Lack of demand and prices threaten the solar energy business

The paradox facing the solar sector in Spain is that photovoltaic facilities are generating more electricity, yet their revenue is declining.

Spain is generating an increasing share of its electricity from solar sources, yet the profitability of photovoltaic plants is steadily declining. Plummeting prices during peak sunlight hours, sluggish electricity demand, and grid capacity constraints have pushed parts of the sector to the brink. Industry players fear they may be unable to service the debt associated with their installations and are calling for interventions to help them survive until the anticipated surge in electrical consumption materializes.

The challenges are not evenly distributed across the industry. Both sector associations and financial sources consulted agree that the difficulties are concentrated among specific company profiles and project types, particularly those most exposed to market price volatility and with limited capacity to absorb years of reduced revenue. The extent of the impact varies depending on how each facility sells its electricity, but calculations by the Spanish Photovoltaic Union (UNEF) suggest that approximately 17% of installations are affected, representing a capacity between 7 GW and 8 GW.

The solar power sector operates through four distinct business models. Some facilities are locked into long-term power purchase agreements, commonly known as PPAs, which guarantee a fixed revenue stream for operators regardless of prevailing market conditions. Other sites also hold PPAs, but their contracts include provisions that suspend payments whenever spot prices hit zero or turn negative. A third category consists of plants that sell their output directly on the wholesale market. Within this last group, two distinct profiles emerge. One set of operators entered the market during earlier periods of high prices and has accumulated sufficient cash reserves to weather the current downturn. The other, in a more precarious position, began operations within the past two years and has not yet had the opportunity to build up financial buffers.

Just two years ago, none of these facilities were experiencing such issues. In 2022, only five hours were recorded with zero or negative prices. However, the trend toward price collapse has intensified this year, with approximately 1,100 hours affected. Consequently, facilities that sell their electricity on the market, as well as those with contracts allowing buyers to stop paying the agreed price during zero or negative price hours, are finding themselves without revenue for 15% of the time.

José María González Moya, chief executive of the Association of Renewable Energy Companies (APPA), explained that average prices during solar hours have fallen to between 30 and 34 euros per megawatt-hour (MWh), a range that sits below the 32 to 35 euros per MWh threshold required for solar installations to remain profitable. In recent days, wholesale electricity prices have surged, with some days seeing minimum prices exceed 100 euros per MWh, a spike driven by rising gas costs linked to the conflict in Iran. However, González Moya cautioned that this price increase does not resolve the underlying issue, as solar generation remains minimal during these months.

José Donoso, chief executive of the Spanish Photovoltaic Union (UNEF), noted that the issue stems from the need to redefine the electricity market system to align with the new characteristics of a sector increasingly driven by renewable sources that carry no variable costs. The Spanish market operates under a marginalist pricing model, a standard practice across Europe, where hourly prices are determined by the cost of the final power plant required to meet demand. Typically, the most expensive technology is the last to be dispatched to cover consumption, a role usually filled by combined-cycle gas plants. However, the surge in installed solar photovoltaic capacity in Spain, coupled with low demand, means that during daylight hours, these solar facilities are sufficient to meet the system’s generation requirements.

Like wind power, solar photovoltaic energy is offered at zero or near-zero prices because it relies on a free resource—the sun—and once a plant is constructed and connected to the grid, it incurs virtually no operational costs for its owner.

Market pressures are compounded by a second factor: grid technical constraints. During certain hours, the system operator, Red Eléctrica, orders a reduction or complete halt to power generation because there is insufficient capacity to transmit electricity or due to congestion at the grid nodes where the plants are connected. According to calculations by APPA, photovoltaic installations have received approximately 34.5 euros per megawatt hour so far this year. However, if these facilities have been forced to remain idle for roughly 17% of the hours due to various restrictions, effective revenues could drop to around 29 euros per megawatt hour.

The core issue is not the inherent unprofitability of the facilities, but rather the significant divergence between the revenue projections used to build the projects and the actual income they are generating. This discrepancy directly undermines the operators' ability to service the debt obligations they have with banks. "It is the first year we are falling below the levels required to repay the debt," González Moya confirmed. In fact, during the first half of the fiscal year, average prices were particularly low, a period that coincides with the months of highest solar irradiance from April to July. Consequently, several companies were forced to renegotiate terms or extend their repayment schedules.

In response to these conditions, UNEF has proposed to the government the establishment of a financing line through the Official Credit Institute (ICO) worth approximately 300 million euros. The aim is to provide liquidity to power plants most exposed to zero or negative prices over the next three to four years, a period the association believes is necessary before electricity demand rises and revenues improve. Although UNEF had initiated discussions with the executive branch, the process is currently stalled, according to Donoso. Last week, Rafael Benjumea, president of the business federation, reiterated the request to Sara Aagesen, the third vice-president and minister for Ecological Transition and the Demographic Challenge, during her participation in the organization’s annual congress. Aagesen made no reference to this possibility in her address.

Batteries: necessary but not enough

The lack of demand and pricing pressures are threatening the solar energy business

The industry anticipates this scenario will persist for at least three years, until electricity demand recovers. Demand had plummeted to levels not seen in a decade following the war in Ukraine, but is expected to rebound as new industries, such as data centers, come online. Year-to-date, demand has grown by approximately 3%, though it remains far below projections.

Energy storage offers an alternative. It can capture electricity during midday hours, when solar generation drives prices down, and release it in the evening or at night, when demand and market prices rise.

APPA argues that battery storage is neither an immediate nor a permanent fix. The association notes that systems currently being deployed typically offer a duration of around four hours and are generally sized to capture only a portion of a plant’s output, roughly between 20% and 30%. While this allows for the shifting of a fraction of the generated energy, it does not independently resolve the surplus of solar supply or the constraints imposed by the grid. Furthermore, adding storage requires new capital outlays for companies that are already struggling to service the debt associated with their photovoltaic facilities. Banks consulted on the matter acknowledge that financial institutions are increasingly active in financing the hybridization of solar parks with battery storage, and in some cases, with wind installations.