How Spain’s solar power boom turned to bust

As anyone planning their Mediterranean summer holiday would know, Spain gets a lot of sunshine: typically more than 3,000 hours a year, almost double that of the UK.

So it’s little wonder that Spain has embraced solar power. From a standing start two decades ago, last year solar became Spain’s top source of electricity, surpassing wind, gas and nuclear.

The shift, driven initially by climate concerns and more recently by the loss of Russian gas since the Ukraine invasion, has helped Spain weather the Iran war’s hit to energy supplies.

Now, though, Spain is discovering that it’s possible to have too much of a good thing.

A construction frenzy, driven by more than $80bn (£60bn) ploughed in by investors and banks, has created 25,000 hectares of solar farms that produce almost 60 terawatt hours a year.

So when the sun shines, Spain faces a solar energy glut.

And like any glut, that means plummeting prices – even dropping below zero – and evaporating returns.

For consumers, this means lower bills. But for investors and lenders, it looks like a boom turning to bust.

And it has come just as Donald Trump threatens to cut off trade with Spain, potentially jeopardising the flow of imported American gas.

“It’s a critical moment,” says Daniel Perez, the head of Catalonian utility L’Energètica. “I don’t think that the 50 gigawatts of solar capacity that we have are going to close, because there’s a sunk cost – the investment is already made. But I think it’s going to disincentivise investment in new plants.”

With wholesale solar electricity prices expected to drop even further, some investors are reportedly trying to bail out, putting their assets up for sale.

“They are looking to do a stop-loss and sell, or they’re trying to find some Canadian pension fund or Chinese company that wants to get a stake in Spain’s renewable energy market,” one industry insider says.

But many are struggling to attract decent bids.

“Whether buyers will get what they want depends on whether the banks are ready to refinance the existing project,” says an industry source.

Banks, though, have become wary of lending more to the overbuilt sector, where demand simply doesn’t match supply.

The solar industry crunch has brought Spain to a fork in the road on its journey to net zero.

The Socialist government of Pedro Sánchez plans to reach net zero by 2050, with emissions cut by 23pc from 1990 levels by 2030.

To get there, Spain will have to generate 70pc of its energy from renewable sources by the end of the decade, up from almost 60pc now. This means more solar, wind and hydropower, because Sánchez is winding down the country’s nuclear reactors.

But a catastrophic blackout in April last year, which shut down transport and telecommunications and plunged 47 million Spaniards into darkness, has shifted the politics of net zero.

Although the official verdict is that technical issues within the grid were at fault, the blackout kindled popular suspicion of the breakneck drive to green energy.

The conservative People’s Party is looking to turn its current opinion poll lead into victory, possibly in coalition with the populist Vox party, at an election due within the next year.

It has pledged to slow the renewables push, invest in baseload power generation and retain the nuclear fleet.

Sánchez, by contrast, is doubling down. In May he presented a €9bn (£7.6bn) climate plan that would speed up the energy transition.

However, a lot more money than that will be required to meet his ambitions. McKinsey estimated in 2022 that the baseline goal would need an average of €85bn a year, spent across energy, transport and buildings.

The one thing Sánchez can’t afford is for investors to take fright. But the solar crunch threatens to drain vital flows of capital from his green revolution.

It all looked so different three years ago. France, Germany, Finland and Sweden were already grappling with the problem of falling prices. They even turned negative – solar farms couldn’t even give their surplus energy away. But Spain seemed immune.

So the Spaniards threw themselves into a massive new solar build-out, spurred by the 2022 Russia-Ukraine energy crisis. In just the past two years, Spain has added 20 gigawatts of solar capacity to the system.

But the boom came with a catch: the woes that have afflicted Spain’s neighbours became a Spanish problem, too.

Solar panels’ output is concentrated in the hours that the sun is shining. And the more panels Spain added, the more energy it could produce during this window.

Increasingly, this has become more energy than Spain’s electricity grid can handle, or more than its economy wants or needs at those times. So at those times, the price falls.

The surplus can become so large that prices even turn negative. In the first half of this year, this happened for 408 hours in France, or about 9pc of the time. Spain notched up 397 hours of negative prices in just the first quarter.

The solar energy producers are then forced to cut their output, which is known as curtailment. Spain’s recent solar boom has sent curtailment rates soaring to 2.5 terawatt hours in the first half of this year, according to Aurora Energy Research. That’s triple the same period last year.

About half of this happened during the June heatwaves. In some of the more disconnected solar regions, curtailment rates were above 30pc.

There are three ways to fix the problem. First, if the energy can be stored in batteries, it can be fed into the grid later, when it is really needed, smoothing out supply and prices. But spending on batteries has lagged behind investment in panels.

Second, more transmission and distribution lines can be added, so that the surplus solar energy can be shifted elsewhere in Spain, or even into France, where there may be higher demand or lower supply.

But the authorities have not been willing or able to knock up pylons and wires as quickly as investors have built solar farms.

“The grid has been developing very slowly, especially because of red tape, basically because of the Nimbys, the judicial proceedings, all the things that impede investment. This could have been avoided,” Perez said.

One industry insider says this is a major block for investors. “How am I going to make a final investment decision on a project that will be delivered in three years, if I see that work has not even begun on the line that should be supporting it?” he says.

“I’m not going to begin that investment until I see real work in progress, real boots on the ground, on that line.”

The third fix is simply to increase demand, which can soak up the solar surplus.

Energy industry players are more optimistic on this one. They say Spain’s super-cheap electricity is attracting new factories and data centres from abroad, who can use the excess supply at the right time.

But until there’s more grid and storage, the supply issues will likely linger. And because prices may have further to fall, the new industrial buyers of solar will also be wary of locking themselves into long-term contracts, known as power purchase agreements (PPAs).

That’s a significant blockage: these PPAs are typically the basis on which banks lend money or investors stump up cash.

Perez reckons that solar will nevertheless continue expanding in Spain. But he says it will likely be on-site panels for factories, hospitals, desalination plants and the like.

Others say that the downturn will be transitory.

“I would not be building more photovoltaics (PV) now, but probably I will maintain a certain degree of development in PV, because in the future, if demand is going to pick up, it is good to be prepared,” one industry executive says.

He’s just not sure when. “Two, three, five, seven years? That’s the question: how long is this going to take?”

Long enough, it would seem, to cast a dark cloud over Sánchez’s solar-powered net-zero ambitions.