Renewable Energy 2018 : Spain

By Gonzalo Olivera and Alberto Artés King & Wood Mallesons’ Madrid group.

Market framework

1.Who are the principal government participants in the electricity sector? What roles do they perform in relation to renewable energy?

At state level, the Ministry of Energy, Tourism and Digital Agenda (MINETAD) is in charge of proposing and executing government policies in relation to energy.

Among other functions, the MINETAD is responsible for adopting the necessary measures to secure the supply of electricity and the economic and financial sustainability of the electric system. The establishment of the National Energy Plan and of an economic regime for those facilities entitled to regulated remuneration are also part of the MINETAD’s duties. Furthermore, the MINETAD’s role also includes granting the relevant authorisations for facilities (i) with an installed capacity of more than 50MW; (ii) when they affect the territorial scope of more than one autonomous community; and (iii) when they are off- shore in the territorial sea.

Broadly speaking, autonomous communities are in charge of developing basic state-level legislation. They also grant the necessary authorisations when the electric infrastructure solely affects their territory unless such authorisations are expressly reserved for the MINETAD as explained in the paragraph above.

At municipal level, town councils are in charge of granting the necessary works and activity licences for the installation of the facilities.

The National Commission for Markets and Competition (CNMC) is the independent regulator in charge of supervising and controlling the proper functioning of the electricity sector. The CNMC also over- sees the degree and effectiveness of market openness and competition in both the wholesale and retail markets. The CNMC has been vested with several functions for these purposes, the main ones being:

• consultancy functions (it has to issue obligatory reports in relation to regulations, authorisation, amendment or dismantling procedures for electric installations, energy planning, economic regime, quality of supply, etc);
• conflict resolution (access to the network); and
• imposing disciplinary measures.

Red Eléctrica de España, SA (REE) is the sole transmission agent and system operator (TSO) for the Spanish electricity system. Among other duties, it is responsible for guaranteeing the continuity and security of the electricity supply, for ensuring proper coordination between generators and the transport and distribution networks, and for operating and managing the transmission grid. REE is a company partially owned by the state (20 per cent).

OMI-Polo Español SA (OMIE) is the electricity market operator. It manages the wholesale electricity market for the Iberian Peninsula (Spain and Portugal), where market agents trade the amounts they need (MWh) at transparent prices. OMIE also carries out the invoicing and settlement of the energy traded on these markets and oversees the corresponding financial settlements. In addition, the Iberian Energy Market Operator (OMIP) (Portuguese Division), SGMR, SA manages the futures market (forward and derivatives) on the Iberian peninsula.

2. Who are the principal private participants in the electricity sector? What roles do they serve in relation to renewable energy?

In the liberalised market context of the electricity sector, though subject to a high degree of regulation, all operators are private (except for the 20 percent stake held by the state in the TSO (REE) as explained in question 1).

The CNMC publishes an annual list of the principal operators in the electricity market; that is, those operators with the five highest market shares. According to its Resolution of 6 October 2016, the principal operators are currently Endesa, SA, Iberdrola, SA, Gas Natural SDG, SA, Hidroeléctrica del Cantábrico, SA and Viesgo Infraestructuras Energéticas, SL. These are all vertically integrated groups and thus have interests throughout the whole electricity supply chain (generation, distribution, trading, etc).

Other players in the renewable electricity sector are independent generators (not vertically integrated) such as Abengoa, Eolia, Renovalia, Fotowatio, T-Solar, Gestamp, etc. The pioneering development of renewable energies in Spain has also contributed to the rise of many other Spanish companies that have become world leaders in project development or equipment manufacturing, such as Cobra, Acciona, Grupo Clavijo and Gamesa.

Investment funds and investors of a different nature (pension funds, etc) also play a key role by investing in the share capital of generation or distribution companies and traders. These funds and investors include KKR, Brookfield, First State, Macquarie, Oaktree and Cerberus, among many others.

3. Is there any legal definition of what constitutes ‘renewable energy’ or ‘clean power’ (or their equivalents) in your jurisdiction?

Article 2 of Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 (Directive 2009/28/EC) defines ‘electric energy from renewable sources’ as electric energy coming from renew- able non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogasses. This definition is further developed in article 2 of Royal Decree 413/2014, which mainly includes the technologies set forth in the Directive.

4. What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

Spain’s renewable electricity regulations are governed by the common framework for the generation and promotion of renewable energy established by the European Union, mainly Directive 2009/28/EC, which establishes national targets for each member state on renew- able energy generation, reduction of greenhouse effect gas emissions and energy efficiency. It also requires member states to introduce support schemes and measures of cooperation between different member states and with non-member states in order to achieve their national targets.

At state level, such policies and legal regimes are mainly implemented in Spain through:

• Law 24/2013, of 26 December, on the Electricity Sector (LSE);
• Royal Decree 413/2014, of 6 June, on electricity generation by means of renewable, cogeneration and waste facilities (Royal Decree 413/2014);
• Royal Decree 1955/2000, of 1 December, on regulation of trans- port, distribution, commercialisation, supply and authorisation procedure for electricity facilities (Royal Decree 1955/2000);
• Royal Decree 900/2015, of 9 October, regulating administrative, technical and economic types of electricity supply and generation with self-consumption (Royal Decree 900/2015);
• Royal Decree 2019/1997, of 26 December, organising and regulating the electricity production market; and
• Order ITC/1522/2007 of the MINETAD, regulating guarantee of origin certificates (Order ITC/1522/2007).

Most autonomous communities have also passed legislation developing several issues of state legislation in relation to the authorisation process in their territories.

Town councils also have their own regulations regarding the issuance of works and activity licences.

Environmental and town planning regulations (which are mainly developed at autonomous community and town council levels) also have to be taken into consideration when developing a renewable energy project.

5. Can environmental attributes be stripped and sold separately?

As regards environmental attributes, Order ITC/1522/2007 regulates the guarantee of origin certificate, which can be sold to traders to justify the use of renewable energy. Guarantee of origin certificates are issued for each 1MWh and can be transferred by generators to traders or direct final consumers.

According to Order ITC/1522/2007, generators are the only ones that can export these certificates to other countries, but this entails them waiving the economic incentives for the energy produced associated with that certificate.

6. Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

Yes. In general terms, under the Spanish incentive scheme, renewable power generators (i) sell the electricity they generate into the Spanish wholesale market and receive market price for such sales; and (ii) also receive additional regulated payments during their respective regulatory lives (eg, 20 years for wind farms and 30 years for solar photovoltaic facilities, starting on the commissioning operation date).

Renewable energy generators receive the following regulated payments in addition to the market price:

• remuneration for the investment, which is intended to compensate for investment costs in renewable installed capacity that cannot be recovered through the market price. This remuneration is based on the investment costs that an efficient and well-managed company cannot recover from the market (based on technology-dependent standards). The set of standard parameters includes a standard value of initial investment; and
• remuneration for the operation, which is intended to compensate for the difference between operating costs and operating income. This is also determined by reference to technology-dependent standards, including a standard value of operating costs.

Royal Decree-Law 413/2014 provides for the review of the remuneration scheme by establishing statutory periods of six years. Each statutory period is divided into two three-year regulatory sub-periods. At the end of each regulatory sub-period, the MINETUR may amend the remuneration for investment to reflect:

• changes in expected future wholesale electricity prices, with a corresponding adjustment to remuneration for investment; and
• deviations in actual wholesale electricity market prices (as deter- mined and published by the CNMC) as against expected future wholesale electricity market prices as established during the previous regulatory sub-period.

The regulation provides for lower limits (LI1 and LI2) and upper limits (LS1 and LS2), as determined by the MINETUR, which govern how potential deviations from the estimated wholesale market price may be reflected in remuneration for investment in subsequent regulatory sub-periods.

Generators bear the market risk with respect to any portion of the actual market price that falls within the first band (between the estimated wholesale market price and LS1 or LI1), meaning that there will be no adjustment to remuneration for investment for the upcoming regulatory sub-period.

With respect to any portion of the actual market price that falls between LS1 and LS2, half of the difference between the actual pool price and LS1 will be reflected in the adjustment (as a decrease) in the next regulatory sub-period. Conversely, for an actual pool price that falls between Ll1 and Ll2, half of the difference between the actual pool price and Ll1 will be reflected in the adjustment (as an increase) in the next regulatory sub-period.

With respect to any portion of the actual market price that falls above LS2, the full difference between the actual pool price and LS2 will be reflected in the adjustment (as a decrease) in the next regulatory sub-period. Conversely, for an actual market price that falls below Ll2, the full difference between the actual pool price and Ll2 and half of the difference between Ll2 and Ll1 will be reflected in the adjustment (as an increase) in the next regulatory sub-period.

The above-described remuneration scheme is intended to allow each standard renewable facility to achieve a pre-determined pre-tax rate of return over that facility’s regulatory life (reasonable return). The specific determination of the reasonable return is fixed in the corresponding regulation approved at the beginning of each regulatory period based on the average yield on Spanish 10-year bonds on the secondary market in the 24 months preceding the month of May prior to the commencement of the new regulatory period.

However, for the first regulatory period (until 31 December 2019), Royal Decree 413/2014 established that (i) the reasonable return for new installations was determined by reference to market yields for the 10-year Spanish government bond calculated as the average of the months of April, May and June of 2013 plus a spread of 300 basis points (which resulted in a rate of return of 7.503 per cent); and (ii) the reasonable return for existing facilities in the first regulatory period was determined by reference to market yields for the 10-year Spanish government bond during the 10 years prior to 14 July 2013, plus a spread of 300 basis points (which resulted in a rate of return of 7.398 per cent).

In addition to economic incentives, other policies that promote the development of renewable energies in Spain are the following rights granted to renewable generators:

priority of access to the grid. Renewable energy generators have priority over other operators to access and connect to transmission and distribution networks; and

priority of dispatch of electricity generated in the wholesale market. Under equal market conditions, renewable energy generators have priority over other conventional generators to deliver their electricity in the wholesale market.

7. Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Renewable energy incentives are established at state level (economic incentives, priority of access, priority of dispatch). In Spain, the MINETAD is the body with exclusive competence to determine the economic regime for those facilities entitled to regulated remuneration, such as renewable energies installations.

8. What mechanisms are available to facilitate the purchase of renewable power by private companies?

In order to facilitate and promote the purchase of renewable power by private companies, the European Union enacted Directives 2001/77/ CE and 2004/8/EC, which were subsequently transposed into national law by Order ITC/ 1522/2007 of the MINETAD.

As explained in question 5, these regulations promote the use of a guarantee of origin certificate which assures that a certain number of kilowatt hours of electricity produced in a plant within a given period of time have been generated from renewable energy sources or high- efficiency cogeneration.

The guarantee of origin certificate can be transferred to traders, who can justify the ‘green’ nature of the electricity they sell.

9. Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

The LSE and Royal Decree 413/2014, which develops the LSE, represent the most notable legislation recently enacted in reference to renewable energies. The approval of the LSE was part of the structural reform of the electricity sector included in the Council Recommendation on the 2013 National Reform Programme  of  Spain, approved by the Council of the European Union on 9 July 2013.

The LSE and its developing regulation profoundly reformed the previous framework in relation to renewable energy and the electricity sector. The depth of this reform means that there has been no notable pending legislation or proposals since 2014. However, the possibility of further changes cannot be completely discarded.

Current self-consumption regulations in Spain have not properly fostered the development of these projects (see question 21 below) and thus in the near future such regulations should be amended to intro- duce the appropriate incentives to develop this area. Additionally, smart grids, microgrids and distributed generation should be devel- oped to a greater extent.

10.What are the biggest drivers of change in the renewable energy markets in your jurisdiction?

The main driver of change is the progressive decrease of CO2 and greenhouse gas emissions pursuant to the necessary compliance by Spain with its international commitments. Spain must also reach its national targets on installed renewable capacity as established by EU Directives and this could act as an important incentive to the further development of renewable energies.

Among other consequences, these commitments will entail a development of the self-consumption regime, which promotes the installation of small generators that produce renewable energy in venues where there is the capacity to produce energy. These facilities are controlled by their owners, which often complicates the operation of the regular system. As stated, the current regulations do not promote self-consumption, but in the near future this will become a key area for development.

Fulfilment of international commitments could also imply further support for electric vehicle regulations (there are currently local regulations incentivising the use of electric vehicles).

The Spanish TSO (REE) is also carrying out significant sustain- able energy initiatives that may become an important incentive for the development of renewable energies. In its infrastructure planning for 2015-2010, REE foresees:

• the strengthening of interconnections to improve the guarantee and security of supply and achieve a greater integration of renewables (both internationally and between islands);
• the increase of a safer integration of renewable energies to con- tribute to the reduction of air pollutant emissions and to reduce dependence on foreign sources of energy;
• the construction of new facilities in order to increase transmission capacity, improve grid meshing and facilitate connections between electricity systems; and
• several other initiatives in relation to energy storage, smart grids and self-consumption.

11. Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

Pursuant to the Operation Rules of the wholesale electricity market for the Iberian Peninsula (Spain and Portugal) managed by OMIE, any disputes arising in relation to the application of these rules must be settled through an arbitration proceeding under UNCITRAL rules.

However, the CNMC will resolve any disputes that may arise in connection with access to the transport or distribution network or conflicts related to the technical or economic management of the system.

Market participants may also challenge authorisations, permits and concessions, and any administrative resolutions in an administrative proceeding before either the administrative authority that issued them or the relevant superior administrative body. They can subsequently be challenged before the competent courts, which may be the Superior Court of Justice of an autonomous community, the Supreme Court, or lower courts, depending on the specific administrative resolution being challenged.

Foreign investors may also try to resolve any dispute through arbitration pursuant to the Energy Charter Treaty (ECT), to which Spain is a signatory country. The ECT seeks to protect foreign energy investors against key non-commercial risks (eg, discriminatory treatment, direct or indirect expropriation, or breach of individual investment contracts). The ECT includes a ‘fork in the road’ provision by which an investor has to choose whether to submit the dispute to a domestic legal proceeding or to an international arbitration proceeding under the ECT.

Utility-scale renewable projects

1. Describe the primary types and sizes of existing and planned utility-scale renewable energy projects in your jurisdiction.

The primary types of renewable energy projects in Spain are wind power and hydropower facilities. Notwithstanding this, hydropower facilities of more than 10MW are not considered renewable for the purposes of Royal Decree 413/2014 and do not have access to the economic incentives established therein.

According to the REE Annual Report of 2016, 22.8 per cent of the total installed capacity in Spain is wind power electricity and 20.3 per cent comes from hydropower facilities (including both mini-hydros (up to 10MW) and larger facilities). Furthermore, solar photovoltaic energy amounts to 4.4 per cent of total installed capacity, with solar thermal accounting for 2.3 per cent.

Project sizes vary depending on the renewable technology but it can generally be stated that wind farms, solar thermal and solar photovoltaic facilities are usually of a maximum of 50MW (because of the provisions of the former regulation, in force until 2013), while hydro- power facilities are of less than 10MW (to access economic incentives for renewables).

Renewable energies increased their overall share in electricity demand coverage from 36.9 per cent in 2015 to 41.1 per cent in 2016. This increase mainly resulted from the 25.1 per cent increase in hydro- electric production compared to 2015. Likewise, wind power grew by1.7 per cent and was the second renewable generation source in 2016.

2. What types of issues restrain the development of utility-scale renewable energy projects?

The main issues that may restrain the development and profitability of renewable energies are:

• lack of legal certainty. From 2008 to 2013, different government measures led to a profound reform that affected the remuneration of existing and future renewable facilities, cutting their incentives. This resulted in great regulatory uncertainty and instability and affected investor trust. Some of them have not yet recovered from this situation;
• low regulated incentives. Access to the current regulatory scheme is obtained through competitive public tender processes. The government launches these processes and there is no certainty as to when this will happen. Tender processes to date have ended with a result that no incentive (or very low) will be granted to the projects and most of their remuneration comes from market price, prevent- ing non-mature technologies from being awarded capacity and thus preventing them from being developed;
• installed capacity versus electricity demand. There is currently an excess of installed capacity in Spain, much of which is under- used. This can also slow down the installation of new renewable power; and
• economic context. The development of renewable energy projects may also be affected by general economic conditions that positively or negatively influence electricity demand.

Hydropower

1. Describe the primary types of hydropower projects that are prevalent.

Large hydropower projects in Spain mainly fall within three categories:

(1) Impoundment plants

Impoundment plants use a dam to store river water in a reservoir. Water released from the reservoir flows through a turbine that activates a generator to produce electricity. Water may be released either to meet changing electricity needs or to maintain a constant reservoir level.

(2) Pumped storage plants

Pumped storage plants are similar to impoundment plants but with the capacity to store energy by pumping water uphill to a reservoir at a higher elevation from a second reservoir at a lower elevation. During periods of high electricity demand, the water is released back into the lower reservoir and activates a turbine, generating electricity.

(3) Run-of-the-river plants

Run-of-the-river plants are those with little or no reservoir capacity, and usually do not require the use of a dam. Only upstream water is available for electricity generation at any particular moment and any oversupply cannot be stored.

The main types of mini-hydropower plant (not more than 10MW) are run-of-the-river plants and impoundment plants, together with hydropower plants on irrigation channels.

2. What legal considerations are relevant for hydroelectric generation in your jurisdiction?

All necessary authorisations from an electricity regulation point of view must be obtained for the construction of a hydroelectric plant, including its evacuation infrastructures (see question 24 below).

In addition, according to article 52.1 of the Spanish Water Act, the right to private use of the public water domain, whether or not consumptive, is acquired by legal provision or by administrative concession for a maximum term of 75 years.

The specific fees that hydropower plants are obliged to pay represent another relevant issue to take into consideration:

A yearly fee for the use of hydraulic public domain goods (water- course and riverbed). The amount of this fee depends on whether there is an occupation of the hydraulic public domain soil, or whether there is a use of the hydraulic public domain (non- consumptive use) or a use of public domain goods.

A yearly fee for the use of continental waters to generate electricity (hydroelectric plants), the entity holding the relevant concession at any time being liable to pay such fee. The taxable base of the fee is determined by the River Basin Authority and represents the economic value of the hydroelectric energy produced by the concessionaire through the use of said waters in a given annual taxable period. The annual tax rate is 25.5 per cent, reduced by 92 per cent for those hydroelectric plants with an installed power equal to or less than 50MW and by 90 per cent for pumped-storage hydroelectric plants of more than 50MW.

Distributed generation

1. Describe the prevalence of on-site, distributed generation projects.

The distributed generation system is a set of electrical generation systems that are connected to the distribution networks and characterised by their low power and an energy production plant close to the consumption point. Spain has a highly centralised electrical scheme and distributed generation has so far been developed mainly through small self-consumption facilities.

Royal Decree 900/2015 of 9 October regulates the administrative, technical and economic conditions of the supply of electric energy in relation to production of energy and self-consumption.

The LSE and Royal Decree 900/2015 establish two types of self- consumption model:

• type 1: supply with self-consumption. This applies to installations equal to or less than 100kW. Electricity production is generated only for self-consumption purposes. Any surplus can be exported to the grid but it is not remunerated with financial compensation; and
• type 2: generation with self-consumption. This applies to a consumer in a single facility or supply point that is associated with one or more production facilities connected within its grid, or that shares connection infrastructure with it or is connected to it. The surplus generated electricity can be exported to the grid and is remunerated with financial compensation.

According to the MINETAD, approximately 2 per cent of electricity consumption in Spain is produced through self-consumption. It is also worth noting that several sources cite an annual increase in self- consumption installed capacity in Spain of approximately 50MW.

2. Describe the primary types of distributed generation projects that are common in your jurisdiction.

The main technologies of self-consumption in Spain are photovoltaic and cogeneration, with a presence not only in the domestic market but also in agriculture (irrigation systems), livestock, industry, and so on. There are also other technologies used for self-consumption purposes such as wind power or mini-hydro, but their presence is minor in comparison with photovoltaic and cogeneration.

Royal Decree 900/2015 banned collective self-consumption projects (condominiums, buildings, etc). However, the Spanish Constitutional Court lifted this ban on 25 May 2017. In the short term, it will continue to be difficult to develop collective self-consumption schemes in practice given the other administrative barriers included in the same Royal Decree that remain in force (see question 18).

However, in the medium and long term, this resolution of the Spanish Constitutional Court opens the door to fostering collective self- consumption in Spain.

3. Have any legislative or regulatory efforts been undertaken to promote the development of microgrids? What are the most significant legal obstacles to the development of microgrids?

In general terms it can be stated that there is a lack of regulatory development to promote microgrids, which represents one of the main obstacles to their development.

In this sense, it is important to note that the LSE and Royal Decree 900/2015 were theoretically aimed at fostering self-consumption. However, the regulation established multiple administrative barriers to the installation of self-consumption facilities. The administrative procedures for installing self-consumption facilities and utility-scale projects are almost the same.

Thus, current regulations do not provide any incentives for the tar- get developers of self-consumption facilities (domestic customers and small businesses) not only because of the complexity of the procedure itself, but also owing to its costs in comparison with its benefits. In addition, Royal Decree 900/2015 introduces financial obligations for self- consumption generators (the sun tax), which further discourage the development of these projects.

As stated, the ban on collective self-consumption schemes constitutes another important barrier to the development of self-consumption.

4. What additional legal considerations are relevant for distributed generation?

Significant regulatory development in this area can be expected in the short term. Many operators are already investing efforts and resources in distributed generation issues and regulations should be implemented in short order to provide appropriate incentives for the development of distributed generation.

Energy storage

1. What storage technologies are used and what legal framework is generally applicable to them?

Depending on the amount that is intended to be stored, the main ways of storing energy are as follows.

(1) Large-scale storage: reversible hydroelectric (pumping) and thermal storage

According to the Energy Foundation of the autonomous community of Madrid, the total installed capacity of pumping hydroelectric facilities in Spain amounts to more than 8,100MW.

Spain also has thermal storage in CSP cylinder parabolic trough power plants. These plants have a full thermal reservoir that can continue to run turbines at full load for several hours.

(2) Storage in networks and end user storage: batteries, domestic batteries, capacitors and superconductors

REE has implemented the Almacena project as regards batteries, which consists of an electrochemical energy storage solution connected to the general network as well as the installation of a prototype flywheel in the Canary Islands. REE also intends to construct a reversible hydro- electric plant on the island of Gran Canaria between the reservoirs of Soria and Chira.

The regulations applicable to energy storage projects do not differ from the general framework. Storage facilities (both large-scale and end user (batteries, etc)) depend on the power plant of which they are part. Therefore, the relevant authorisations and legal framework are included within the authorisation process for power plants.

2. Are there any significant hurdles to the development of energy storage projects?

In principle, the only hurdle to the development of energy storage projects aside from their cost and financing would be Royal Decree 900/2015, which regulates certain aspects in relation to the self- consumption of energy through solar photovoltaic energy and its stor- age through batteries.

Royal Decree 900/2015 allows for the use of storage batteries. However, batteries cannot be used to decrease the contracted power capacity of domestic consumers and therefore payment for their connection to the grid continues to be obligatory. As stated, Royal Decree 900/2015 also introduces financial obligations (eg, sun tax) for these projects, including those using energy storage. Only projects that are fully disconnected from the grid would be exempt from these financial obligations.

The foregoing has so far had a cooling effect on the development of these low-scale or domestic energy storage projects.

Foreign investment

1. May foreign investors invest in renewable energy projects? Are there restrictions on foreign ownership relevant to renewable energy projects?

Foreign investments in renewable energies in Spain are not subject to any restrictions and, in fact, there has been a great amount of foreign investment in Spain in this area. Only under very exceptional circumstances (investments in renewables located in the Spanish islands or in non-mainland electricity systems) could the MINETAD impose certain obligations on foreign investors to guarantee the supply of electricity.

2. What restrictions are in place with respect to the import of foreign manufactured equipment?

It is important to distinguish between imported goods within the European Economic Area and goods from third countries. In relation to imported goods from the European Economic Area, there are no trade barriers or tariffs whatsoever limiting the trade of goods in relation to manufactured equipment.

On the other hand, if goods are imported from third countries they will be subject to a customs duty once they enter any of the countries that are part of the European Economic Area. This customs duty may differ depending on the commercial agreements (eg, free trade agreements) in force between the European Union and said third countries. There might also be specific barriers for equipment manufactured in certain countries (eg, North Korea).

Projects

1. What government authorisations must investors or owners obtain prior to constructing or directly or indirectly transferring or acquiring a renewable energy project?

As per the provisions of article 111 in conjunction with article 115 of Royal Decree 1955/2000, the construction, expansion, modification and operation of all electricity installations requires the following administrative authorisations:

• administrative authorisation in relation to the preliminary draft of the installation as a technical document to be processed; if appropriate, in conjunction with the environmental impact study;
• approval of the execution plan; and

Update and trends

On 16 June 2017, the Spanish Government approved Royal Decree 650/2017 launching a new bid to assign 3,000MW of wind and solar photovoltaic energy. The bidding terms allow as well for an additional assignment of installed capacity over those 3,000MW, whose amount is not yet established. As per the Ministry words, this bid may enable solar photovoltaic facilities to obtain installed capacity, given that wind energy projects were granted most of the 3,000MW assigned in the bid of 17 May 2017. However, its final outcome is still pending.

This new bid will allow Spain to reach 19.5 per cent of renew- able energy over final energy consumption, only 0.5 per cent below the EU target set in 20 per cent for 2020. There are also further talks about the launching of another bid after the summer of 2017, which would be applicable only to solar photovoltaic technologies. However, this has not been confirmed by the MINETAD.

In order to foster new self-consumption facilities, also on 16 June 2017, the Spanish government approved Royal Decree 616/2017, regulating the direct granting of subsidies for these facilities. According to this Royal Decree, the Spanish government will subsidise up to 80 per cent of solar photovoltaic self-consumption projects to be developed by municipalities of a population of less than 20,000. These projects, both connected and not connected to the grid, must be of an installed capacity of more than 5kW and entail an investment of between €50,000 and €1 million.

• start-up certificate, which permits the commencement of commercial exploitation once the plan has been executed. The request of the start-up certificate must be accompanied by a final works certificate signed by a competent technical expert, stating that the installation has been implemented in accordance with the specifications contained in the approved execution plan as well as with the requirements of applicable technical regulations. The relevant authorities issue the start-up certificate within a period of one month from receipt of the request, having completed the necessary technical inspections and verifications of the project.

It is also necessary to obtain a facility transmission authorisation for the direct transfer of any renewable project. The party intending to acquire ownership of the facility must submit the request for such authorisation to the MINETAD.

The application must be accompanied by documentation to prove the legal, technical and economic capacity of the applicant, as well as a statement from the owner of the facility expressing its will to transfer ownership.

Upon approval, the applicant will have a term of six months to transmit ownership of the facility. The authorisation will expire after this period. The applicant must notify the MINETAD of the effective- ness of the transfer within one month after it becomes effective.

For projects authorised by a given autonomous community, its corresponding administrative bodies must issue the authorisation for the transfer of the facility. If a given autonomous community has not enacted any specific legislation in this regard, Royal Decree 1955/2000 will also apply in said autonomous community.

Royal Decree 1955/2000 does not establish the need for an authorisation for an indirect transfer (eg, by selling shares of the project company) of a renewable facility. However, several autonomous com- munities (eg, Catalonia, Castilla-León, Castilla-La Mancha) have also enacted legislation that establishes a requirement to obtain authorisation for both direct and indirect transfers of facilities.

2. What type of offtake arrangements are available and typically used for utility-scale renewables projects?

Operators can resort to offtake arrangements to mitigate the risks of price volatility of the wholesale market. The main arrangements in the Spanish market are forward market organised contracts, bilateral physical contracts and OTC agreements such as contracts for difference.

In Spain, the forward market is managed by OMIP (the clearing house). OMIP has standardised energy values for the contracts according to delivery period (days, weeks, months, quarters, years (up to four years)).

This is a generally available resource for offtakers in relation to the energy acquired on the wholesale market and there is no specificity in relation to renewable energy.

3. How are long-term power purchase agreements procured by the offtakes in your jurisdiction? Are they the subject of feed-in tariffs, the subject of multi-project competitive tenders, or are they typically developed through the submission of unsolicited tenders?

Long-term PPAs are usually in the form of bilateral physical contracts or negotiated in the financial forward market.

Since the forward market agreements have a maximum term of four years, these schemes do not address risks after the fourth year and are also subject to regulatory uncertainties. In Spain, an offtake arrangement usually has a term of one or two years and it is hence not common for offtakers to execute long-term PPAs.

These schemes are not so common in Spain as in other countries, particularly considering that renewable energy projects are subject to the economic incentives scheme already explained and the electricity they generate has to be sold on the wholesale market.

4. What government authorisations are required to operate a renewable energy project and sell electricity from renewable energy projects?

Please see question 24.

5. Are there legal requirements for the decommissioning of renewable energy projects? Must these requirements be funded by a sinking fund or through other credit enhancements during the operational phase of a renewable energy project?

The owner of the generation facility has the obligation of dismantling the facility after its definitive closure. In case of a breach of this obligation, the authorities may dismantle the plant at the owner’s expense.

According to the provisions of articles 135 et seq of Royal Decree 1955/2000, the owner of the facility that it is intended to close must request administrative authorisation of closure before the MINETAD or the competent body of the autonomous community. The request must enclose a closure plan, which shall contain at least one report detailing the technical, economic and environmental circumstances of the facilities for which closure is sought. Likewise, the plan must include up-to-date blueprints of the facility.

It can be stated in general that there will be no credit enhancements or sinking fund guarantees to be made during the operational phase of the renewable project, given that Royal Decree 1955/2000 does not establish any financial requirements or guarantees for the decommissioning. However, there might be provisions in the relevant administrative authorisation, and regulations from autonomous com- munities (eg, solar photovoltaic installation in Andalusia) that may specify guarantees for dismantling if deemed appropriate.

Transaction structures

1. What are the primary structures for financing the construction of renewable energy projects in your jurisdiction?

Financing is typically provided on a limited recourse basis, with sponsors taking on construction risk through a completion guarantee. The security package also includes pledges over receivables under the EPC agreement and in some (few) cases direct agreements with EPC contractors. Banks also sought some form of performance or revenue guarantee in some older deals structured at a time of greater regulatory uncertainty, although sponsors naturally resisted this. Additional security includes pledges over project accounts, receivables from sale of power and O&M agreements, if any, and shares in the project company. Security over land is uncommon because of its exorbitant tax costs.

In terms of financial covenants, debt service coverage ratio (DSCR) is typically tested on the basis of the previous year’s audited financial statements (with perhaps an additional semi-annual test); forward- looking testing is rare. Leverage ratios, which were as high as 90 per cent at one point, would now be more conservative.

Facilities are normally syndicated except in the case of smaller deals, which are completed as a club deal or even on a purely bilateral basis. In all but the largest transactions, Spanish law and Spanish courts have been chosen to govern the financing documents.

2. What are the primary structures for financing operating renewable energy projects in your jurisdiction?

Operating projects have easier access to financing, particularly those with a strong operating record. Some facilities are more project-finance based in these cases, while others rely more on acquisition finance-type documentation. The security package will typically involve pledges over project accounts, sale revenues, O&M agreements and shares, and no real estate mortgages.

As in the case of greenfield projects, leverage ratios would now be in the 60–70 per cent range and DSCR would be tested backwards, annually or semi-annually.

Spanish law and jurisdiction would also be the norm here.

In many cases, projects would be on a portfolio as opposed to a stand-alone basis, allowing stronger projects to support weaker ones (to a certain extent), with cross-guarantees and security over all portfolio assets and receivables.

Note: The article has been produced by our Madrid E&I Department for Getting the Deal Through legal magazine.