Spanish failure should alarm policymakers

Spain wanted to award support for renewables projects totalling 3.3GW in its 2022 tender, where the results were published on 22nd November. It achieved just 1.3% of that: four projects totalling 45.5MW.

This must be a wake-up call for policymakers.

The reason for this failure is simple: inflation. Wind turbine makers have spent most of 2022 warning that the cost of producing turbines is going up, because raw materials, power, fuel and money are getting more expensive. It is costlier to buy wind turbines than it has been since at least 2017, which is raising costs for developers. Governments cannot assume wind is as cheap as it has been.

WindEurope warned that the Spanish government’s tender failure is the result of two main factors.

First, it had a ‘secret’ ceiling price, meaning developers didn’t know how much they would have to bid to even be in contention. And second, the ceiling price appears to have been around €47/MWh, which doesn't reflect development costs in today's market. Developers could not cover their costs at this level.

Development distress

This is a sign that the pain being felt by European turbine makers is spreading to developers. Turbine makers are having to be more selective about the deals they bid for and are charging more for the orders they are winning. This has a knock-on effect on developers, who have seen the levelised cost of energy rise at their projects. If developers cannot build projects at the tender levels set by governments, then we would expect more of those developers to struggle too.

The ’lost’ Spanish tender of 2022 should be a warning to other governments, in the European Union and beyond, that they must reflect where the market is today. If they ignore inflation then we can expect more tender failures.

For example, the German wind energy association has warned Germany is at risk of repeating the Spanish mistake because the ceiling price in its upcoming tender is too low.

There is no doubt that governments are aware that inflation is a problem: it is the biggest challenge that most of them currently face. But they need to bring this commercial reality to bear when it comes to setting their auction prices.

Of course, we can understand why many governments have been slow to catch up. They have become used to the idea that renewables can keep driving down costs; and can offer power far cheaper than other sources. This is still true to an extent, as wind is highly competitive compared to other sources of energy.

But catch up they must. These countries need renewables to help reduce the cost of energy for consumers, and hit long-term environmental targets. Yet they are only going to achieve this if developers can build projects that still turn a profit. If governments don’t respond, developers will see their project pipelines wither.

With Spain’s failed tender, policymakers can’t claim they haven’t been warned.

And as for Spain, the capacity it failed to award in this 3.3GW tender – all 3.25GW of it – will be added to its 2023 tender. In that respect, the capacity that wasn’t awarded this time might be next year, if the government can fix its flawed tender model. But it will still be a major blow, as awarding support for 3.25GW more wind and solar projects now would make a major contribution in helping Spanish energy users.

WindEurope made another warning too. It said there are 2,000 wind projects that are currently stuck in Spain’s permitting process, and that 19GW of them need to gain environmental impact assessments by 23rd January or face having to resubmit, with potential delays of two or three years. Spanish wind’s issues are far bigger than the failed 2022 tender, but getting the rules right for next time must be a priority.

This shows that policymakers are affected by inflation too.