, and so investors

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Speaker 1: that previously have invested in subsidized projects moving to this

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Speaker 1: new model. Also because competition is slightly lower at the moment,

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Speaker 1: and there are some investors that did invest in in Iberia,

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Speaker 1: in Spain and Portugal and had bad experience with feeding

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Speaker 1: tariffs and retractive feeding tariffs imposed by the government. So

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Speaker 1: now how long ago was that? That was in two

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Speaker 1: thousand and ten December to be precise, made quite an

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Speaker 1: impression for many of us a country go back and say,

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Speaker 1: because Spain was such a leader for absolutely the early

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Speaker 1: stage of the solar industry, their leader here too. Yeah,

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Speaker 1: they kind of overspent in feeding tariffs and that generated

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Speaker 1: a bubble, and that bubble burst, So that was not

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Speaker 1: an ideal way of subsidizing sector. You always want to

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Speaker 1: put in place stable support mechanism, just as Germany did

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Speaker 1: over the years, that there is a risk that Spain

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Speaker 1: might have its own smaller bubble this year in two

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Speaker 1: thousand and nineteen, where thanking somewhere in between four to

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Speaker 1: five gig awats to come online because of huge pipeline

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Speaker 1: of projects tendered in two thousand and seventeen and some

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Speaker 1: of these subsidy free projects to come online. But thanks

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Speaker 1: to the good economics of subsidy free projects, actually we're

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Speaker 1: expecting the Spanish market to continue building, probably not at

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Speaker 1: the same rate. So there's going to be a halving

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Speaker 1: of the market next year in twenty from full gigawats

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Speaker 1: to two gig awats. But the good thing about subsidy

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Speaker 1: free projects is that they don't need government support, and

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Speaker 1: that's what certain investors like. But you would also assume

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Speaker 1: that when there is a government support mechanism, like an auction,

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Speaker 1: it's planned out right, we can we can accommodate this

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Speaker 1: much capacity to go onto the grid, and so therefore

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Speaker 1: we're going to auction off this amount with subsidy free.

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Speaker 1: It's just kind of a free for all, and you

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Speaker 1: get nine projects, right, or four gigs this year and

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Speaker 1: two next year. Can the grid accommodate this amount of

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Speaker 1: solar coming on? And what is it doing or what

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Speaker 1: are the TSA was doing or the transmission systems operators

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Speaker 1: doing to manage things. The grid cannot accommodate all of

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Speaker 1: the capacity from these subsidy free projects which are getting

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Speaker 1: developed at the moment. So if you think about Spain, well,

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Speaker 1: right Electrical SPANA, which is the local transmission system operator,

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Speaker 1: they received around one hundred sixty gig awats of grid

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Speaker 1: filing permits a hundred and sixty gigas as of made

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Speaker 1: from up from thirty kick awards at the end of ten.

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Speaker 1: So that's a surgeon good applications and authorities already said

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Speaker 1: that a lot of that capacity will not make it online.

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Speaker 1: There's no way that the country needs all that capacity.

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Speaker 1: Note that Spain across all technologies has around one hundred

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Speaker 1: kig awards of generation assets, so that I think puts

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Speaker 1: things into perspective definitely. So the reason why there's this

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Speaker 1: surge and grit applications is because the economics are getting

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Speaker 1: more attractive and there's expectation of perhaps future tenders, so

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Speaker 1: developers are preparing for this boom and there's actually a

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Speaker 1: secondary market of of permits whereby the lucky developers that

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Speaker 1: obtain the permits sell those onto later stage investors at

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Speaker 1: a much higher price. And what we what we expect

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Speaker 1: is that that there is going to be a surge

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Speaker 1: in grid applications in other countries, so high requests for

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Speaker 1: notes on the grid. But in we've already seen in

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Speaker 1: Portugal auctions for grid notes. So local authorities ran an

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Speaker 1: auction in July and made available grid connections for those

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Speaker 1: developers who offered the highest spids, and some of these

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Speaker 1: solar developers offered up to twenty seven uros per mega

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Speaker 1: what hours only to use the grid for a fifteen

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Speaker 1: year duration. Beyond that fifteen years, they become the owners

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Speaker 1: of the note and can sell the electricity on the

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Speaker 1: wholesale market free of any tariffs. To me, that's fascinating, right.

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Speaker 1: You go from a market where the government is paying

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Speaker 1: solar developers to put stuff on the grid because they

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Speaker 1: can didn't have any to the point where developers are

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Speaker 1: paying to get onto the grid. Absolutely, it's crazy. And

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Speaker 1: in Spain CNMC, which is the competition authority, announced well

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Speaker 1: they're thinking of running similar auctions for any spare grid

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Speaker 1: capacity any note, which is bigger than two hundred megawats.

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Speaker 1: So it's an interesting space. So it seems like a

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Speaker 1: bit of a solar boom, so to speak in Spain.

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Speaker 1: And if you have these changing dynamics, how is anybody

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Speaker 1: making any money off of it? If everyone's flooding in

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Speaker 1: I would say that developers or investors which managed to

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Speaker 1: get their projects online sell electricity onto the wholesale market,

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Speaker 1: those are definitely making money out of it because the

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Speaker 1: wholesale power prices high and they are not incurring into

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Speaker 1: any of these auctions, at least that's true for Spain, Italy,

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Speaker 1: any country outside of Portugal, so they can sell for

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Speaker 1: the price that works exactly now, more solar on the grid,

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Speaker 1: the more power prices are going to depress, So that

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Speaker 1: might not be the case in future. But you were

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Speaker 1: saying earlier when we were in the run up to

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Speaker 1: this interview that the biggest beneficiary is actually the consumer.

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Speaker 1: Is that right? The biggest beneficiaries, I would say are

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Speaker 1: the consumers because they no longer have to pay to

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Speaker 1: subsidize clean electricity generation via their electricity bills, which has

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Speaker 1: been the case so far. So if you look into

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Speaker 1: your bill. At least if I look in my Italian bill,

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Speaker 1: I can see a component which is essentially attacks, which

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Speaker 1: goes to subsidize existing projects, which I imagine will you'll

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Speaker 1: continue to have until those contracts right now and I

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Speaker 1: guess for the twenty years, So we'll take a lot.

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Speaker 1: It'll take quite a while. Is either benefits shake out

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Speaker 1: in this we'll have you back here in the studio.

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Speaker 1: There you go. I have a particular interest in corporate

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Speaker 1: sustainability and how companies are going about doing that, and

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Speaker 1: within the p p A market, renewables p p A

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Speaker 1: s are a pretty popular way in the US to

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Speaker 1: think about reducing your carbon footprint. However, that doesn't seem

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Speaker 1: to be playing out the same way in Europe. Who

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Speaker 1: exactly in Europe are buying these p p A s

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Speaker 1: because it's actually not that many companies that are looking

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Speaker 1: to use it for their own personal uses it. That's true,

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Speaker 1: I would say in Europe. So far, large tech companies

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Speaker 1: the likes of Google, Facebook have been the most active

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Speaker 1: in northern Europe, but other companies we haven't seen a

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Speaker 1: lot of traction from other companies across Europe as a whole.

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Speaker 1: So there's definitely an opportunity for growth. UM definitely the

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Speaker 1: biggest off takers of clean energy for the moment our utilities,

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Speaker 1: and the reason why they do that is because prices

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Speaker 1: are solo cost of generation from solar is is low,

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Speaker 1: and they can sell on that electricity to other consumers,

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Speaker 1: retail consumers who don't necessarily want to look into p

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Speaker 1: p as for ten years and don't want to get

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Speaker 1: into that hassle because it's looking into a p p

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Speaker 1: A and structuring a p p A s quite a task.

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Speaker 1: It's not a straightforward job, okay. So government subsidies are

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Speaker 1: going away more or less. Utilities are buying this power

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Speaker 1: in p p a s, and corporates are doing the

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Speaker 1: same thing because it makes financial sense, and banks are

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Speaker 1: getting involved in investing in these projects. You know, in

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Speaker 1: the in the development state, it seems like solar is

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Speaker 1: growing up. Is that a fair assessment? It definitely is.

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Speaker 1: But it's necessarily that these three parties you mentioned work

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Speaker 1: together so that these projects can can actually break the ground.

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Speaker 1: And that's where we're seeing a big hurdle. UM developers

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Speaker 1: working with banks, working with off takers so that they

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Speaker 1: all agree on the terms of the p p A

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Speaker 1: the term on the financing, but it seems like the

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Speaker 1: market is moving ahead and also the party's involved in

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Speaker 1: in the project final structuring are maturing and growing up.

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Speaker 1: Get sure, thanks for coming in. You're welcome, Mark, Thanks

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Speaker 1: Dana Bloomberg. An EAP is a service provided by Bloomberg

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