The sun-kissed Spanish hills around Trujillo, Extremadura are rich with history - from the fictional homeland of Russell Crowe's gladiator to real birthplace of conquistador Francisco Pizarro, the conqueror of Peru

It is here, in the south west, between the Rio Tejo and the Rio Guardiana where Qualitas Equity Partners (75 per cent owner) and Fotowatio Energía Solar (25 per cent) are making history again, building part of one of Spain's most ambitious renewable developments to date - a €176 million (US$233.6m) 20 MW solar photovoltaic (PV) project called La Magascona.

Drivers

The south west of Spain is a strategic location for solar power in Europe. Irradiation, the quantity of energy coming from the sun and received on a surface unit during a day, is at a maximum in the south of Spain - with values of approximately 7.2 kWh/m2.

The federal government has also created a supportive environment to develop solar in Spain.

A Royal Decree in 2004 amended an existing renewable energy framework, the Electricity Act of 1997, to provide an incentive for projects greater than 100 kW to receive a tariff of 300 per cent of the regulated power price. 

This remains in effect for the first 25 years, after which the fixed tariff for PV is reduced to 240 per cent.

However, since La Magascona is broken up into 200 installations of 100 kW each, it qualifies for 575 per cent of the regulated tariff which is reduced to 460 pre cent after 25 years.

Discrepancy in the tariffs based on size has led Grupo Santander and other firms to develop a strategy around building and financing projects divided into smaller installations between 90 and 100 kW.

The tariff scheme is the key to making a deal work. Within the right kind of political framework, a PV solar facility can be an attractive investment.

Similar tariff programmes exist in Germany, Portugal and Italy creating fertile soil for developers to sow Europe's solar seeds.

Although irradiation conditions are best on the Iberian and Italian peninsulas, Germany has led the charge in the solar sector with over 837 MW installed.

Under Germany's feed-in tariff introduced in 2004, the base level of compensation for ground-mounted systems can be up to €0.45 (US$0.60) per kWh - which is reduced by 6.5 per cent per year from the start of opeartion.

Other tariff programs vary. Portugal, developers get €0.32 (US$0.42) per kWh for 15 years and Italy's tariffs range from €0.45 to €0.49 (US$0.60 to US$0.65) per kWh for 20 years.

The project

The La Magascona project will be sub-divided into 200 installations, each producing 100 kW with additional locations near Badajoz, also in Extramadura, and the capital Madrid.

La Magascona should be operational in late 2007 and will sell the power generated to Spanish utility Iberdrola. It is twice as big as the world's current largest PV solar project - the 10 MW Bavaria Solarpark in Germany. It also eclipses an 11 MW project being built by GE Energy Financial Services and PowerLight in Serpa, Portugal.

Development group Elecnor will build, and operate the system, covering 100 hectares, on a turnkey basis and its subsidiary Atersa will supply more than 120,000 solar modules. Each module will be fitted to a single-axis solar tracking structure designed by PowerLight to follow the sun. The mono and polycrystalline panels have an average life-span between 25 and 40 years.

Grupo Santander's executive director of structured finance, Antonio García Méndez says that both the legislation and location made La Magascona an attractive project to finance.

According to Méndez the project's risks were well mitigated. The only thing unusual about this project, compared to other others Grupo Santander has financed in Spain, is its record-setting 20 MW size. Previously, the group's three largest portfolios were one, seven and 12 MW.

'There is no increased risk due to the increased size,' says Méndez, '(La Magascona) uses the same technology as a 1 MW project, so the risk is essentially the same.'

Financing

Mandated lead arrangers, Dexia and Grupo Santander closed a €159 million (US$211.1m) debt package for the deal last month, which is Spain's largest non-recourse solar financing to date.

The banks underwrote the 22-year loan on a 50:50 basis with a 90:10 debt:equity ratio.

The €17 million (US$22.6m) equity consists of 50 percent share-holder capital and 50 per cent (€9m or US$11.9m) sub-debt.

Law-firm Garrigues acted as technical advisor to the lenders, while Cuatrecasas advised Qualitas and Fotowatio.

The typical range of equity return for PV solar in Spain is about 10 percent on low-risk projects, where as higher-risk projects can return up to 20 per cent.

Conclusion

More large PV projects like La Magascona are expected to develop in Spain's fast growing market as witnessed earlier this month when Endesa has inked a collaboration agreement with solar panel manufacturer Isofoton.

That deal paves way for cooperation with the government of Andalusia to build a €250 million (US$331.35) polysilicone plant - shoring up Endesa's equipment supply needs for 100MW of PV solar by 2011.

So as firms scramble to get on top of the Spanish solar market, the question remains: Will La Magascona set a benchmark for further investment in large Spanish PV solar projects?

Only time and history will tell.

The project at a glance