< Back to all Publications

San Giorgio Group Brief: How Spain created a world-leading CSP industry then shattered investor confidence

Published: August, 2014

Executive Summary

Concentrated solar power (CSP) is an extremely promising, potentially scaleable renewable energy technology. Because it stores solar energy as heat, CSP can deliver stable, low-carbon power even after the sun sets. By supplying power reliably and flexibly whenever it’s most needed, CSP can help balance gaps between supply and demand, complementing more variable supply from other renewable energy technologies.

However, CSP investment and production costs are high compared to other more established options such as fossil fuel generation and mature renewable energy technologies. At this stage, CSP requires financial support from public sources to make private investments attractive.

Over the past year, Climate Policy Initiative (CPI), with the support of the Climate Investment Funds (CIF), has undertaken a series of studies on financing models and policy instruments for CSP. The aim of this work is to distill lessons on the effectiveness of different public financing and policy tools for CSP that can help policymakers choose the most effective of these tools for reaching their goals. This series includes a background paper looking at the CSP industry and markets worldwide, two in-depth case studies on large-scale CSP projects in India and South Africa, and a lessons learned paper pulling conclusions from this case study and all the other papers together. This case study focuses on Spain, currently the largest CSP market in the world.

Spanish policy prompted CSP deployment, drove innovation, and created a world-leading industry

We find that Spanish financial incentives for renewable energy – namely, the Feed-in Tariff and Feed-in Premium – were very successful in driving CSP installations. Spain deployed 2.3 GW of CSP plants in less than five years, with an average of 300MW financed every year between 2006 and 2012.

By offering the option to earn a premium over the market price, policy also supported innovation by driving investment in thermal storage technology. Project developers who invested in storage were able to increase revenues by selling at times when daily electricity prices were highest and to reduce unit costs by increasing plants’ capacity factors. From a public perspective, investments in storage facilities have significant benefits to the energy system as whole as they increase the amount of dispatchable power available, reducing the uncertainty around the availability of power flowing into the grid.

These policies were also instrumental in developing a national CSP industry. In the last ten years, the Spanish CSP industry not only dominated 75% of Spain’s domestic CSP market but has also developed more than 55% of CSP capacity installed outside Spain.

CSP support proved more expensive than expected and subsequent cost-cutting measures and retroactive policy changes badly hurt investor confidence

The lack of a cap or any other kind of policy control over the amount of CSP deployed led to a situation in which support became much more expensive than planned, just as the country’s economic condition deteriorated because of the global financial crisis. Further, because Spanish CSP policy was unsuccessful in driving cost reductions and fostering market competition, investment costs (as disclosed by developers) didn’t fall much as installed capacity increased. This is in contrast to the latest installations in countries such as Morocco and India have been built at almost 30% lower costs.

The policy response to this situation was twofold:

As the cost of support became higher than what Spanish authorities deemed acceptable, the government introduced a project approval process to stagger connections on an annual basis. On one side, this allowed a more controlled commissioning of CSP power; on the other, it left several plants being excluded and shelved; and incidentally led to some cost inflation as approved projects had to rush in procuring half of the project material and equipment in a matter of few months.

The government then approved several retroactive changes to directly reduce the cost of support to CSP plants and resulted in hurting significantly the financial performance of operating plants. This second set of changes brought Spain’s domestic CSP market to a complete standstill. Existing projects face significant financial constraints and no new CSP investments have been made since 2012.

Our analysis indicates that these policy changes have increased risk aversion and financing costs to a level that Spain is now much less attractive for CSP than many other developed and emerging nations, despite the fact that Spanish companies play a leading role in the global CSP industry. As a result of current policy uncertainty, if investors’ risk aversion is not mitigated, any public support policy that aimed to keep CSP investments attractive would now need to be almost 20% higher than before, even assuming a significant reduction of 30% in technology costs.

Policy recommendations

The Spanish example clearly highlights crucial lessons for policymakers both in Spain and elsewhere. In Spain in particular, we recommend that establishing a transparent and stable support framework that combats policy uncertainty should be a higher priority even over setting a different level for the support or a new tariff.

Policymakers from Spain and other countries looking to support CSP installations may want to keep the following additional lessons in mind:

CSP support policies need to foster competition and cost reduction as well as drive deployment, while also systematically and transparently reducing subsidy levels as technology costs decrease

CSP support policies need to introduce differentiated remuneration profiles to stimulate innovation and investments in the technologies with the highest system benefits

Policymakers need to be able to control the amount of support that public budget or rate payers are liable to pay as a result of the capacity installed, plan these liabilities in advance and avoid late and retroactive cut-backs

Policymakers need to avoid retroactive changes to policy that can significantly damage investors’ perception of policy risk and increase their overall risk aversion