Analyzing the impact of cost-containment mechanisms on the profitability of solar PV plants in Spain

Abstract

From mid-2007 to September 2008, the Spanish PV sector experienced an investment boom, which led to a ten-fold increase in solar PV deployment. The concern of the government about the large increase in the associated support costs through a feed-in tariff led to the implementation of several cost-containment regulations. These included a cap on the electricity generation being eligible for support, a grid access charge, a generation charge, a shortening of the support period and the updating of tariffs below the consumer price index. The aim of this paper is to analyze the impact of those cost-containment mechanisms on the profitability of solar PV plants in Spain. The results show that these measures have had a moderate impact on the profitability of those plants, which is still relatively high, with internal rates of return which are always above 7% in all the simulated cases. However, their impact is mediated by different features of the plant, including the levels of the initial investment (upfront costs), borrowing and operation and maintenance (O&M) costs. It is also mediated by policy variables (such as changes in the tariff-updating method and the level of the grid-connection charges) and by other variables, e.g., the interest rates of loans. The specific impact of each of the cost-containment measures has also been analyzed. Our findings show that the generation charge has the greatest impact, followed by the change in the tariff-updating mechanism, the generation cap, the shortening of the support period and the grid access charge.