Finance for fully merchant projects take shape in Spain

Increasing flexibility in financing conditions for renewable projects in Spain due to available credit and competition between banks means developers of merchant plants that do not have power purchase agreements (PPAs) for their future generation can already seek funding in the market, delegates heard at a conference this week in Madrid.

Two Spanish banks, Sabadell and Bankia, have been closing finance transactions for fully merchant projects in the Iberian country. And other banks, while not yet following suit, have been more flexible with their terms and conditions, including financing projects involving PPA offtakers without investment grade.

"This year we have already financed 10 merchant transactions, seven of them without PPAs," Sabadell's head of project finance and specialised lending, Roger Font Garcia, told delegates at the Iber-REN event in Madrid this week.

One such transaction was a €29.7mn long-term loan for Spanish renewables firm Renovalia Energy Group to develop its 79.2MW El Bonal solar photovoltaic (PV) park in the country's central Castilla-La Mancha region.

Renovalia last month said it planned to reach similar deals for other projects of its 1GW pipeline in Spain, with PPAs to be signed only "under attractive pricing conditions and not as a requirement to secure financing".

Spanish banks until recently financed only regulated wind and solar PV power projects — including those that won capacity in Spain's 2016 and 2017 renewables auctions — or else merchant projects backed by PPAs. But terms and conditions for merchant financing were stricter, including the need for investment grade buyers and the preference for long-term PPAs of 10-15 years or more.

"We don't request any investment grade these days," head of renewable energy at Triodos Bank Vera Pereira said at the conference. Counterparties, however, still need to have "quite a good credit record" to secure financing, she said.

And while Triodos is still "a bit more conservative than Sabadell" and continues to focus on financing only PPA-backed projects, they are now more "open" to discuss more flexible PPA conditions, she said.

CaixaBank is more aligned with Triodos than Sabadell, but it has also improved financing conditions in recent years, global head of energy Jose Maria Arzac de la Pena said. Those include financing 20-25pc of the merchant risks associated with projects whose PPAs do not cover the full amortisation period.

Borrowers with a standard 10-year PPA, for instance, often have an amortisation period of 15 years or more, and Sabadell uses its own pricing models to calculate the merchant risks for the remaining years, Font Garcia said.

Sabadell derives a "low base-price floor" on its models that is "low enough for us to feel comfortable" with the financing terms and conditions, even in the case of 100pc merchant projects. But there are "issues" with long-term price risks in Spain, especially for solar PV projects, he said.

Long-term political and regulatory risks are particularly complex to price in, which means banks' finance departments have a "difficult" time convincing risk management colleagues to sign off loans worth tens of millions of euros, CaixaBank's Arzac de la Pena said.

Capture prices for both wind and solar PV power could drop sharply in Spain towards the end of the next decade, which would affect the return of investment of merchant projects being developed in the country, Finnish consulting and engineering firm Poyry principal in Spain, Javier Revuelta, said at the conference. Factors linked to the political sector, such as decisions on the nuclear phase-out in Spain and the implementation of technically challenging bi-national interconnection projects could have a significant impact on future power prices.

Different costs, old preferences

While financing fully merchant projects is already possible in Spain, costs are higher in comparison with deals for PPA-backed projects.

"Lenders are willing to finance merchant projects, but the financing conditions can be enhanced by PPAs," investment banking and financial services firm Global Capital Finance Europe director Victoria Wagner Mastrobuono told delegates.

Terms and conditions, including interest rates, amortisation periods and banking fees, are all different for pure merchant projects.

"It's a new market and, as usual, there's a premium," founder and managing director at investment advisory and financial services firm CleanTech Capital Winfried Weigel said.

And despite the recent flexibilisation, the banking sector still has a marked preference for financial PPAs — those that do not involve the physical delivery of power — and for investment grade counterparties, delegates heard.

"Physical PPAs, particularly when they have volume risks associated to projects, are probably the most complex," ABN AMRO Bank project finance executive director Lisa McDermott said. "Financial PPAs are commoditised much more quickly."

But while the possibility of receiving finance for fully merchant projects are clearly positive for renewable developers, wouldn't the absence of a need for PPAs affect power retailers — the ones that have been the main PPA offtakers in Spain?

"If banks were offering finance to merchant projects exactly under the same conditions as to projects with PPAs, then yes, this could be a problem," Spanish utility Holaluz PPA lead and chief legal officer Daniel Perez told Argus.

Small and medium-sized utilities will rather benefit from the increasing competition between banks, since most of these companies do not have investment grade, Perez Rodriguez said.

"We need to first see more banks financing projects with PPAs that are not very bankable in the first place before more of them move to pure merchant financing," he said.