Wind Farms in Portugal. A New Drive in an Already Emerged Market

Duarte Brito de Goes.

24/11/2005 Infrastructure Journal


1. Emerging Market

Pursuant to the Kyoto Protocol, Portugal undertook the obligation to increase its renewable energy sector in order to reach, by 2010, a 39% ratio of consumed energy produced by renewable energy sources (RES).

This obligation undertaken by Portugal, allied to the exceptional weather and environment conditions in Portugal, allowed the development of several forms of renewable energies.

Notwithstanding the fact that Portugal imports 85% of its energy requirements, in the last eight years (since the Kyoto Protocol), and particularly since the approval of the Kyoto Protocol in Portugal, in 2002, this sector has expanded and is today a reference market.

Portugal was the world’s second fastest growing wind market in 2004 (after New Zealand). It was the first country to complete a wave energy construction contract in a commercial basis (having tested several technologies related with this RES in the last couple of years) and is developing one of the major world solar projects.

The newly elected Portuguese Government has already expressly assured that the development of RES will continue to be a priority for Portugal, in order to meet the targets set out in the Kyoto Protocol. This is despite its position at the current worst performer of the Kyoto objectives within the EU. Alongside with solar energy, biomass and biogas will be the new Portuguese target sources. This offers a means of complying with the international obligations but also as a fire prevention method (biomass) and as a way to deal with and take advantage of some major environmental problems (biogas).

The renewable energy sector growth was enhanced this year with a law published in February, introducing a 15 years guaranteed feed-in tariff for all the RES, calculated in accordance with the importance that each source represents for the Portuguese interest and bearing in mind the capability of power injection in the electric grid.

Apart from the abovementioned new RES that will be developed in Portugal, the Portuguese Government has launched, in the end of July, an international tender for two portfolios of connection points to the grid, up until an aggregate of 1500 MW, and will be launching until the end of this year a third tender of 200 MW.

Portugal is in the spotlight of the world’s renewable energy sector and promises to keep the lights pointed at it, until having achieved all its goals set forth in the Kyoto Protocol.

 

2. Wind Sector

Wind energy has been the RES with the most significant increase in Portugal.

YEAR

INSTALLED CAPACITY (MW)

2002

175

2003

352

2004

616

June 2005

754

Preview for 2007

> 2000 MW

Source: Direcção Geral de Geologia e Energia

As expressed in the table above, the growth of Portuguese wind power sector has been remarkable in the last two years and is expected to continue this incredible development until 2010.

Since the signature of the Kyoto Protocol by Portugal, the installed capacity of wind farms in Portugal has almost doubled each year, with a 500% growth from 2002 until mid 2005. The market is being therefore in continuous evolution and ebullition.

2.1. The market

The Portuguese wind energy market is, since 2003, in continuous evolution and ebullition.

The Spanish Armada has arrived with Endesa (through the acquisition of Finerge) and Iberdrola (through the acquisition of Gamesa portfolio and the creation of a new company with Portuguese minority investors) very active. Other Spanish giants may also want to put a foot in Portugal, which promises new investments in the sector and new (perhaps unexpected) moves.

German Enegiekontor and Danish Energi E2 have also started their involvement in this market but the pioneer promoters continue to lead the market. Enersis (Portuguese Group Semapa) with 28,7% of the installed and under construction capacity, Generg (controlled by several Portuguese investors and with a significant stake held by Electrabel) with 17,2%, Enernova (Group EDP) with 15% and SIIF Energies (an EdF subsidiary) with 7,8%*.

By the end of the first semester of 2005, Portugal had 754 MW of wind power installed capacity, from 84 wind farms and 536 turbines. More than 80% of these wind farms have an installed capacity below 25 MW.

As at the same date, 2325 MW were licensed and, therefore, it is expected that more than 2000 MW will be under operation by 2007.

2.2. Next step

As mentioned above, at the end of July, the Portuguese Government has launched a new international tender for two portfolios of connection points to the grid, one of 800 to 1000 MW and the other of 400 to 500 MW. A third portfolio of 200 MW is expected to be launched up until the end of 2005 and will be divided in several packs of 10 to 20 MW.

Apart the stimulation of the wind energy sector, in order to comply with the Kyoto Protocol targets, the purpose of this tender is to create an industrial cluster for turbine construction. Winners of the two major portfolios will have to develop an industrial project in Portugal to supply the major part of the equipment to be utilized in the construction of the wind farms.

This investment in the wind farm sector and in the creation of an equipment related industry has called the attention of major players in this market. The cluster aims to create 1600 new work sites and results in a EUR 900,000,000 investment.

The bid offers will have to be submitted in January 2006 and there are already three consortia put in place, possibly subject to some fine tuning. Some medium size players are still not included in any of these consortia and, therefore, until the end of the year some changes in the market or in the consortia are expected.

These portfolio tenders, allied to the aforementioned feed-in tariff guaranteed for 15 years, enhances the hunger from the major European players to enter or reinforce their position in this market.

2.3. New perspectives

The boom of wind farms project financing deals in Portugal made in the last two years has dangerously engaged the exposure of the major Portuguese credit institutions to the major wind farms promoters.

The consolidation of the sector, the conclusion of the construction works and the connection of the wind farms to the electric grid will decrease the lenders’ risk and will allow the structuring of new refinancing solutions that have already been tested in other jurisdictions. Several financial advisers and investment banks are starting to look at this new opportunity.

Although some usual refinancing schemes are being adopted (such as wrap up bonds schemes and mezzanine financings), some other more innovative structures are being studied.

3. Other RES

A note should also be included in relation to other RES that are emerging and that will guarantee the sustained development of this sector.

Biomass (presently with 363 MW) and biogas (with 4,9 MW) were selected by the new government as two leading RES to be developed and supported. Biomass source is especially important in Portugal since it can be a profitable route to improve forest cleaning and, subsequently, helping the control of wild fires that have ravaged the country for so many years.

Solar Thermal and Solar PV are two other RES where huge investments are being considered. Presently with 3 MW of installed capacity, the target for 2010 is established in 150 MW. Part of this capacity shall be used by the 64 MW Moura EUR 250,000,000 Solar PV project, which is being developed by AMPER (a municipality company) and BP Solar, and by the 50 MW Solar Thermal project that is starting to be put in place.

The Portuguese Government has recently announced its intention of launching two international tenders, one for the attribution of a 22 MW Solar PV licence and the other for a 100 MW biomass licence.

4. What is the future?

The strong presence of the major international players and of the innovative and gifted Portuguese promoters will certainly enhance the vitality of the renewable energy sector in Portugal in the following years.

The market will certainly develop new solutions in all the aspects related with this sector: (i) in the technical issues, with the growing know how of the Portuguese promoters, which have already developed several technical solutions to some of the wind farms problems found a couple of years ago, (ii) in the financing of the projects, with investment banks, both Portuguese and international, trying to leverage each project, finding new proposals to increase the promoters return and new financing and refinancing schemes; (iii) in the legal aspects, with solutions to any problems that may arise related with the licensing, environment, tax or commercial and financial issues.

This is the major challenge that the presence of the most important players combined with a promissory growing market offers to Portugal. Certainly, Portugal will take this opportunity to become a relevant player in the renewable energy sector.


*Source INEGI, first quarter of 2005.