Covid-19 may have dealt the final blow to Iberia’s collapsing coal-fired power fleet, opening the way for a rapid acceleration of wind and solar deployment on the southern European peninsula.

Spain shuttered seven of its 15 plants in June and it is expected to close most of the remainder by 2022. The closures come eight years earlier than the phase-out deadline set by the government.

For Spain, the EU’s banning of national subsidies for the sector put coal on the ropes. Pummeled by stubbornly high prices for carbon allowances and expensive retrofitting requirements under Europe’s industrial emissions directive, coal plants saw themselves running ‘out of the money’.

Portugal, meanwhile, planned to close its last two coal plants by 2022 – before lower power prices brought on by the Covid-19 outbreak accelerated the situation.

"Coal plants have proportionally been the most affected by the pandemic in Iberia. I don't think the economics will allow coal plants to stay on the grid much longer. Most of them will be shut by end-2022. That is around 7GW of generation capacity," said Paul Marty, senior vice president with analyst group Moody’s.

But it is not just coal plants that have come under pressure. Spain’s ageing nuclear fleet is also expected to start coming off the grid as early as the middle of the decade. This, after nuclear last year had the largest share in the country’s power generation with 22%, according to grid operator REE, operating installed plant capacity of over 7GW.

“Spain’s nuclear power plants are quite old and the government’s position is that they will not extend their lifetimes again. The phase-out will take time to fully complete, but a number of reactors – around 4.2GW – will retire in the coming years,” said Pablo Dorronsoro, a Madrid-based partner with law firm Pinsent Masons.

Opportunity for renewables

The retirement of coal plants – followed by nuclear – opens up a huge opportunity for renewable energy.

In Spain, wind power has so far accounted for more than 800MW of new capacity in 2020 and now has the second largest share in the electricity mix after nuclear, according to REE. Last year, wind supplied 21.5% of Spain’s electricity.

Moody’s expects Iberia to see 18GW of new renewables capacity installed between now and 2025, of which 6GW will be onshore wind and 11GW solar. Annual investments of €17bn ($20bn) are foreseen coming from developers such as Iberdrola, Endesa, EDP and Naturgy, all moving up the gears in their respective energy transitions and drawn by low interest rates coupled with plenty of policy support at EU level.

And new entrants, including oil companies Repsol, BP and Total are also appearing on the Iberian stage.

“Ten years ago, investment in renewables was dominated by five or six large utilities. Now the market has opened up and there are more actors, particularly in solar but also in wind,” said Dorronsoro.

Spain’s wind and solar sector boomed in the early 2000s, fuelled by generous feed-in tariffs that ultimately became too expensive to maintain. The government introduced radical changes to the support schemes for renewables in 2013, and, as a result, investment fell away sharply.

Since, however, the levellised cost of energy of wind and solar has been dramatically reduced, with band investors now willing to bet on wholesale power prices and, increasingly although from low base levels, power purchase agreements (PPAs) to see returns on their investment.

We are talking about different risks than before, market risks not regulatory risks.

“Today, most players in the market are investing in merchant projects that rely on the pool price or PPAs. We are talking about different risks than before, market risks not regulatory risks,” said Dorronsoro.

The increasing share of renewables on the grid is putting downward pressure on wholesale power prices and cutting into investor returns. In response, the Spanish government last month approved a new set of renewable auction rules with bids for contracts of up to 20 years, to protect investors from fluctuations in power prices.

"There are question marks over economics. In the last Spanish renewable auction in 2017, bidders did not ask for subsidies but wholesale prices now are much lower," said Coralie Laurencin, director for European power and renewables at IHS Markit.

"Our view is that the reliance on the pool price will change," said Laurencin, with the resumption of renewables auctions likely to be accompanied by capacity auctions for gas-fired generation.

Lower prices have also pushed gas plants off their perch but capacity payments could help keep them on the grid, given that their relatively low CO₂ emissions would be more immune to the impact of higher EU carbon prices.

"In the short term, gas-fired plants can replace most of the generation capacity from coal. Spain has around 28GW that are partly idle with only around 35% of the capacity currently used. But from 2027, Spain's nuclear power plants will also start to be phased-out which will leave a gap to fill," said Marty.

Floating wind potential

Spain has big potential for floating wind, but the regulatory framework is still in the making with a draft strategy paper expected sometime next year. There are clear signs of progress though, with German developer RWE teaming up with Saitec, on a 2MW pilot project off the Basque Coast and developers Greenalia and Equinor have nascent plans for a utility-scale project offshore the Canary Islands in the Atlantic.

Research carried out at the University of Lisbon as part of the EU’s ArcWind project, calculates using a GIS-based approach to development could lead to 33 floating wind farms off Portugal and Spain with an installed capacity over 18GW that would supply electricity to 13 million homes and save 26 million tonnes of CO₂ emissions.

Nevertheless, onshore developments seem lower hanging fruit for Spain as there is plenty of available land and limited public opposition compared with some other European countries.

Marty thinks offshore wind is a “more distant prospect” for Spain, given “there is plenty of space for onshore wind which does not face the same constraints when it comes to the 'not in my backyard' approach as in other countries like Germany”.

Portugal’s situation is somewhat different. The country is also phasing out coal, but new onshore wind projects seem few and far between, with the ten-year national energy and climate plan it submitted to the European Commission stating the focus would be on re-powering existing wind farms, as well as building hybrid plants marrying wind, solar and energy storage.

Portugal nevertheless targets around 4GW of new wind capacity by 2030, which would take the total to 9.3GW including 300MW offshore wind. The country’s – and in fact the Atlantic Ocean’s – first floating wind project, the 25MW WindFloat Atlantic, developed by a consortium consisting of EDP, Engie and Repsol, began operating off the country’s northern shore late last year.

The target for PV is also set high: 9GW by 2030, up from 2GW now.

Hydrogen in the spotlight

Spain’s official target is for 74% of electricity to be produced by renewables by 2030, while Portugal targets at least 80%. The vast growth in renewables presents opportunities for green hydrogen production in the longer term

The two nations recently announced that they want to utilise the existing gas network to transport green hydrogen in the future. Portugal targets around 2.5GW of electrolysis capacity by 2030, Spain has the goal of 4GW. In early October, Spain approved a hydrogen roadmap which sets an interim target of 300-600MW by 2024.

Some projects are beginning to show progress. Iberdrola and fertiliser company Fertiberia recently announced plans for a 100MW electrolysis plant in Puertollano that would be powered by solar power and could be operational by 2021.

With so much wind and solar being built, it seems like Iberia will finally fulfil much of its renewables potential this decade.

This will also benefit other nations in Europe as Iberia is strengthening interconnection capacity with France. The EU-backed subsea cable through the Bay of Biscay will almost double the exchange capacity between the two nations to 5GW when commissioned in 2025.

But the rapid acceleration of renewables also brings about challenges, not just on the operational side but also for investors in the energy sector.

"From 2025 on certain days in Iberia all demand will be met by renewables. This is good from a decarbonisation point of view but not from a business point of view as it puts downward pressure on power prices," said Laurencin.

It seems the quicker Iberia can roll-out a green hydrogen economy, the quicker it will eliminate some of these challenges.

Transition

'Shut by 2022': Covid the final blow to Iberian coal as peninsula embraces green future