Spanish solar power financings will decline sharply in 2008 as plunging tariffs and higher borrowing costs end a two-year boom that has helped crown Spain as Europe's second-largest producer of solar energy.

The renewable finance market has been nervously awaiting Madrid's launch of a new royal decree to regulate the high-flying photovoltaic (PV) sector, which became overheated during an investment bubble. The legislation came into effect on September 28 and cut the PV tariff by around 30%, and put a cap on subsidy at 400MW for 2009, down from 1200MW in the previous scheme.

In last year's more robust credit markets, the generous tariff triggered a rush of PV financings, with banks stepping over themselves to bankroll projects. Consequently, developers reached 85% of the government's target in September 2007 – three years ahead of schedule.

New tariffs

The new tariffs are Eu0.32-0.34/kWh for roof-mounted systems and Eu0.32/kWh for ground-based systems – much less than the previous 0.43/kWh. On the upside, in the Spanish wholesale market power changes hands for around Eu0.07/kWh, and there is also an extra 100MW available on the 2009 cap to ease market transition and a 460MW cap for 2010. The changes are also less than the original draft which saw PV tariffs fall to Eu0.29/kWh.

As David Craig, a Bank of Scotland energy finance director overseeing the Iberian market, says: "There is going to be a slowdown in the number of projects and the financings linked to them. We have had a massive boom to get projects done before the September deadline. You won't see this level of activity again for a while." In light of the changes, and a spot market tariff that solar developers note is not competitive, many sponsors will assess the new regime's impact before seeking new financing, stalling the market for some time.

A consequence of the new legislation is that banks are getting more picky about the projects they back and developers will be under greater pressure to show their projects are on the money. Net PV costs will have to decline by the same amount as the tarrif cut. The good news is that falling prices for solar components will help developers cut costs. "Manufacturers knew that tariffs would come under pressure in Spain and Europe so they have been boosting capacity and improving efficiencies to cut prices; helping boost developers' margins, Craig notes.

Other observers back Craig's view, saying that generation costs have dropped an average of 5% annually in recent years and that the sector will achieve "grid parity" in 2012, matching solar electricity costs to those of conventional sources. As the market toughens up, developers are expected to invest in research and development initiatives to slash operating costs to make money with the lower tariff, helping the sector wean itself from government help.

While PV projects look set to decline solar thermal looks like being a more predictable winner. The current 661/2007 decree rewards solar thermal parks with a Eu0.27 per kWh tariff. Only 2% of the government's 500MW target for 2011 has been met but given PV's hazy outlook, bankers predict solar thermal financings will gather pace in coming months. Still, they don't expect solar thermal to mirror the investment craze built around PV – triggered by a much higher tariff, strong credit markets and significantly lower investment requirements.

To be profitable, solar thermal plants must be set up to feed 50MW, costing between Eu250 million and Eu300 million. In contrast, PV fields can be built to generate 1kW-50MW and still make a solid return on equity. "When PV took off, many small investors could enter the business at very good rates and this helped the market develop," says Juan Carlos Lavanderia, a renewable energy consultant in Madrid. "But because solar thermal projects are much more expensive to install, they require a smaller and more selective club of investors."

Because solar thermal is a more nascent technology, parts procurement and manufacturing costs can be higher while projects are generally more complicated to pursue than PV, Lavanderia says. But despite these challenges, some bankers envisage a small boom in solar thermal construction.

Only 50MW of solar thermal farms have been built this year, but another 400MW will begin construction shortly, says one banker, adding that the 85% target will be met in late 2009, when the state will grant a one-year extension for remaining applications. The banker says his institution has received 5-6 financing requests for solar thermal assets. There could be 10-12 projects in the next 12 months compared to a much smaller number for PV, he says.

Based on the Eu250 million-Eu300 million cost estimate for solar thermal parks, the segment could require Eu3.6 billion in debt financing this year. Developers such as Acciona, Endesa, Abengoa, and builder Safir, are seeking the largest commitments, bankers say. Safir itself is looking to fund two 50MW projects after securing funds for a first project.

PV vs thermal

In future, Spain will continue to promote the PV and solar thermal markets but there is little clarity about how – and how much – it will do so. Opinions differ about which technology will win the most support from the government. The country ranks number two in European solar production after Germany. Since the European Union wants 12% of its renewable-power objectives to come from solar, the country cannot afford to turn its eye away from the industry if it wants to continue leading the European market.

Using towers headed by sun-gazing mirrors, solar thermal produces heat and steam to power electricity turbines. In contrast, PV uses sun-fixed silicon panels to do the same. PV is usually easier and cheaper to run than solar thermal but produces a much smaller output.

Some bankers believe the scales will tip in favour of solar thermal, which is a relatively new technology, because PV's technological base has not changed much. PV panels and semiconductor efficiencies have remained the same and cannot be significantly improved. However, there are important advances being introduced in solar thermal and more technologies being explored.

Furthermore, while solar thermal is more costly to run than PV, it generates more electricity, making it ideal for mass-production strategies. Solar thermal costs around Eu6 million per MW while PV costs Eu4 million but it produces 3,000 hours of power compared with 1,500 hours for PV. Solar thermal's production costs are also expected to fall once the technology develops further – boosting a currently limited number of suppliers that has kept prices high.

"Photovoltaic efficiencies have peaked," says Luis Dominguez da Costa, energy director at Ecoprogresso, "particularly when it comes to panels. Still, the circuit will continue to grow as an attractive alternative in the small investor space. This is a plug and play type of technology that's much easier to install than solar thermal. It will be ideal for the small investor community while solar thermal will be used for more large-scale generation projects."

But the winning technology will ultimately boast the greatest cost/efficiency ratios. Spain wants to develop the sector as competitively as possible so the cheapest and most efficient technology will get the most funding.

---------------------------------Portugal's permit drought----------------------------------------------------------------------------------------------------------

Portugal's solar-power market has developed at a much slower pace than Spain, which has had a much more ambitious agenda for the sector. Some market participants say the Portuguese market will remain dormant amid a scarcity of permits for new solar parks.

"There isn't going to be anything for a while," says Ecoprogresso's da Costa. "There aren't anymore licenses for solar projects. The government's renewable strategy is more focused on wind." However, he says Lisbon may reconsider its policy once solar generation costs fall to match wind.

Currently, Portugal pays a subsidised tariff of Eu310-Eu320 to PV projects while there is no system to reward solar thermal energy. Lured by a more attractive tariff, Portuguese investors have been keen to invest in Spanish farms. However, the paring back of the Spanish subsidy regime could change that trend, analysts say.

"The high Spanish tariff used to attract investors to Spain, but that could change depending on where the Spanish regulation goes," says a project finance analyst in Lisbon. Indeed, the new Spanish regime could make Portugal more attractive, prompting the state to issue new licences.