“We need leases for renewable equipment packages”

Expert Interview – July 04, 2024 | Sarah Hommel de Mendonça

With 1.5 gigawatts (GW) market growth in 2023, Portugal remains a small, but significant part of the 14 European GW-size markets.

It is significant because of its comparably large share of renewables within the total electricity mix, and because of its high irradiation levels and attractive investment conditions that make a great business case for solar energy projects.

We spoke to Pedro Amaral Jorge, CEO of the Portuguese Association for Renewable Energies APREN about the current opportunities and challenges of the Portuguese market for photovoltaics (PV) and renewable energies.

Interview with Pedro Amaral Jorge, CEO of the Portuguese Association for Renewable Energies APREN

Portugal has an impressive share of renewables in its total electricity consumption. But almost half of this comes from hydropower − at least in the past 6 months. What are the main challenges for the expansion of the new renewable energies solar and wind?

Between October 2023 and mid-May 2024, we produced a lot more hydropower than usual. On average, hydropower made up more than 40 percent of our electricity generation. Our total hydropower capacity is 8 gigawatts (GW), and we also have 5.6 GW of wind power and close to 4 GW of PV. The PV capacity is split between 1 GW of self-consumption and small-scale systems and 3 GW utility-scale.

Our main challenge is licensing. The second challenge is grid availability. Grid capacity is scarce. There are projects that may have to wait for up to nine years. This also generates a stress in terms of the supply side for electricity.

The third challenge is the competition for land use. We need to be able to integrate renewables into our landscape and make sure that municipalities receive compensation at some stage – otherwise people will reject PV. We also need more clarity about the regulatory framework provided by the European Commission and the European Parliament which is to be implemented into the national laws of EU member states.

Another new challenge is the design of the electricity market. We still allow electricity prices to be set on the basis of the short-term price of natural gas. This is not suitable for non-dispatchable renewable energy sources like solar and wind. We need a solution, preferably a market-based solution, using standardized PPAs. Standardized PPAs can be traded by consumers and suppliers alike. We also need to establish sovereign guarantees for consumers’ credit worthiness as a basis for bilateral PPAs.

Besides, we need to make sure that our regulation is reliable and suitable for incentivizing private sector investment. There has to be a degree of bankability for each project. We need hybrid systems using wind, solar and batteries. All of this has to follow a new paradigm of renewable electricity supply and, in my opinion, the new paradigm is: We have to build renewable power stations that operate 4,000 or 4,500 hours a year at nominal power. That’s the future of the market.

Although the potential for solar power in Portugal is huge, only 20 percent of all available rooftop areas are used for PV. What obstacles is the Portuguese rooftop sector facing?

When you consider single-family homes, the situation is simple. Here, owners usually have sufficient disposable income and are interested in self-consumption. These types of homes can easily be equipped with an electric vehicle, a battery, PV panels and a heat pump – the whole self-consumption package, and financial tools, e.g. loans, are easily available.

But when it comes to multi-story buildings with a large number of apartments, the roof can only cover 10 or 15 percent of the building’s energy consumption, at least if we assume that all the energy consumed is in the form of electricity. We need to develop energy communities without regulatory barriers, neither through the Distribution System Operator (DSO) nor the global general managers of the electrical system. We need to come up with solutions.

Then there are rooftops where irradiation is insufficient to make a business case. In the past, construction did not focus on energy efficiency. Also, I think the European Commission should encourage member states to provide the necessary financial tools.

The example is very simple: Just like it’s possible to lease a combustion engine vehicle through a leasing tool, it should be possible to lease a renewable energy package. We need to come up with a suitable system in order to ramp up the demand for electrification.

When it comes to apartment buildings, getting all apartment owners on the same page is still difficult.

In most European countries with a high percentage of wind and solar, the grid is a bottleneck. What is the situation in Portugal in terms of the digitalization and modernization of the grid?

In Portugal, both the Transmission System Operator (TSO) and the DSO grant public concessions to private operators. That means that any investments need to be approved by regulator. Both the DSO and the TSO need to be more aggressive about finding solutions for dynamic grid management.

At the same time, the regulator needs to loosen their criteria and allow for more CapEx investments into the grids to make sure that we can promote flexibility and manage grids in a more intelligent way. We use AI to make sure that every part of the grid is balanced, and curtailment and congestion are kept to a minimum.

Another problem for the European renewables sector is price cannibalization: very low or negative rewards for renewable energy producers due to price drops caused by oversupply. How does this problem affect Portugal?

Portugal and Spain together form the Iberian electricity market. Although we have two separate bidding zones, it’s the same market.

Over the past five months, we had an excess of renewable power, which meant that there were a lot of times during the day when the price was at zero. We were operating 23 to 25 GW, producing electricity and supplying all consumers without being paid. The European market design needs to solve this problem because we cannot continue to say that natural gas should determine the price for each hour that there isn’t enough renewable energy.

We know that there will be enough renewables. We need to increase demand. But we also need investors and lenders to be confident that even when the prices drop to zero, they still get the minimum required compensation so that their business remains viable. Otherwise, all equity or debt investments will stop.

How is the market for battery storage developing in Portugal?

It's still at a slow pace because there is not enough support for behind-the-meter applications. We need incentives for batteries. Also, we still have some issues in terms of legislation on stand-alone batteries. We need a regulatory definition for stand-alone batteries, specifically for the TSO, the DSO and the Directorate-General for Energy and Geology (DGEG).

With a stand-alone battery, you don’t need a grid connection point in the way that a power station does. It’s very simple: No one will feed power from batteries into the grid while the price is at zero, and this prevents congestion. Operators of large installations will store the power and feed it into the grid at a time when the price is up.

How do you think the Portuguese solar market will develop in the future?

We hope that in 2 or 3 years, we will have added another 3 to 4 GW to the system. A lot of production licenses have already been issued and there is a lot of construction work being done on the grid to help those projects get connected. A growing number of companies are looking for self-consumption solutions.

Our target for 2030 is 15 GW at utility scale and 5 GW in the area of self-consumption, energy communities and small scale. Even in a very pessimistic scenario of achieving just 50 percent of that target, we will still have added another 6 GW by 2030.

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