Spain: New Regulatory Requirements On Grid Connection Points May Raise Investment Opportunities

Last Updated: 22 October 2018
Article by Javier Lasa and Mario Sáez

The Government has recently approved Royal Decree-Law 15/2018 ("RDL 15/2018") which, among other important provisions for the electric sector, is intended to finish with the shortfall in available connection capacity as a consequence of numerous developers having locked connection points all over the distribution and transmission grids, and thus increasing the selling price for greenfield projects.

New and tougher requirements are then imposed by the RDL 15/2018 for securing a connection point1.This may involve several consequences for investors and developers, as well as for the greenfield projects market itself:

Greenfield projects which have not obtained connection permits will require stronger financial backup to be developed:

The amount of the bank guarantee to be posted to secure a connection point has been increased by 4 times, from 10 €/kW to 40 €/kW of installed capacity. Such guarantee is reimbursed to the developer when the renewable asset is commissioned within an agreed term (otherwise the guarantee is enforced and the connection permits expire), but such a substantial increase in comparison to the projects currently under development, increases the financing cost of projects, as clearly shown in the examples below:

Type of project2/Installed capacit Amount of the guarantee (€) Difference (€)
Before the approval of RDL 15/2018/td> After the approval of RDL 15/2018
PV /25 MW 250,000 1,000,000 +750,000
WF /50 MW 500,000 2,000,000 +1,500,000
PV /100 MW 1,000,000 4,000,000 +3,000,000

Greenfield projects which have already obtained connection permits must meet additional requirements (even if the increasing cost of the bank guarantee does not affect them):

  • Anticipating 10% of the investment to enlarge the grid connection point. The developer shall pay in advance to the distribution/transmission grid operator 10% of the investment value of the new connection facility (i.e. works to be carried out by the grid operator to reinforce or enlarge the connection point). The payment must be made no later than 12 months after the connection permits have been granted. This requirement applies to connections over 36 kV, which in fact represents most of the projects. In case such payment is not carried out by the indicated term, both access and connection permits will expire automatically3.
  • Concluding an agreement for the enlargement of the connection point. The developer shall also conclude, no later than 4 months after he has obtained the administrative authorization, an agreement with the grid operator which captures both the works to enlarge/reinforce the connection point and the remaining payments due by the developer to fully finance such enlargement4.
  • Keeping the project as initially presented. The project must not differ from the one initially presented to the authorities in charge of granting the approvals. The Government must still regulate which (if any) modifications would be acceptable, but probably there will be little room for amending the type of technology, the installed capacity of the project, the type of evacuation facilities, etc.5

In case a project is modified beyond the regulatory limits, the petitioner should obtain new permits for the resulting asset, as those previously secured will no longer be valid for the modified facility.

  • Reporting the progress of the project's development. The promoter must report to the Authorities: (i) the dates in which both the environmental impact assessment and the administrative authorizations for construction and commissioning are applied for; and (ii) the dates in which such assessment and authorizations are finally obtained.

The term when such milestones are to be achieved, is still pending to be regulated by the Government. However, controversy might arise in case the new deadlines are not met due to the authorities' inaction (silencio administrativo), as developers should appeal such inaction before the Courts so as to protect themselves from potential negligence behaviour6.

New transactions of greenfield projects at an initial stage of development is expected in the short term.

Developers which have already obtained access and connection permits before the enactment of RDL 15/2018 but are not able (or are not willing) to fulfil the new requirements, in particular the advanced payment to the distribution/transmission grid operator, can waive such permits in 3 months and recover the posted guarantees. If otherwise any due payment is not made within the 12-month term set forth in the RDL 15/2018, the connection permits will expire and the posted guarantees will be enforced7.

It is therefore expected that a number of developers willing to abandon projects, offers such projects to investors at a discount over current market prices (rather inflated according to prior regulatory conditions), as an alternative to recover the guarantees posted and the loss of any other costs they may have incurred.

In the mid and long term, only investors with high financial capacity will be able to secure connection points.

In the future, securing connection points will only (or mainly) be feasible for investors and developers with high financial capacity. Medium and small-size developers may find it more difficult to start greenfield projects without such financial backup from financial third parties or strong developers.

Therefore, it is expected that the price of greenfield projects remain stable, as a consequence of lack of speculation in the connection capacity, since (much) less opportunist developers will be able to lock connection points with a speculative purpose (and therefore there should be no high increase in the price of greenfield projects due to lack of connection capacity).

Finally, the RDL 15/2008 makes connection to the transmission grid easier in case there is no previously planned capacity in the connection point.

As a general principle, any connection to the transmission grid which requires the enlargement of the connection point must be made either in an already existing facility or in a facility which enlargement is already included in the official planning. However, RDL 15/2018 allows energy production assets to connect to a transmission facility that must be enlarged (up to a maximum number of connecting positions), even though such enlargement is not included in the official planning, provided that (i) it is technically and physically feasible; (ii) it is not possible to connect the assets through already existing positions; and (iii) the developer funds the necessary investment.

Footnotes

1 Third additional provision of RDL 15/2018.

2 PV stands for photovoltaic solar project. WF stands for wind farm project.

3 Please note tha,t when connecting to the transmission grid, the existing regulations already set forth an advanced payment of 20% of the expected cost of reinforcing the connection point (section 54 of RD 1955/2000). Such payment must be done when the connection point was applied (i.e. much before than the 10% advanced payment set forth in RDL 15/2018). It remains unclear if under the new regulations either only 10% can be advanced by the promoter, or the 10% advanced payment applies only to connection to the distribution grid, or (more unlikely) the new advanced payment of 10% must be added to the already compulsory 20%.

4 The RDL 18/2015 states that, in case the promoter quits the projects, all the costs paid to the grid operator for the permitting and enlargement of the connection point shall be reimbursed, except those 'non-recoverable' costs, although the connection permits will then expire. It is unclear form the regulation whether expiration of permits also triggers the enforcement of the guarantees, as it may be the case according to section 59 bis.2 and 66 bis.2 of RD 1955/2000 or would be considered a part of the 'non-recoverable' costs.

5 It was not rare that connection permits requested, for instance, to connect a large wind farm project were later used to connect several PV solar projects (i.e. using the same connection capacity, several projects can be separately developed –and eventually sold). This will probably not be allowed anymore.

6 Authorities inaction results in the relevant authorization deemed dismissed. However, it is not unusual nowadays that legal deadlines are exceeded due to such inaction and authorizations are later granted (without need of any further appeal being filed). However, if the new regulations imply that exceeding deadlines involve that connection permits expire, the promoters will need to file an appeal against inaction so that permits remain legally in force until the appeal is judged, allowing the authorities time enough to grant the relevant permits in the meantime. A litigation problem will then arise where there was no need to.

7 3rd transitional provision of RDL 15/2018.

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