The lack of projects with PPA brings merchant projects into focus of financing

AleaSoft Energy Forecasting, March 25, 2022. Out of the projects under the reasonable profitability regime of RD 413/2014, there are already very few that need financing. The extreme price volatility in the electricity markets today resulted in few PPA contracts being closed. Faced with this situation of little availability of renewable energy projects to finance, lenders are beginning to change their opinion about merchant projects.

AleaSoft - Wind farm

On March 17, the 20th edition of the monthly webinars organised by AleaSoft Energy Forecasting took place. The meeting had the participation of speakers from EY who, also at the subsequent analysis table, presented the current situation of the renewable energy sector in Spain, both in terms of regulation, as well as in terms of projects financing and assets valuation. As usual in the monthly webinars, an analysis of the evolution of the energy markets in Europe in recent weeks, mainly marked by the Russian invasion of Ukraine, was also carried out. Clients of EY and AleaSoft Energy Forecasting, as well as those interested in its forecasts, can request the recording of the webinar here.

The conclusions on the current financing conditions of the different types of renewable energy projects, their availability and the attractiveness for investors and financial entities are described below.

The few projects of RD 413/2014

The most attractive projects for financiers and those that currently obtain the best financing conditions are projects under the remuneration scheme of Royal‑Decree 413/2014. These are the projects that, before the Royal‑Decree, enjoyed the feed‑in‑tariff and that now receive compensation for reasonable profitability.

These projects are easily financed with many national and international entities willing to offer financing. These projects are offered leverage that can reach 90% and interests that do not exceed Euribor + 2%. The “disadvantage” of these projects is that there are very few available. According to EY, there are still projects that need financing, but most were already refinanced.

The scarcity of projects with PPA

The next projects in terms of attractiveness and financing conditions are the projects that have a long‑term power sale contract, a PPA. These are also projects that have no problem finding financing because financial entities see them as interesting. Currently, the conditions are attractive and allow leverage of up to 80% and interest does not exceed Euribor + 2.5%.

The drawback with these projects is that few PPA are currently closing and there are few projects available that need funding. The extreme volatility of prices in the electricity markets is making it very difficult to agree on long‑term contracts. According to EY, this situation has been occurring since 2020, when the pandemic sank prices in the markets, which complicated negotiations in PPA. Currently, high prices and volatility cause the same difficult situation when it comes to finalising contracts.

The change of perception about merchant projects

Until now, in Spain, merchant projects, those whose only source of income is the sale of energy at market prices, received practically no attention, with only a few financial entities interested in them. The conditions that these projects currently obtain are less advantageous than in previous projects, with leverage that does not exceed 65% and interest that can reach Euribor + 3.25%.

However, given the current situation of low availability of RD 413/2014 projects and projects with PPA to finance, financial institutions are paying more and more attention to merchant projects. According to EY, unless the PPA situation changes a lot, merchant projects will soon gain prominence in financing.

The new projects of the REER auctions

Soon, in the panorama of projects available for financing, the winning projects of the auctions of the Renewable Energy Economic Regime will begin to appear. The REER works as a twelve‑year PPA, where the producer receives the price offered at the auction plus a certain exposure to market prices.

The attractive part of these projects is that they do not have counterparty risk since the contract is guaranteed by the State. Therefore, it is considered that they will be projects that will not have problems finding financing with good conditions.

AleaSoft Energy Forecasting’s analysis on the prospects for energy markets in Europe and the renewable energy projects financing

The next webinar in the series of monthly webinars organised by AleaSoft Energy Forecasting will take place on April 21 and, in addition to reviewing the evolution and prospects for energy markets in Europe, it will focus on a key aspect of the energy transition and for which long‑term hourly price forecasting is essential: the future of energy storage systems.

Source: AleaSoft Energy Forecasting.
AleaApp platform for the data compilation and analysis

Subscription to AleaSoft