Navigating Spain’s dynamic energy market: Unlocking value and opportunities for investors and developers

Recent events, including a significant power outage in Spain in April, have brought the stability of energy grids and the integration of renewable sources into sharp focus. The Spanish government’s report on the incident clarified that the blackout was not caused by a reliance on renewables, as initially speculated. Instead, it was attributed to a combination of factors. These included an “overvoltage” on the grid that triggered a chain reaction, insufficient voltage control capacity, and inability of the grid operator Red Eléctrica (Redeia) and certain conventional power plants to manage voltage levels and absorb overvoltage. Some disconnections of generators even occurred prematurely. The reality, highlighted by market trends in Spain, underscores a more nuanced challenge: addressing grid stability and storage needs.

Addressing grid stability and storage needs

Storage had already been gaining momentum and investor interest in the Spanish market, and the recent blackout further accelerated this trend. While hydro assets are very attractive, they are somewhat scarce, difficult, and slow to develop from scratch. This puts batteries at the centre of attention. Spain has ambitious targets to increase battery storage to 22 GW by 2030, further emphasising this opportunity. This focus on storage aligns perfectly with the need to enhance grid stability and manage the intermittency of renewables.

In this context, the government recently issued a Royal Decree. Even though it wasn’t ultimately validated in Congress, it at least helped alleviate the pressure of cliff dates for connecting renewable energy production plants. Projects gained the option to extend these deadlines during the month the decree was in force, and the new connection dates established are valid even without Congress validation. As the regulatory framework for energy storage is implemented in the Spanish market, we at Green Giraffe Advisory are actively supporting investments in both stand-alone and hybrid battery storage projects. We strongly believe that battery storage penetration is fundamental for market and system stability. Green Giraffe Advisory leverages its extensive experience and credentials in implementing these systems across Europe and other reference markets. Our team of experts is fully available to generate value for our clients in the Spanish market.

Optimising existing connections through hybridisation

A further important factor in the Spanish market is the penetration of solar energy. This has led to significant hourly price volatility and a steep deterioration of market price capture rates for PV. As a result, hybridisation is being discussed on all fronts to address these price fluctuations. Everyone is looking to optimise their existing grid connections by combining technologies. The goal is to produce an attractive baseload profile that can help unlock more attractive PPA prices, better sources of funding, and more attractive returns. Recognising this trend, Green Giraffe Advisory actively facilitates and advises on hybrid projects, blending technologies such as solar PV with storage or onshore wind to help clients maximise their asset efficiency and revenue potential. Green Giraffe Advisory’s market–competitive solutions are proven, as demonstrated by experiences like the Oya Energy BESS hybridised project in South Africa. This 128 MW co-located hybrid plant (wind, solar PV and lithium-ion batteries) has shown its ability to generate value as it outperforms fossil fuel projects on price while generating a stable base load production profile. 

Capitalising on shifting market dynamics and financing trends

A further consequence of the increased solar PV cannibalisation is the substantially broadened differential between solar and wind prices. This makes wind extremely attractive, but scarce. This trend has also led to a substantial gap in PPA prices offered by the market for PV versus wind, due to PV’s less attractive production profile and excess energy supply during daylight hours. Spain is also starting to see zero and negative prices appear, causing some players to suffer as certain PPAs do not properly address this in their settlement formulas. Despite these new dynamics and complexities, Spain remains a good market to gain exposure to merchant and corporate PPAs. This is due to its market depth, the number of sizeable projects, and the overall fact that Spain still has very limited negative prices compared to other European countries, both in terms of frequency and order of magnitude of the prices. 

What does all this mean for the financing front? We see that optimising existing structures and recycling capital are prominent trends. One major topic in debt is merchant financing for PV assets, with many players pursuing this while waiting for a PPA price recovery or hybridisation of their portfolios. The aim is to offer a more attractive base-load production profile to off-takers. While financing options exist, funders are prioritising portfolios with a mix of technologies. Subordinated debt is another way to optimise the capital stack given constrained capacity to raise high levels of senior debt for PV. A third option is exploring alternative lenders, who also offer interesting and attractive financing structures. For old assets with structures that are not optimised, significant uplift can be achieved via refinancings. Finally, HoldCo debt for platforms is a very active area in Spain as well. While the landscape is complex, Green Giraffe Advisory actively supports clients in navigating these financing challenges, structuring deals that appeal to funders and align with market realities. 

Strategic M&A and new growth sectors

On the M&A side, we see the market being flooded with PV sell-side projects, and M&A activity declining due to lower valuations. Nonetheless, the number of active players in Spain continues to expand. The second half of the year will also offer interesting wind opportunities as investors keen to rotate some of their mature portfolios in Spain and Portugal bring them to the market. Some of these opportunities offer an added expected value associated with hybridisation and repowering potential. 

Beyond traditional renewables and battery storage, data centres are a hot topic in Spain. Developers are looking to deploy capital into data centres as traditional sectors lose attractiveness. The focus is on real estate packing, then selling it all together to a technical expert in the data centre business. This new area of interest for renewable energy developers seeking to use their development expertise presents a significant opportunity. With our expertise in energy infrastructure, Green Giraffe Advisory is well-positioned to help facilitate connections and investments in this burgeoning sector. 

Furthermore, biogas from agricultural waste is gaining momentum, with many PV developers now looking to re-employ capital in the energy transition through this avenue. Spain has significant potential in this sector given its sizeable agricultural sector and only very few operating facilities compared to other European countries. We see biomethane opportunities increasing with funding requirements at the asset and platform levels. Green Giraffe Advisory offers a unique set of credentials and expertise in this field, including fully dedicated experts with extensive experience. We can guide clients on capital requirements, at the equity and debt levels, at both asset and platform levels, and provide strategic advisory in this sector based on replicable experiences in Europe. 

In conclusion, Spain’s energy market, while undergoing significant transformations, presents a wealth of opportunities for those who understand its intricacies. Green Giraffe Advisory can assist investors and developers in navigating these shifts, particularly in areas such as battery storage, hybridisation, strategic financing, and emerging sectors like data centres and biogas.