WEBVTT - A Solar Boom Without the Subsidy Gloom

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

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<v Speaker 1>It's booming. There's going to be a lot of solar

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<v Speaker 1>on the grid, but can the grid handle it? That's

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<v Speaker 1>the question We really need to get to the bottom

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<v Speaker 1>up and help us really figure this out. We have

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<v Speaker 1>brought in vienna F solar analyst Pietro Reddia, who's actually

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<v Speaker 1>based out of our Milan office. He's here to explain

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<v Speaker 1>the solar boom and the conversation will be based on

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<v Speaker 1>a report titled Europe's subsidy free PV market takes Off.

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<v Speaker 1>But first we're going to talk with the head of

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<v Speaker 1>AMIA Analysis, Tom Roland's Reese, about how the grid might

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<v Speaker 1>accommodate a bunch of solar and wind, highlighting a recent

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<v Speaker 1>study that BIENNAF completed in partnership with Axona, and that

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<v Speaker 1>study is titled Flexibility Solutions for High Renewable Systems and

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<v Speaker 1>it focuses on Spain, so hyphen Spain if you're searching

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<v Speaker 1>for it. Bienna F users can act says these reports

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<v Speaker 1>on bienn f dot com, the BENNF mobile app, and

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<v Speaker 1>the Bloomberg terminal. As a reminder, bienn F does not

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<v Speaker 1>provide investment or strategy advice, and you can hear a

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<v Speaker 1>full disclaimer at the end of the show. I'm Dana

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<v Speaker 1>Perkins here with Mark Taylor and you're listening to Switch

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<v Speaker 1>It on the b F podcast. Tom. Thank you for

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<v Speaker 1>joining us here today. Hi Dana, thank you for having me.

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<v Speaker 1>So the big question we have is we've got lots

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<v Speaker 1>of solar coming in in Europe and we're going to

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<v Speaker 1>talk about that later on with Pietro, but we want

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<v Speaker 1>to know from you can the grid handle it. So

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<v Speaker 1>the Flexibility Report, which follows on from reports that we

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<v Speaker 1>did for UK and Germany, was focused on Spain, and

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<v Speaker 1>obviously every market has its different dynamics, and the particular

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<v Speaker 1>question we were trying to answer is can we keep

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<v Speaker 1>supply and demand in balance as more wind and solar

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<v Speaker 1>comes onto the grid, as opposed to can the network,

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<v Speaker 1>the wires, the transformers handle it, which is a separate question,

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<v Speaker 1>is separate issue, but when we're talking about matching supply

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<v Speaker 1>and demand, we found that actually Spain has a pretty

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<v Speaker 1>good chance of hitting its its targets. So we had

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<v Speaker 1>different scenarios where we sort of made it easier and harder.

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<v Speaker 1>We made batteries more expensive, we made batteries cheaper, We

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<v Speaker 1>added lots of electric vehicles, we made them flexible, we

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<v Speaker 1>made them inflexible, we added interconnectors to France. We tried

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<v Speaker 1>all sorts of different things in our models to see

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<v Speaker 1>what would happen. And the conclusion, one of the big conclusions,

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<v Speaker 1>was that whatever you do, the lowest cost system in

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<v Speaker 1>Spain is still one based largely around wind and solar.

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<v Speaker 1>So flexibility is not a barrier in Spain in in

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<v Speaker 1>matching supply and demand. And a big part of that

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<v Speaker 1>is because the country has so much hydro, it has

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<v Speaker 1>this natural advantage in solving those problems. So hydro serves

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<v Speaker 1>as the battery. Yeah, to to some extent, they've got

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

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<v Speaker 1>batteries on the grid already before they've even started thinking

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<v Speaker 1>about renewables. So punchline. A lot of solar coming under

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<v Speaker 1>the grid. But but Spain's in a good position to

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<v Speaker 1>handle it, at least from supply and demand. Point of

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<v Speaker 1>of the challenge then, is that word don't flexibility getting

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<v Speaker 1>away the solar boom. Pietro high mark, Hi Dama, thanks

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<v Speaker 1>for coming in. We understand the solar market in the

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<v Speaker 1>EU is going in a bit of a transformation. Can

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

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<v Speaker 1>So we've noticed that there's quite a few announcements in

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<v Speaker 1>Europe for subsidy free projects which are not backed by

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<v Speaker 1>feeding tariffs or any kind of subsidies. And most of

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<v Speaker 1>these projects are getting built or will be built in Spain,

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<v Speaker 1>Portugal and Italy. So we tracked project level data for

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<v Speaker 1>quite a few of these projects around twelve kick awats.

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<v Speaker 1>If you think about Europe as a whole, next year,

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<v Speaker 1>there's going to be eighteen kick awats to come online

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<v Speaker 1>across residential, commercial, utility scale, subsidized and non. So twelve

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<v Speaker 1>gig a wats out of eighteen is quite a considerable amount. Now,

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<v Speaker 1>not all of that twelve kick awats will will be

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<v Speaker 1>built next year, but it does put in context how

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<v Speaker 1>big this market is. That twelve a watts will will

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<v Speaker 1>come online via ninety nine projects. Even it's quite precise.

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<v Speaker 1>Somebody built one more. I know, Come on, everybody out there,

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<v Speaker 1>let's do this. These are really sunny countries. So is

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<v Speaker 1>it just that this is a great place for solars?

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<v Speaker 1>So on subsidized solars going in there or is there

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<v Speaker 1>another reason? So it helps if solar I radiation is

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<v Speaker 1>high and if you have a lot of land available,

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<v Speaker 1>which is the case in Spain. Some of these projects

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<v Speaker 1>have been already developed under the feed in tariffs, so

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<v Speaker 1>back in the boom days in two thousand and eight

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<v Speaker 1>and UM. What's important as well is that electricity high

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<v Speaker 1>prices are high. So the rational now is that instead

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<v Speaker 1>of receiving feed in tariffs, you sell the electric You

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<v Speaker 1>generate electricity and sell the electricity onto the wholesale power markets.

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<v Speaker 1>Or alternatively, you can look into a p p A.

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<v Speaker 1>So let's go into the p p A s. Then

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<v Speaker 1>we did an episode on this a little while back

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<v Speaker 1>with our colleague Kyle Harrison. UM. A p p A

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<v Speaker 1>is a power purchase agreement to a contract for sale

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<v Speaker 1>of power between two parties. Those parties might be a

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<v Speaker 1>utility who's going to dittribute it to you and I,

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<v Speaker 1>you know, to our house or to to businesses or whatever.

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<v Speaker 1>Or it could be direct to a company that's buying

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<v Speaker 1>power for say big power needs, UM, a data center

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<v Speaker 1>or an industrial process or something like that. Those used

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<v Speaker 1>to not be a thing in Europe. Why is it

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<v Speaker 1>happening now? Okay, So out of those twelve kick awats

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<v Speaker 1>that we tracked subsidy free projects, around five gig awats

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<v Speaker 1>five point five gig a wats are looked into p

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<v Speaker 1>p A s, so roughly almost half of that volume

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<v Speaker 1>is looked into pp A s and p p as

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<v Speaker 1>are quite an important tool for developers to obtain that financing.

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<v Speaker 1>So it's a prerequisite for banks in order for them

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<v Speaker 1>to provide financing to these projects. Why that's because they

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<v Speaker 1>provide long term visibility and the large majority of PPAs

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<v Speaker 1>that are getting contracted are for ten year products. But

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<v Speaker 1>they can range country by country or there are some

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<v Speaker 1>countries that are shorter, some countries that are much longer. Yeah,

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<v Speaker 1>we noticed that some countries such as Italy are quite

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<v Speaker 1>a liquid on the long term products, so off takers

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<v Speaker 1>are keener to lock into short term pp A. So

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<v Speaker 1>the five year product is the preferred one in in Italy.

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<v Speaker 1>Spain is pushing for ten to twenty year contracts. So

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<v Speaker 1>just to get that straight, So you sign a p

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<v Speaker 1>PA for five years, you sell power at the at

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<v Speaker 1>the agreed rate four or five years, and then after

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<v Speaker 1>that you're not gonna cut You're not gonna tear down

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<v Speaker 1>your plant, you're but you're on your own selling the

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<v Speaker 1>power right to exactly, or you renegotiate and extend the

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<v Speaker 1>pp A. Do you think you would renegotiate with the

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<v Speaker 1>same parties or do you think you would reegotiate with

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<v Speaker 1>somebody else independence on who gives you the best offer.

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

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<v Speaker 1>Does does this transition in Europe mean it's an end

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<v Speaker 1>of subsidies for solar and could that spread to other

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<v Speaker 1>markets as well? I think governments in Europe are still

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<v Speaker 1>going to run auctions which can be seen as a

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<v Speaker 1>form of subsidy. Now, the revenues from these auctions, I

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<v Speaker 1>mean auctions are very competitive and you can see the

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<v Speaker 1>latest results in Spain in Portugal the revenues are very low.

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<v Speaker 1>So yes, these projects are locked into some form of subsidy,

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<v Speaker 1>but it's not that high, so the support from convenance

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<v Speaker 1>is not considerable. Now, whether subsidy free investments are going

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

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<v Speaker 1>It might be a pocket of opportunity out there. Um

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<v Speaker 1>time will tell, And one uncertainty with this kind of

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<v Speaker 1>model is cannibalization of revenue streams. So as more of

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<v Speaker 1>such projects commonline, that might have an effect on power

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<v Speaker 1>prices because previous and non dispatchable source of electricity, you

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<v Speaker 1>cannot turn on and switch off your power plant whenever needed,

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<v Speaker 1>and ultimately you end up with all your projects generating

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<v Speaker 1>electricity at the same time. So the price goes lower,

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<v Speaker 1>the price cons lower, But for the moment, I would

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<v Speaker 1>say um off takers are keen on on purchasing electricity

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<v Speaker 1>because power prices in Spain are high and the cost

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<v Speaker 1>of generation of PV assets is low. So if you

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<v Speaker 1>think about the level ice cost of electricity, which is

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<v Speaker 1>one metric to measure how costly it is to generate

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<v Speaker 1>electricity from your solar power plant, l c o s

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<v Speaker 1>are at around thirty five ft US per mega without

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<v Speaker 1>compared to fifty five years per megawadour is on the

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<v Speaker 1>wholesale power markets. So there's a quite a widespread at

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<v Speaker 1>the moment. Now, whether that spread is gonna stay sustained

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<v Speaker 1>over the next couple or three decades is yet to see.

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<v Speaker 1>So this how does that play into maybe the psychology

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<v Speaker 1>of some of the projects here, because it certainly seems

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<v Speaker 1>that with so many projects going into Spain within the

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<v Speaker 1>investment community who are actually helping to fund these assets.

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<v Speaker 1>Why are these unsubsidized assets more popular than perhaps other

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<v Speaker 1>subsidized assets in other locations. So subsidy free assets um

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<v Speaker 1>are free from restrictions that other projects are subject to

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<v Speaker 1>projects that apply to the auctions, so they can get

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<v Speaker 1>built on agricultural land, there's no quotas, and so investors

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<v Speaker 1>that previously have invested in subsidized projects moving to this

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<v Speaker 1>new model. Also because competition is slightly lower at the moment,

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<v Speaker 1>and there are some investors that did invest in in Iberia,

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<v Speaker 1>in Spain and Portugal and had bad experience with feeding

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<v Speaker 1>tariffs and retractive feeding tariffs imposed by the government. So

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<v Speaker 1>now how long ago was that? That was in two

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<v Speaker 1>thousand and ten December to be precise, made quite an

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<v Speaker 1>impression for many of us a country go back and say,

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<v Speaker 1>because Spain was such a leader for absolutely the early

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<v Speaker 1>stage of the solar industry, their leader here too. Yeah,

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<v Speaker 1>they kind of overspent in feeding tariffs and that generated

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<v Speaker 1>a bubble, and that bubble burst, So that was not

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<v Speaker 1>an ideal way of subsidizing sector. You always want to

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<v Speaker 1>put in place stable support mechanism, just as Germany did

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<v Speaker 1>over the years, that there is a risk that Spain

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<v Speaker 1>might have its own smaller bubble this year in two

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<v Speaker 1>thousand and nineteen, where thanking somewhere in between four to

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<v Speaker 1>five gig awats to come online because of huge pipeline

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<v Speaker 1>of projects tendered in two thousand and seventeen and some

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<v Speaker 1>of these subsidy free projects to come online. But thanks

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<v Speaker 1>to the good economics of subsidy free projects, actually we're

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<v Speaker 1>expecting the Spanish market to continue building, probably not at

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<v Speaker 1>the same rate. So there's going to be a halving

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<v Speaker 1>of the market next year in twenty from full gigawats

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<v Speaker 1>to two gig awats. But the good thing about subsidy

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<v Speaker 1>free projects is that they don't need government support, and

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<v Speaker 1>that's what certain investors like. But you would also assume

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<v Speaker 1>that when there is a government support mechanism, like an auction,

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<v Speaker 1>it's planned out right, we can we can accommodate this

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<v Speaker 1>much capacity to go onto the grid, and so therefore

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<v Speaker 1>we're going to auction off this amount with subsidy free.

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<v Speaker 1>It's just kind of a free for all, and you

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<v Speaker 1>get nine projects, right, or four gigs this year and

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<v Speaker 1>two next year. Can the grid accommodate this amount of

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<v Speaker 1>solar coming on? And what is it doing or what

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<v Speaker 1>are the TSA was doing or the transmission systems operators

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<v Speaker 1>doing to manage things. The grid cannot accommodate all of

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<v Speaker 1>the capacity from these subsidy free projects which are getting

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<v Speaker 1>developed at the moment. So if you think about Spain, well,

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<v Speaker 1>right Electrical SPANA, which is the local transmission system operator,

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<v Speaker 1>they received around one hundred sixty gig awats of grid

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<v Speaker 1>filing permits a hundred and sixty gigas as of made

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<v Speaker 1>from up from thirty kick awards at the end of ten.

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<v Speaker 1>So that's a surgeon good applications and authorities already said

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<v Speaker 1>that a lot of that capacity will not make it online.

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<v Speaker 1>There's no way that the country needs all that capacity.

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<v Speaker 1>Note that Spain across all technologies has around one hundred

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<v Speaker 1>kig awards of generation assets, so that I think puts

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<v Speaker 1>things into perspective definitely. So the reason why there's this

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<v Speaker 1>surge and grit applications is because the economics are getting

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<v Speaker 1>more attractive and there's expectation of perhaps future tenders, so

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<v Speaker 1>developers are preparing for this boom and there's actually a

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<v Speaker 1>secondary market of of permits whereby the lucky developers that

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<v Speaker 1>obtain the permits sell those onto later stage investors at

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<v Speaker 1>a much higher price. And what we what we expect

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<v Speaker 1>is that that there is going to be a surge

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<v Speaker 1>in grid applications in other countries, so high requests for

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<v Speaker 1>notes on the grid. But in we've already seen in

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<v Speaker 1>Portugal auctions for grid notes. So local authorities ran an

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<v Speaker 1>auction in July and made available grid connections for those

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<v Speaker 1>developers who offered the highest spids, and some of these

0:13:54.320 --> 0:13:58.400
<v Speaker 1>solar developers offered up to twenty seven uros per mega

0:13:58.440 --> 0:14:02.920
<v Speaker 1>what hours only to use the grid for a fifteen

0:14:03.000 --> 0:14:07.280
<v Speaker 1>year duration. Beyond that fifteen years, they become the owners

0:14:07.280 --> 0:14:10.760
<v Speaker 1>of the note and can sell the electricity on the

0:14:10.800 --> 0:14:14.600
<v Speaker 1>wholesale market free of any tariffs. To me, that's fascinating, right.

0:14:14.640 --> 0:14:17.080
<v Speaker 1>You go from a market where the government is paying

0:14:17.240 --> 0:14:19.480
<v Speaker 1>solar developers to put stuff on the grid because they

0:14:19.480 --> 0:14:22.360
<v Speaker 1>can didn't have any to the point where developers are

0:14:22.400 --> 0:14:25.520
<v Speaker 1>paying to get onto the grid. Absolutely, it's crazy. And

0:14:25.680 --> 0:14:30.880
<v Speaker 1>in Spain CNMC, which is the competition authority, announced well

0:14:31.000 --> 0:14:35.640
<v Speaker 1>they're thinking of running similar auctions for any spare grid

0:14:35.760 --> 0:14:40.040
<v Speaker 1>capacity any note, which is bigger than two hundred megawats.

0:14:40.160 --> 0:14:43.480
<v Speaker 1>So it's an interesting space. So it seems like a

0:14:43.480 --> 0:14:46.080
<v Speaker 1>bit of a solar boom, so to speak in Spain.

0:14:46.400 --> 0:14:50.360
<v Speaker 1>And if you have these changing dynamics, how is anybody

0:14:50.400 --> 0:14:52.600
<v Speaker 1>making any money off of it? If everyone's flooding in

0:14:53.560 --> 0:14:57.960
<v Speaker 1>I would say that developers or investors which managed to

0:14:58.040 --> 0:15:02.320
<v Speaker 1>get their projects online sell electricity onto the wholesale market,

0:15:02.880 --> 0:15:05.880
<v Speaker 1>those are definitely making money out of it because the

0:15:05.880 --> 0:15:10.720
<v Speaker 1>wholesale power prices high and they are not incurring into

0:15:10.800 --> 0:15:15.040
<v Speaker 1>any of these auctions, at least that's true for Spain, Italy,

0:15:15.280 --> 0:15:18.200
<v Speaker 1>any country outside of Portugal, so they can sell for

0:15:18.240 --> 0:15:22.280
<v Speaker 1>the price that works exactly now, more solar on the grid,

0:15:22.600 --> 0:15:26.080
<v Speaker 1>the more power prices are going to depress, So that

0:15:26.160 --> 0:15:29.080
<v Speaker 1>might not be the case in future. But you were

0:15:29.120 --> 0:15:31.120
<v Speaker 1>saying earlier when we were in the run up to

0:15:31.120 --> 0:15:34.040
<v Speaker 1>this interview that the biggest beneficiary is actually the consumer.

0:15:34.080 --> 0:15:36.880
<v Speaker 1>Is that right? The biggest beneficiaries, I would say are

0:15:36.920 --> 0:15:40.640
<v Speaker 1>the consumers because they no longer have to pay to

0:15:40.840 --> 0:15:46.680
<v Speaker 1>subsidize clean electricity generation via their electricity bills, which has

0:15:46.720 --> 0:15:49.520
<v Speaker 1>been the case so far. So if you look into

0:15:49.560 --> 0:15:53.160
<v Speaker 1>your bill. At least if I look in my Italian bill,

0:15:53.680 --> 0:15:58.200
<v Speaker 1>I can see a component which is essentially attacks, which

0:15:58.240 --> 0:16:03.120
<v Speaker 1>goes to subsidize existing projects, which I imagine will you'll

0:16:03.240 --> 0:16:05.760
<v Speaker 1>continue to have until those contracts right now and I

0:16:05.800 --> 0:16:09.920
<v Speaker 1>guess for the twenty years, So we'll take a lot.

0:16:09.960 --> 0:16:12.000
<v Speaker 1>It'll take quite a while. Is either benefits shake out

0:16:12.000 --> 0:16:13.800
<v Speaker 1>in this we'll have you back here in the studio.

0:16:14.040 --> 0:16:18.480
<v Speaker 1>There you go. I have a particular interest in corporate

0:16:18.520 --> 0:16:22.720
<v Speaker 1>sustainability and how companies are going about doing that, and

0:16:22.920 --> 0:16:25.680
<v Speaker 1>within the p p A market, renewables p p A

0:16:25.800 --> 0:16:29.400
<v Speaker 1>s are a pretty popular way in the US to

0:16:29.480 --> 0:16:34.000
<v Speaker 1>think about reducing your carbon footprint. However, that doesn't seem

0:16:34.080 --> 0:16:37.760
<v Speaker 1>to be playing out the same way in Europe. Who

0:16:37.800 --> 0:16:41.360
<v Speaker 1>exactly in Europe are buying these p p A s

0:16:41.520 --> 0:16:44.920
<v Speaker 1>because it's actually not that many companies that are looking

0:16:44.920 --> 0:16:48.280
<v Speaker 1>to use it for their own personal uses it. That's true,

0:16:48.480 --> 0:16:52.480
<v Speaker 1>I would say in Europe. So far, large tech companies

0:16:52.520 --> 0:16:55.520
<v Speaker 1>the likes of Google, Facebook have been the most active

0:16:55.560 --> 0:16:58.760
<v Speaker 1>in northern Europe, but other companies we haven't seen a

0:16:58.800 --> 0:17:02.240
<v Speaker 1>lot of traction from other companies across Europe as a whole.

0:17:02.760 --> 0:17:08.280
<v Speaker 1>So there's definitely an opportunity for growth. UM definitely the

0:17:08.320 --> 0:17:12.280
<v Speaker 1>biggest off takers of clean energy for the moment our utilities,

0:17:12.560 --> 0:17:15.840
<v Speaker 1>and the reason why they do that is because prices

0:17:15.880 --> 0:17:19.880
<v Speaker 1>are solo cost of generation from solar is is low,

0:17:19.960 --> 0:17:23.040
<v Speaker 1>and they can sell on that electricity to other consumers,

0:17:23.160 --> 0:17:28.159
<v Speaker 1>retail consumers who don't necessarily want to look into p

0:17:28.280 --> 0:17:31.320
<v Speaker 1>p as for ten years and don't want to get

0:17:31.320 --> 0:17:34.840
<v Speaker 1>into that hassle because it's looking into a p p

0:17:34.960 --> 0:17:38.080
<v Speaker 1>A and structuring a p p A s quite a task.

0:17:38.160 --> 0:17:42.960
<v Speaker 1>It's not a straightforward job, okay. So government subsidies are

0:17:43.200 --> 0:17:47.000
<v Speaker 1>going away more or less. Utilities are buying this power

0:17:47.160 --> 0:17:49.320
<v Speaker 1>in p p a s, and corporates are doing the

0:17:49.320 --> 0:17:52.879
<v Speaker 1>same thing because it makes financial sense, and banks are

0:17:52.880 --> 0:17:56.720
<v Speaker 1>getting involved in investing in these projects. You know, in

0:17:56.760 --> 0:17:59.840
<v Speaker 1>the in the development state, it seems like solar is

0:18:00.040 --> 0:18:02.960
<v Speaker 1>growing up. Is that a fair assessment? It definitely is.

0:18:03.040 --> 0:18:06.320
<v Speaker 1>But it's necessarily that these three parties you mentioned work

0:18:06.440 --> 0:18:10.679
<v Speaker 1>together so that these projects can can actually break the ground.

0:18:11.000 --> 0:18:15.960
<v Speaker 1>And that's where we're seeing a big hurdle. UM developers

0:18:16.680 --> 0:18:20.200
<v Speaker 1>working with banks, working with off takers so that they

0:18:20.280 --> 0:18:22.639
<v Speaker 1>all agree on the terms of the p p A

0:18:23.680 --> 0:18:26.560
<v Speaker 1>the term on the financing, but it seems like the

0:18:26.600 --> 0:18:31.600
<v Speaker 1>market is moving ahead and also the party's involved in

0:18:31.600 --> 0:18:35.240
<v Speaker 1>in the project final structuring are maturing and growing up.

0:18:35.720 --> 0:18:38.639
<v Speaker 1>Get sure, thanks for coming in. You're welcome, Mark, Thanks

0:18:38.680 --> 0:18:42.800
<v Speaker 1>Dana Bloomberg. An EAP is a service provided by Bloomberg

0:18:42.840 --> 0:18:45.879
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0:18:45.960 --> 0:18:49.560
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0:18:49.640 --> 0:18:53.160
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0:18:53.320 --> 0:18:55.960
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