Power policy

The Spanish government has set ambitious, legally binding renewable energy targets for 2030, including for a 74% renewables share in electricity consumption by 2030, up from 37% in 2019. The country’s renewable energy market has firmly bounced back since the era of retroactive cuts to renewable energy project subsidies in the mid-2010s, which were passed to alleviate a ballooning tariff deficit and overcapacity.

Spain has a growing market for unsubsidized renewable energy projects, but offtake contracts with the government are still available to developers via auction. The government held two clean energy auctions in 2021 under its new program, known as the Economic Regime for Renewable Energy (REER). These auctions award two-way Contracts for Difference (CfDs) – a simplified euro/MWh payment mechanism with a 12-year contract duration. The first two rounds in 2021 backed a total of 3.3GW onshore wind projects and 2.9GW PV projects, which mainly went to small developers. A further five auction rounds are expected to be held each year from 2022-26, with allocations in the government’s auction schedule expected to support a total 9GW of CfDs to PV, 7.5GW to onshore wind – in addition to 1GW for other technologies including solar thermal. However, the auction pipeline alone is not enough to meet government targets. In addition to upcoming REER auction volumes, a further 20GW of renewables – accounting for a little over 50% of total capacity additions to meet Spain’s 2030 targets – will need to be built without government support.

Prior to the REER program, the government held auctions held between 2016 and 2017 under a different remuneration mechanism, awarding 4.6GW to onshore wind, 3.9GW to solar, and 200MW to biomass. These projects receive a capex-based incentive paid on top of the wholesale electricity price, which guarantee a ‘reasonable’ rate of return over 30 years for PV and 25 years for onshore wind. The rate of return is subject to revision by the government every six years under this scheme. Projects with a feed-in tariff and premium from subsidy programs prior to 2014 have also had their subsidies replaced with the regulated return on investment.

Power prices and costs

The Iberian wholesale power market (Mibel) is shared between Spain and Portugal and is coupled to the European day-ahead market. Iberian electricity prices are higher than the European average, largely due to limited interconnections with the rest of the continent. This has exacerbated Spain’s grid overcapacity and reliance on the internal market to balance the power system. Given the collapse of coal generation, gas is now the dominant price setter in the Iberian power market and has been responsible for the surge in prices in 2021. Power prices are also sensitive to hydropower availability, as seen in 2017 when drought conditions halved Spain's hydro power generation and prices spiked. Low hydro output caused more expensive gas and coal generators to ramp up production to meet demand, alongside a rise in imported energy from France and Portugal. As higher volumes of utility-scale onshore wind and PV projects are commissioned, BNEF expects a long-term squeeze on the country's gas sector. While Spain’s relatively high power prices have proven attractive to renewable energy developers, higher volumes of zero-marginal cost renewable energy generation are expected to place significant downward pressure on power prices.

Power market

Spain's generating capacity has doubled since 2003 to reach 105GW in 2020 and is set to continue increasing with the delivery of renewable energy auctions. Today, more than half of the country's power generation is produced by nuclear and gas. But capacity additions over the last 10 years have been dominated by wind, hydro and solar – with renewables reaching 47% of generation in 2020. In 2020, more than half of Spain's remaining coal capacity closed due to worsening economics and the unwillingness of generators to upgrade their power plants to meet emissions requirements. The Spanish government has proposed introducing a capacity market, which would offer an additional revenue stream to firm generation and is likely to support gas generators. The capacity market is intended to be open to participation by renewable energy and energy storage generators on a de-rated basis. Spain offers compensation (at 15% of wholesale prices) for any curtailment incurred in the spot market.

Doing business and barriers

The business environment for renewable energy is relatively positive in Spain as the market moves through its second boom, although some investors are rightly wary of regulatory risk. That is particularly the case following the government’s reaction to the spike in electricity prices in 2021. A ‘clawback’ mechanism has been imposed from September 2021 to March 2022 affecting the revenues of certain types of zero-emission generators. There is also continued policy risk around the regulated return on investment given the revisions to rates every six years. Beyond this, investors are also increasingly wary of price risk. Much of the capacity secured in the 2016-17 auctions is exposed to merchant risk, having effectively bid for zero subsidy on the regulated return on investment. Projects with contracts under the new REER auction regime also face merchant risk given that CfDs are only paid over 12 years, well below the operational lifetime of a typical wind or solar project. According to Bloomberg's country risk assessment, Spain is a higher risk market than its mainland European counterparts, including Portugal (but lower risk than Italy), due to political and economic factors.

Nonetheless, there is an increasingly buoyant market for private power purchase agreements (PPAs) in Spain. BNEF has tracked a steady flow of corporate PPAs in Spain, with more than 5GW of wind and solar projects securing such contracts between 2018 and 2021. The country also faces a bottleneck with permitting for new renewable energy projects due to the very high volumes of applications. As of end October 2021, more than 147GW of wind and solar projects have been granted grid access, while 120GW have had permission denied, according to the system operator. In the past, a major barrier for small-scale renewables was the PV-plus-storage tax, which restricted financial compensation for feeding excess electricity to the grid. This barrier was removed in October 2018 by the government, and there has been a healthier level of small-scale solar deployment since then. BNEF estimates that more than 1.5GW of small-scale PV capacity was deployed from 2020-21, compared to about 800MW from 2018-19.

EV market

Consumers in Spain have been slower to adopt electric vehicles (EVs) than other European markets, primarily due to the relatively limited availability of EV models and slower introduction of government capex subsidies for low-emissions vehicles. Adoption is accelerating with increased government subsidies, alongside the ramp up in requirements for automakers under EU fuel economy standards. In 2020, sales of new passenger EVs in Spain surpassed 40,000, more than doubling the sales volume of 2019. However, EVs still represent less than 1% of the total passenger vehicle fleet. Plug-in hybrid EVs accounted for more than 60% of new EV sales in Spain in 2020. This is likely due to the fairly early stage of Spain’s rollout of public EV charging infrastructure, creating a deterrent for some consumers for battery EVs, and the fact that consumers can still receive capex subsidies for the purchase of new plug-in hybrid EVs.

EV policy

Spain has gradually increased budgetary support for EV subsidies and strengthened policy and regulatory measures to accelerate EV adoption. The government passed legislation to introduce capex subsidies for new passenger and commercial EVs and charge point installations in February 2019, with its MOVES program. In 2021, the government set a target for a fleet of 250,000 EVs on the road in Spain by 2023 – in addition to 80,000 to 110,000 charge points installed. That is more than double the registered fleet of just over 87,000 passenger EVs and 13,000 commercial EVs in 2020. To help meet this new target, and as part of the government’s Covid-19 green recovery package legislated in 2021, the MOVES program is receiving a healthier 400-million-euro budget for its third phase to be deployed from 2021-23. BNEF estimates that this budget can support up to 93,000 new passenger and commercial EV sales, in addition to 80,000 charge point installations. The government is also planning an ultra-fast charging network as part of the implementation of its recovery package.

As an EU member state, EU regulations direct fuel economy standards for sales of new vehicles in Spain. BNEF expects these standards to be an important driver of increased EV model availability among automakers and adoption of EVs in the region over the coming decade. Beyond this, the Spanish government also legislated a climate law in May 2021, including a target to phase out new sales of internal combustion engine (ICE) vehicles by 2040. Vehicles emitting less than 120g CO2/km are also exempt from vehicle registration tax in Spain, and there some regions providing additional road tax incentives for EVs. For example, the cities of Madrid, Barcelona, Zaragoza and Valencia offer lower annual circulation (ownership) tax rates for electric and fuel-efficient vehicles compared to ICEs.

Buildings market

Spain has an estimated total of 25.7 million residential dwellings in 2020, based on the government’s household survey, of which three-quarters are primary dwellings, and the remainder are secondary dwellings or are empty. The majority (70%) of the Spanish housing stock are multi-family homes, and the country has a high owner-occupancy rate at more than 77%. Spain also has around 12.3 million non-residential buildings, including 3.3 million commercial, industrial and office buildings. More than half of Spanish residential heating is supplied by fossil fuels: with 30% of space and water heating supplied by natural gas and another 25% from oil boilers. Nonetheless, Spain is a relatively large market for heat pumps, with around 100,000-120,000 units sold per year – representing an estimated 5-10% of annual residential heating unit installations. The government’s energy efficiency agency, IDAE, published a study in 2016 that estimated the Spanish heat pump market is comprised of more than 11.3 million heat pumps installed, of which 8.5 million are in residential dwellings. That would equate to about one-third of residential buildings having a heat pump installed, although half of these units are used exclusively for cooling, according to the survey.

Buildings policy

Spain has a target for 42% heating and cooling energy consumption to come from renewable energy sources by 2030, up from around 19% in 2020. The government has a direct grant program in place for heat pump installations to support progress towards this target. The PREE grant program for energy efficiency in existing buildings supports insulation, as well as installations for solar thermal heaters and air-source heat pumps, with an average single family home eligible for between 1,600 and 5,000 euros in direct capex support. The government also updated its long-term strategy for energy efficiency in the buildings sector in 2020 and has an array of programs administered at the national and sub-national levels to encourage energy efficiency measures in the building stock. To improve progress toward its targets, the government plans to establish an energy efficiency certification system and implement minimum standards for energy efficiency. It is also considering reforms to energy taxation, which could improve the economics of electric heat pumps relative to fossil heating systems. The government plans to remove a portion of renewable levy costs from consumers’ electricity tax bills, and instead create a separate fund to cover these costs (known as FNSSE). This FNSSE incurs charges for energy retailers –spreading the costs of renewable energy subsidies across both gas and electricity.