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Developing renewable energy technologies is a priority in Spanish energy policy. Against this backdrop, financing the large investments that are required to develop, build and launch renewable energy projects is key to implementing the ambitious installation plans included in the National Energy and Climate Plan.

In a new edition of the Garrigues Sustainable Dialogs, Javier Trueba, José Manuel Olea and Julián Pérez de Madrid—all professionals with extensive experience in renewable energy project financing—shared their view of the current state of financing for renewable energy generation assets in Spain. The meeting was moderated by Marcos Botella, partner in Garrigues Corporate and M&A, and Sofía Lazcano, partner in charge of G-advisory, Garrigues’ consulting arm offering strategic advice on energy and ESG matters.

Despite volatility in energy prices and high interest rates, the participating experts agreed that interest in financing for renewable energy projects remains high and explained that there is a trend toward more flexible financing structures that seek to balance profitability and flexibility. They also addressed more specific issues such as the need to have power purchase agreements (PPAs) in place to gain access to financing for projects versus selling energy on the spot market.

Javier Trueba de Sinety, Managing Director of Structured Finance Energy and Renewables at Banco Santander, explained his perception of the current state of financing for renewable energy projects and highlighted that financial institutions are extremely interested in these projects, despite the current environment of high volatility in energy prices. In his opinion, three trends currently stand out: First of all, hard mini-perm structures that allow for more leverage and fewer costs in exchange for greater refinancing risk, with more and more sponsors pointing to this type of model. Second, flexibility in revenues: “We come from a world of regulated projects. We have switched to a world with projects with PPAs and I think we are going to have to coexist with a merchant–PPA world.” And, third, very swift financing for construction: “Speed is essential. There are certain regulatory milestones to be met and swiftness is important in these processes.” He also noted two areas of focus or concerns from the finance provider’s perspective. One clearly regulatory: “They need to give us a bit more visibility in that area.” And another one which has to do with the pricing power we have in Spain and the possibility of managing bottlenecks. In addition, Javier Trueba announced Banco Santander’s commitment to provide €2 billion on a merchant financing basis over the next 12 months.

José Manuel Olea, CEO of Renovalia Energy Group, referred to financing conditions from the sponsor’s perspective and noted that finance providers are still not entirely comfortable with the risk of developments in two variables: mainly, energy prices and interest rates. These are factors which, as he explained, impose more restrictive conditions and make it necessary to find a type of financing that is more flexible and able to adapt over time to developments in these two variables. He also offered some thoughts on how financing structures have to adapt to investors’ different profiles. In this regard, he noted that the type of investor that is needed in the industry is one that prefers a reasonable financing structure that does not involve an excessive number of guarantees because the amount and the leverage were forced, and that adapts to more flexible structures, to developments in energy prices, interest rates, etc. This has not been achieved yet and is, in his opinion, what the industry should aspire to.

Julián Pérez de Madrid, Managing Director & Co-Founder of Kenta Capital, also highlighted the time of high volatility that we are living through due to electricity prices, and even due to the expected trend in these prices, to which we must add high interest rates, which have a serious effect on this type of financing, taking into account the impact of leveraging on shareholders’ returns. And he pointed to a third variable: investment costs, which also affect the implementation of projects. “All of this means that performing a profitability analysis of projects is complicated at this time,” he noted. In any case, he also confirmed that there is again a great deal of interest in investing in the market.

Throughout the meeting, as they spoke, the experts reviewed current financing conditions including such aspects as interest rate hedge agreements, debt terms, leverage ratios and structuring or personal guarantees from shareholders and sponsors. And they addressed the current state of investment costs (CAPEX) and project implementation costs, as well as the supply periods of the main items of equipment. They also discussed the challenges involved in meeting the deadlines to secure a construction and operating permit from the authorities, taking into account the time limits stipulated in the recent Royal Decree 23/2020, published in the Official State Gazette on June 24, 2020.