Gigascale Spanish renewables tender fails as price cap doesn't 'reflect real cost of energy'

Only a tiny fraction of 3.3GW on offer was awarded in Spain’s latest renewables tender as a price cap of around €47 ($49) per MWh failed by far to “reflect the real cost of energy”, the country’s wind energy association (AEE) claimed.

The slow pace of permitting and processing also contributed to the failure of the auction that meant to tender off 1.8GW of solar and 1.5GW of wind energy. only 46MW of new wind capacity was awarded.

The 'secret' price cap, which hadn't been communicated to developers, neither took into account the impact of inflation on the costs of new renewable installations, nor the prospects for future electricity prices, the AEE said.

“The higher prices of raw materials and logistics in the sector's supply chain, as well as accumulated inflation, have driven the increase in the values ​​of the offers made at the auction,” the AEE said in a comment.

“As stated by some of the main wind turbine manufacturers, the wind industry cannot be immune to the rise in the costs of raw materials and the logistics of transporting the components of this technology.

“Like any other productive sector, it cannot function in the red.”

Taking current and future cost inflation until 2025 into account, the price cap at the latest tender should have been about 53% higher, the AEE calculated.

With inflation rates until recently at around 2% or less per year, inflation so far had not been factored into European tendering schemes, and governments are only slowly waking up to the problem, while annual eurozone inflation has topped 10% recently.

In Latin American countries such as Brazil, which traditionally have been struggling with higher inflation rates, feed-in tariffs (FITs) granted in tenders are usually indexed to the local consumer price index to protect investors.

The lack of permits due to the slow pace of processing projects in Spain also was a factor in the failure of the tender, the AEE said.

Some 20GW of wind projects have not been processed in a timely manner, endangering Spain’s target to boost its wind power capacity to 40GW by 2025 (from 28.2GW in 2021), the association estimated.

The AEE demanded that the volume not awarded in the latest auction should be offered again in future tenders, once the price cap has been adjusted to the actual cost of energy and technologies.

'Other governments should take note'

WindEurope said it could only assume the price cap stood at around €47/MWh, but added it actually didn't know the exact level.

Developers at the same time also had to reflect current inflation, supply chain bottlenecks and high raw material and shipping costs in their bids, the industry lobbying body said.

"To make up for this lost auction, Spain must now ensure they get it right in the next one. Crucially they need to change the flawed “secret” price cap mechanism," WindEurope chief executive Giles Dickson said.

"And they must grant more permits for new wind farms. Up to 2,000 wind energy projects are stuck in permitting in Spain. Especially worrying: 19 GW of new onshore wind projects urgently need to get their Environmental Impact Assessments (EIAs) approved.

"If they are not approved before 23 January 2022, these projects have to start the EIA process again. That’ll delay them by 2-3 years.”

“All future auctions should also be indexed to reflect possible increases in commodity prices. That does not only apply to Spanish auctions. Other governments in Europe should take note of the higher costs for new wind projects as well."