Spain’s Ecological Transition Ministry in January issued environmental impact statements, or permits, known as Declaración de Impacto Ambiental (DIA), to some 150 greenfield renewable energy schemes, all above 50 MW in size and totalling some 30 GW of capacity.

The announcement, the largest approval of new Clean Energy projects ever by the Spanish government, is a boon to Spanish solar, which represent some 88% of the approved schemes.

The move also brings the total number of environmental permits for new solar projects to more than 40 GW – comprising those approved in January and a further 10 GW of projects with capacity of less than 50 MW that have also been recently approved by local authorities.

A senior manager at an infrastructure fund-backed investor, says: “It doesn’t mean that all these projects will be built, because some might not get all the necessary administrative approvals and some will fail along the way, but this is a huge boost to the sector. It makes Spain the hottest market for solar in Europe right now.”

To understand the magnitude, there is currently 19 GW of installed solar capacity in Spain, so the projects just approved in January will more than double existing capacity.

Projects owned by the likes of Iberdrola, Total Energies, Ignis Group and Austria’s Verbund won the bulk of approvals in January, according to Infralogic data. Others are backed by developers and utilities including Brookfield’s X-Elio, IFM and GIP’s Naturgy, Intermediate Capital Group-backed Akuo Renewables, Enel Green Power, Opdenergy, KGAL and Solaria.

Lack of time and personnel

The government granted these permits to accelerate renewable investments and achieve the ambitious renewables targets set in its Plan Nacional Integrado de Energia y Clima 2021-2030 (PNIEC). But while it makes Spain an attractive market for renewable investors, this bonanza of new projects comes with huge challenges.

One is that these projects now have a set and tight timeline for reaching the commissioning stage. It means that sponsors need to obtain all the administrative and building permits and secure the financing from lenders within a very limited timeframe.

“This mandatory timing is the elephant in the room,” says a source. “The projects need to be built by 2025, which is impossible to do, considering the amount of work and the financing that needs to be mobilized in the next two years.”

Authorities have given stringent deadlines to reduce the level of speculation and overcrowding seen in the past, and to ensure that only the serious bidders take part in bidding processes. But they might not have thought it through, according to the sources following the situation.

Map of favourable DIAs for PV, wind and hybrid projects (Source: MITECO)

“The number of deals is crazy and the timeframe short, particularly considering the normal timing of approvals,” says one source at a financial advisory firm.

Some 3 GW to 5 GW of solar capacity has been approved each year over recent years – but it will be impossible to handle three or four times that capacity, says this source. “It will create huge bottlenecks,” in terms of availability of materials, manufacturers and of resources in the supply chain.

Another concern is availability of personnel. “If companies are slow in managing these processes, it is in part because of the administrative machine behind it is slow and without enough people,” according to a second a source.

“From our experience, it could take up to nine months to obtain all the relevant authorizations to begin construction, so it’s likely that there might be a bottleneck with these resources,” says a third source.

The same goes for sponsors and their advisors. “We keep getting mandates and RFPs from local and international players for these new solar projects,” says a source at a law firm. “But our teams need to process tons of projects, they don’t have the capacity to do all of them.” He adds: “We would have to work 24 hours a day and even with that, it might not be enough to handle this pipeline.”

Cash mountain needed

Financing the projects is also going to be a major issue, with billions of euros of equity and debt needed for the purpose.

Based on cost estimates of EUR 900,000 to build 1 MW of capacity, sources envisage costs of between EUR 22bn to EUR 25bn to build the 30 GW of projects, around half of which could be debt.

This will rise to some EUR 36bn when accounting for the sub-50 MW projects due to be built, around EUR 20bn of which is expected to be funded by lenders.

Developers are turning to investors with deep pockets to raise equity to build projects. Some of the largest companies have moved forward with their work, including Iberdrola, which in January announced the signing of an alliance with Norway’s sovereign wealth fund, managed by Norges Bank Investment Management, to jointly invest in over 1 GW of new solar capacity in Spain. Iberdrola will keep a 51% stake in the overall EUR 1.2bn portfolio, which is mostly under development in Andalusia, Extremadura and Aragon.

X-Elio, another company which secured DIAs, is also undergoing an ownership change with fresh equity for new projects, confirming global infrastructure investors’ growing interest and willingness to inject cash for Spanish solar deals. On 21 March, KKR agreed to sell its 50% in the Madrid-headquartered renewable developer to co-shareholder Brookfield, which by year end will own 100% of the company. The deal values X-Elio at almost USD 2bn. It follows a greenlight in January to build one of the largest schemes in X-Elio’s portfolio, a 386 MW solar plant in Murcia, requiring a EUR 270m investment.

Sources expect this M&A trend to continue. “It’s not going to be just greenfield. M&A and acquisition of greenfield solar platforms in Spain are also going to become a very hot topic in the coming months,” according to a source linking the acquisitions to the splurge of new projects.

Recent examples include Lightsource BP, which earlier this year agreed to sell its solar PV portfolio in Spain to Spanish fund manager Plenium Partners. In March, the solar developer also said it has obtained clearance to build solar PV plants across Spain with a capacity of more than 1.6 GW and requiring an investment of more than EUR 1.2bn.

Infrastructure funds-backed Bruc Energy recently also took over several assets from Opdenergy, as part of a major 1.1 GW sale agreed in 2021. Bruc is backed by Spanish businessman Juan Béjar, USS and Canadian pension fund OPTrust. Another Canadian-backed investor, Canada Pension Plan Investment Board-backed Renewable Power Capital (RPC), in March partnered with Spanish renewables developer Euder to develop 1 GW of solar PV projects, bringing its development pipeline in the country to more than 4.4 GW.

Big players are selling minority stakes and plan to reinvest elsewhere, for instance in Latin America, a source says, adding that buyers are willing to pay “strong premiums” for buying assets.

There has been already mounting evidence of this in recent weeks, with OX2 appointing RBC to sell a 200 MW Spanish solar portfolio under construction, and Foresight acquiring a further early stage 470 MW solar and battery storage portfolio. Ferrovial also agreed to acquire two solar BDFOM projects with a 100 MW capacity from InfraRed Capital Partners in Andalusia.

Consolidation looming

Due to the “overabundance of players” in the sector, however, one source expects to see further concentration in the coming months. “The smaller players will become less relevant, and the market is likely to be dominated by the big, sophisticated players which are well capitalized,” he says.

Also, not all companies will be able to secure equity co-investors for the new wave of solar projects, nor will they have strong balance sheets for injecting initial capital. Therefore, they will need to raise debt.

It puts banks at the centre of this solar renaissance, says a senior banker, who predicts that lenders will be increasingly active in greenfield, refinancing and M&A processes for Spanish solar deals in 2023-2024. “Banks are very eager to take part in these processes,” he says, adding that institutional investors “also say that there is an acceptable risk for them to take”.

International lenders, for instance German ones, are seen as increasingly active in the Spanish market, which has been historically dominated by domestic lenders, the senior banker says. Debt financing of projects before ready-to-build stage is also on the rise, while the EIB will also continue to be a major lender. For example, Madrid-headquartered solar developer Solaria a few weeks ago agreed with the EIB to finance EUR 1.7bn for building its project portfolio, including 4.8 GW of assets in Spain.

Rise of merchant financing

Merchant financing will continue to grow in Spain. “There’s a role in contracted strategy, but the market is going more and more towards merchant financing,” according to a source. Sabadell was mentioned by various sources as one of the most active banks in this segment. A spokesperson for the bank told Infralogic that in total, Sabadell last year financed more than 750 MW of merchant financing deals and a further 450 MW so far in 2023, totalling more than EUR 570m in just over 15 months.

But other international banks, including French and German ones, and also institutional investors are turning their attention to merchant financing, sources agree. “It’s not just Sabadell, but lots of Nordic funds are becoming more willing to fund projects on a merchant basis. This is reflected in the new financing structures that we have seen, with high leverage and tenors of up to 30 years,” said a source.

For instance last September alternative asset manager Ben Oldman closed its first merchant solar financing in Spain, while Igneo’s Finerge and German asset manager Aquila Capital have also been linked to solar PV projects being financed on a merchant basis in the country.

Whether the overabundance of deals and players will create a bubble with prices rising too high remains to be seen. For now, sources don’t expect pricing to increase this year, as banks still perceive solar as a resilient sector, says the senior banker.

Meanwhile, sponsors have asked authorities either to reduce their targets or to extend the existing timeline. “We hope there will be some decision by the government to smooth this process a bit,” said a source.

There is widespread consensus that measures need to be taken by the government in this respect. There will probably also be a “natural selection” because the type of sponsors is quite diverse: “Some developers are strong and have the capacity and have been doing this for a long time. But some of the smaller developers will struggle with timing and eventually will not go ahead,” a source predicts.

As such, the output will depend on the final mechanism. In the meantime, the industry is waiting to see how much flexibility there will be in the government’s plans. Otherwise, they worry, this “will create an inflation of everything, and this will affect prices and returns.”

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