Speaker 1: Today on Switched On, we're going to talk about European solar.
Speaker 1: It's booming. There's going to be a lot of solar
Speaker 1: on the grid, but can the grid handle it? That's
Speaker 1: the question We really need to get to the bottom
Speaker 1: up and help us really figure this out. We have
Speaker 1: brought in vienna F solar analyst Pietro Reddia, who's actually
Speaker 1: based out of our Milan office. He's here to explain
Speaker 1: the solar boom and the conversation will be based on
Speaker 1: a report titled Europe's subsidy free PV market takes Off.
Speaker 1: But first we're going to talk with the head of
Speaker 1: AMIA Analysis, Tom Roland's Reese, about how the grid might
Speaker 1: accommodate a bunch of solar and wind, highlighting a recent
Speaker 1: study that BIENNAF completed in partnership with Axona, and that
Speaker 1: study is titled Flexibility Solutions for High Renewable Systems and
Speaker 1: it focuses on Spain, so hyphen Spain if you're searching
Speaker 1: for it. Bienna F users can act says these reports
Speaker 1: on bienn f dot com, the BENNF mobile app, and
Speaker 1: the Bloomberg terminal. As a reminder, bienn F does not
Speaker 1: provide investment or strategy advice, and you can hear a
Speaker 1: full disclaimer at the end of the show. I'm Dana
Speaker 1: Perkins here with Mark Taylor and you're listening to Switch
Speaker 1: It on the b F podcast. Tom. Thank you for
Speaker 1: joining us here today. Hi Dana, thank you for having me.
Speaker 1: So the big question we have is we've got lots
Speaker 1: of solar coming in in Europe and we're going to
Speaker 1: talk about that later on with Pietro, but we want
Speaker 1: to know from you can the grid handle it. So
Speaker 1: the Flexibility Report, which follows on from reports that we
Speaker 1: did for UK and Germany, was focused on Spain, and
Speaker 1: obviously every market has its different dynamics, and the particular
Speaker 1: question we were trying to answer is can we keep
Speaker 1: supply and demand in balance as more wind and solar
Speaker 1: comes onto the grid, as opposed to can the network,
Speaker 1: the wires, the transformers handle it, which is a separate question,
Speaker 1: is separate issue, but when we're talking about matching supply
Speaker 1: and demand, we found that actually Spain has a pretty
Speaker 1: good chance of hitting its its targets. So we had
Speaker 1: different scenarios where we sort of made it easier and harder.
Speaker 1: We made batteries more expensive, we made batteries cheaper, We
Speaker 1: added lots of electric vehicles, we made them flexible, we
Speaker 1: made them inflexible, we added interconnectors to France. We tried
Speaker 1: all sorts of different things in our models to see
Speaker 1: what would happen. And the conclusion, one of the big conclusions,
Speaker 1: was that whatever you do, the lowest cost system in
Speaker 1: Spain is still one based largely around wind and solar.
Speaker 1: So flexibility is not a barrier in Spain in in
Speaker 1: matching supply and demand. And a big part of that
Speaker 1: is because the country has so much hydro, it has
Speaker 1: this natural advantage in solving those problems. So hydro serves
Speaker 1: as the battery. Yeah, to to some extent, they've got
Speaker 1: a head start there. Yeah, it's like having tons of
Speaker 1: batteries on the grid already before they've even started thinking
Speaker 1: about renewables. So punchline. A lot of solar coming under
Speaker 1: the grid. But but Spain's in a good position to
Speaker 1: handle it, at least from supply and demand. Point of
Speaker 1: of the challenge then, is that word don't flexibility getting
Speaker 1: away the solar boom. Pietro high mark, Hi Dama, thanks
Speaker 1: for coming in. We understand the solar market in the
Speaker 1: EU is going in a bit of a transformation. Can
Speaker 1: you describe kind of generally what's going on? Yeah, sure,
Speaker 1: So we've noticed that there's quite a few announcements in
Speaker 1: Europe for subsidy free projects which are not backed by
Speaker 1: feeding tariffs or any kind of subsidies. And most of
Speaker 1: these projects are getting built or will be built in Spain,
Speaker 1: Portugal and Italy. So we tracked project level data for
Speaker 1: quite a few of these projects around twelve kick awats.
Speaker 1: If you think about Europe as a whole, next year,
Speaker 1: there's going to be eighteen kick awats to come online
Speaker 1: across residential, commercial, utility scale, subsidized and non. So twelve
Speaker 1: gig a wats out of eighteen is quite a considerable amount. Now,
Speaker 1: not all of that twelve kick awats will will be
Speaker 1: built next year, but it does put in context how
Speaker 1: big this market is. That twelve a watts will will
Speaker 1: come online via ninety nine projects. Even it's quite precise.
Speaker 1: Somebody built one more. I know, Come on, everybody out there,
Speaker 1: let's do this. These are really sunny countries. So is
Speaker 1: it just that this is a great place for solars?
Speaker 1: So on subsidized solars going in there or is there
Speaker 1: another reason? So it helps if solar I radiation is
Speaker 1: high and if you have a lot of land available,
Speaker 1: which is the case in Spain. Some of these projects
Speaker 1: have been already developed under the feed in tariffs, so
Speaker 1: back in the boom days in two thousand and eight
Speaker 1: and UM. What's important as well is that electricity high
Speaker 1: prices are high. So the rational now is that instead
Speaker 1: of receiving feed in tariffs, you sell the electric You
Speaker 1: generate electricity and sell the electricity onto the wholesale power markets.
Speaker 1: Or alternatively, you can look into a p p A.
Speaker 1: So let's go into the p p A s. Then
Speaker 1: we did an episode on this a little while back
Speaker 1: with our colleague Kyle Harrison. UM. A p p A
Speaker 1: is a power purchase agreement to a contract for sale
Speaker 1: of power between two parties. Those parties might be a
Speaker 1: utility who's going to dittribute it to you and I,
Speaker 1: you know, to our house or to to businesses or whatever.
Speaker 1: Or it could be direct to a company that's buying
Speaker 1: power for say big power needs, UM, a data center
Speaker 1: or an industrial process or something like that. Those used
Speaker 1: to not be a thing in Europe. Why is it
Speaker 1: happening now? Okay, So out of those twelve kick awats
Speaker 1: that we tracked subsidy free projects, around five gig awats
Speaker 1: five point five gig a wats are looked into p
Speaker 1: p A s, so roughly almost half of that volume
Speaker 1: is looked into pp A s and p p as
Speaker 1: are quite an important tool for developers to obtain that financing.
Speaker 1: So it's a prerequisite for banks in order for them
Speaker 1: to provide financing to these projects. Why that's because they
Speaker 1: provide long term visibility and the large majority of PPAs
Speaker 1: that are getting contracted are for ten year products. But
Speaker 1: they can range country by country or there are some
Speaker 1: countries that are shorter, some countries that are much longer. Yeah,
Speaker 1: we noticed that some countries such as Italy are quite
Speaker 1: a liquid on the long term products, so off takers
Speaker 1: are keener to lock into short term pp A. So
Speaker 1: the five year product is the preferred one in in Italy.
Speaker 1: Spain is pushing for ten to twenty year contracts. So
Speaker 1: just to get that straight, So you sign a p
Speaker 1: PA for five years, you sell power at the at
Speaker 1: the agreed rate four or five years, and then after
Speaker 1: that you're not gonna cut You're not gonna tear down
Speaker 1: your plant, you're but you're on your own selling the
Speaker 1: power right to exactly, or you renegotiate and extend the
Speaker 1: pp A. Do you think you would renegotiate with the
Speaker 1: same parties or do you think you would reegotiate with
Speaker 1: somebody else independence on who gives you the best offer.
Speaker 1: There you go, Okay, it's a bit like a home mortgage.
Speaker 1: Does does this transition in Europe mean it's an end
Speaker 1: of subsidies for solar and could that spread to other
Speaker 1: markets as well? I think governments in Europe are still
Speaker 1: going to run auctions which can be seen as a
Speaker 1: form of subsidy. Now, the revenues from these auctions, I
Speaker 1: mean auctions are very competitive and you can see the
Speaker 1: latest results in Spain in Portugal the revenues are very low.
Speaker 1: So yes, these projects are locked into some form of subsidy,
Speaker 1: but it's not that high, so the support from convenance
Speaker 1: is not considerable. Now, whether subsidy free investments are going
Speaker 1: to take over as a model, it's too early to say.
Speaker 1: It might be a pocket of opportunity out there. Um
Speaker 1: time will tell, And one uncertainty with this kind of
Speaker 1: model is cannibalization of revenue streams. So as more of
Speaker 1: such projects commonline, that might have an effect on power
Speaker 1: prices because previous and non dispatchable source of electricity, you
Speaker 1: cannot turn on and switch off your power plant whenever needed,
Speaker 1: and ultimately you end up with all your projects generating
Speaker 1: electricity at the same time. So the price goes lower,
Speaker 1: the price cons lower, But for the moment, I would
Speaker 1: say um off takers are keen on on purchasing electricity
Speaker 1: because power prices in Spain are high and the cost
Speaker 1: of generation of PV assets is low. So if you
Speaker 1: think about the level ice cost of electricity, which is
Speaker 1: one metric to measure how costly it is to generate
Speaker 1: electricity from your solar power plant, l c o s
Speaker 1: are at around thirty five ft US per mega without
Speaker 1: compared to fifty five years per megawadour is on the
Speaker 1: wholesale power markets. So there's a quite a widespread at
Speaker 1: the moment. Now, whether that spread is gonna stay sustained
Speaker 1: over the next couple or three decades is yet to see.
Speaker 1: So this how does that play into maybe the psychology
Speaker 1: of some of the projects here, because it certainly seems
Speaker 1: that with so many projects going into Spain within the
Speaker 1: investment community who are actually helping to fund these assets.
Speaker 1: Why are these unsubsidized assets more popular than perhaps other
Speaker 1: subsidized assets in other locations. So subsidy free assets um
Speaker 1: are free from restrictions that other projects are subject to
Speaker 1: projects that apply to the auctions, so they can get
Speaker 1: built on agricultural land, there's no quotas, and so investors
Speaker 1: that previously have invested in subsidized projects moving to this
Speaker 1: new model. Also because competition is slightly lower at the moment,
Speaker 1: and there are some investors that did invest in in Iberia,
Speaker 1: in Spain and Portugal and had bad experience with feeding
Speaker 1: tariffs and retractive feeding tariffs imposed by the government. So
Speaker 1: now how long ago was that? That was in two
Speaker 1: thousand and ten December to be precise, made quite an
Speaker 1: impression for many of us a country go back and say,
Speaker 1: because Spain was such a leader for absolutely the early
Speaker 1: stage of the solar industry, their leader here too. Yeah,
Speaker 1: they kind of overspent in feeding tariffs and that generated
Speaker 1: a bubble, and that bubble burst, So that was not
Speaker 1: an ideal way of subsidizing sector. You always want to
Speaker 1: put in place stable support mechanism, just as Germany did
Speaker 1: over the years, that there is a risk that Spain
Speaker 1: might have its own smaller bubble this year in two
Speaker 1: thousand and nineteen, where thanking somewhere in between four to
Speaker 1: five gig awats to come online because of huge pipeline
Speaker 1: of projects tendered in two thousand and seventeen and some
Speaker 1: of these subsidy free projects to come online. But thanks
Speaker 1: to the good economics of subsidy free projects, actually we're
Speaker 1: expecting the Spanish market to continue building, probably not at
Speaker 1: the same rate. So there's going to be a halving
Speaker 1: of the market next year in twenty from full gigawats
Speaker 1: to two gig awats. But the good thing about subsidy
Speaker 1: free projects is that they don't need government support, and
Speaker 1: that's what certain investors like. But you would also assume
Speaker 1: that when there is a government support mechanism, like an auction,
Speaker 1: it's planned out right, we can we can accommodate this
Speaker 1: much capacity to go onto the grid, and so therefore
Speaker 1: we're going to auction off this amount with subsidy free.
Speaker 1: It's just kind of a free for all, and you
Speaker 1: get nine projects, right, or four gigs this year and
Speaker 1: two next year. Can the grid accommodate this amount of
Speaker 1: solar coming on? And what is it doing or what
Speaker 1: are the TSA was doing or the transmission systems operators
Speaker 1: doing to manage things. The grid cannot accommodate all of
Speaker 1: the capacity from these subsidy free projects which are getting
Speaker 1: developed at the moment. So if you think about Spain, well,
Speaker 1: right Electrical SPANA, which is the local transmission system operator,
Speaker 1: they received around one hundred sixty gig awats of grid
Speaker 1: filing permits a hundred and sixty gigas as of made
Speaker 1: from up from thirty kick awards at the end of ten.
Speaker 1: So that's a surgeon good applications and authorities already said
Speaker 1: that a lot of that capacity will not make it online.
Speaker 1: There's no way that the country needs all that capacity.
Speaker 1: Note that Spain across all technologies has around one hundred
Speaker 1: kig awards of generation assets, so that I think puts
Speaker 1: things into perspective definitely. So the reason why there's this
Speaker 1: surge and grit applications is because the economics are getting
Speaker 1: more attractive and there's expectation of perhaps future tenders, so
Speaker 1: developers are preparing for this boom and there's actually a
Speaker 1: secondary market of of permits whereby the lucky developers that
Speaker 1: obtain the permits sell those onto later stage investors at
Speaker 1: a much higher price. And what we what we expect
Speaker 1: is that that there is going to be a surge
Speaker 1: in grid applications in other countries, so high requests for
Speaker 1: notes on the grid. But in we've already seen in
Speaker 1: Portugal auctions for grid notes. So local authorities ran an
Speaker 1: auction in July and made available grid connections for those
Speaker 1: developers who offered the highest spids, and some of these
Speaker 1: solar developers offered up to twenty seven uros per mega
Speaker 1: what hours only to use the grid for a fifteen
Speaker 1: year duration. Beyond that fifteen years, they become the owners
Speaker 1: of the note and can sell the electricity on the
Speaker 1: wholesale market free of any tariffs. To me, that's fascinating, right.
Speaker 1: You go from a market where the government is paying
Speaker 1: solar developers to put stuff on the grid because they
Speaker 1: can didn't have any to the point where developers are
Speaker 1: paying to get onto the grid. Absolutely, it's crazy. And
Speaker 1: in Spain CNMC, which is the competition authority, announced well
Speaker 1: they're thinking of running similar auctions for any spare grid
Speaker 1: capacity any note, which is bigger than two hundred megawats.
Speaker 1: So it's an interesting space. So it seems like a
Speaker 1: bit of a solar boom, so to speak in Spain.
Speaker 1: And if you have these changing dynamics, how is anybody
Speaker 1: making any money off of it? If everyone's flooding in
Speaker 1: I would say that developers or investors which managed to
Speaker 1: get their projects online sell electricity onto the wholesale market,
Speaker 1: those are definitely making money out of it because the
Speaker 1: wholesale power prices high and they are not incurring into
Speaker 1: any of these auctions, at least that's true for Spain, Italy,
Speaker 1: any country outside of Portugal, so they can sell for
Speaker 1: the price that works exactly now, more solar on the grid,
Speaker 1: the more power prices are going to depress, So that
Speaker 1: might not be the case in future. But you were
Speaker 1: saying earlier when we were in the run up to
Speaker 1: this interview that the biggest beneficiary is actually the consumer.
Speaker 1: Is that right? The biggest beneficiaries, I would say are
Speaker 1: the consumers because they no longer have to pay to
Speaker 1: subsidize clean electricity generation via their electricity bills, which has
Speaker 1: been the case so far. So if you look into
Speaker 1: your bill. At least if I look in my Italian bill,
Speaker 1: I can see a component which is essentially attacks, which
Speaker 1: goes to subsidize existing projects, which I imagine will you'll
Speaker 1: continue to have until those contracts right now and I
Speaker 1: guess for the twenty years, So we'll take a lot.
Speaker 1: It'll take quite a while. Is either benefits shake out
Speaker 1: in this we'll have you back here in the studio.
Speaker 1: There you go. I have a particular interest in corporate
Speaker 1: sustainability and how companies are going about doing that, and
Speaker 1: within the p p A market, renewables p p A
Speaker 1: s are a pretty popular way in the US to
Speaker 1: think about reducing your carbon footprint. However, that doesn't seem
Speaker 1: to be playing out the same way in Europe. Who
Speaker 1: exactly in Europe are buying these p p A s
Speaker 1: because it's actually not that many companies that are looking
Speaker 1: to use it for their own personal uses it. That's true,
Speaker 1: I would say in Europe. So far, large tech companies
Speaker 1: the likes of Google, Facebook have been the most active
Speaker 1: in northern Europe, but other companies we haven't seen a
Speaker 1: lot of traction from other companies across Europe as a whole.
Speaker 1: So there's definitely an opportunity for growth. UM definitely the
Speaker 1: biggest off takers of clean energy for the moment our utilities,
Speaker 1: and the reason why they do that is because prices
Speaker 1: are solo cost of generation from solar is is low,
Speaker 1: and they can sell on that electricity to other consumers,
Speaker 1: retail consumers who don't necessarily want to look into p
Speaker 1: p as for ten years and don't want to get
Speaker 1: into that hassle because it's looking into a p p
Speaker 1: A and structuring a p p A s quite a task.
Speaker 1: It's not a straightforward job, okay. So government subsidies are
Speaker 1: going away more or less. Utilities are buying this power
Speaker 1: in p p a s, and corporates are doing the
Speaker 1: same thing because it makes financial sense, and banks are
Speaker 1: getting involved in investing in these projects. You know, in
Speaker 1: the in the development state, it seems like solar is
Speaker 1: growing up. Is that a fair assessment? It definitely is.
Speaker 1: But it's necessarily that these three parties you mentioned work
Speaker 1: together so that these projects can can actually break the ground.
Speaker 1: And that's where we're seeing a big hurdle. UM developers
Speaker 1: working with banks, working with off takers so that they
Speaker 1: all agree on the terms of the p p A
Speaker 1: the term on the financing, but it seems like the
Speaker 1: market is moving ahead and also the party's involved in
Speaker 1: in the project final structuring are maturing and growing up.
Speaker 1: Get sure, thanks for coming in. You're welcome, Mark, Thanks
Speaker 1: Dana Bloomberg. An EAP is a service provided by Bloomberg
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