Portugal carried out an auction for 1.4 GW of renewable capacity and has achieved spectacularly low prices.
We were recently surprised by the news that, here in Spain, the Ministry for Ecological Transition plans to apply the same model of electricity auction used in Portugal.
This measure would scare potential investors interested into purely merchant projects. It is very difficult, if not practically impossible, to make profitable an investment project in a PV or wind solar plant with the current investment and O&M costs, with such low market price expectations.
Many offtakers will assume these low prices as a reference for PPAs, and financial institutions will not be willing to finance projects with PPAs at fixed prices at those price levels. This is key given that without financing several developments will not go ahead.
We believe that government intervention through auctions distorts the market and introduces unnecessary additional regulatory risk. Our recommendation, therefore, is for the government to allow the market to determine the optimum capacity deployment without interventions, installing the capacity through market mechanisms and that the role of the government be limited to a facilitator for this to happen, promoting the electrification of society and helping to close the thermal gap.