Negative electricity prices are becoming more common in Spain, challenging the traditional risk allocation in PPAs where producers bear most of the risk. Lenders are now pushing for more balanced risk-sharing to protect producers and ensure renewable projects remain viable, with certain unilateral risk allocations no longer accepted by lenders.
In Spain, producers usually bear the costs of negative or zero prices, as buyers typically provide little or no compensation for power generated during those hours. This has been the norm because of the status of Spain as a buyer’s market for PPAs, the fact that the country had not recorded any negative price hours before 2024 and that 0 and negative prices were expected to be short-lived and rare. However, this trend is changing.
Firstly, zero-priced hours have seen a significant increase, rising from 122 instances in 2023 to nearly 530 in 2024, according to exchange data. Spain also recorded its first negative Day-ahead prices in April 2024. Since then, the country has experienced 244 negative-price hours, with most occurring in spring and early summer, when high renewable output overlaps with low demand. In addition, new renewable capacity added in 2024 reached 6 GW by October, close to last year’s record of 6.5 GW. With negative and 0 prices expected to continue, lenders are rethinking their approach to financing.
So far, lenders remain relatively open to financing projects with some level of merchant (market) exposure. Lenders’ caution has, however translated into pushing for new debt structures that involve measures of future financial health, rather than just historical performance, or “cash sweeps,” where excess cash generated by the project is used to pay down debt earlier than scheduled.
As hourly price forecasts reflect more frequent negative pricing, lenders are demanding safeguards in PPA contracts. They are thoroughly assessing project sensitivity to market risks and this, coupled with the less favourable market environment is causing debt-to-equity ratios to drop below 50% in some cases. This means developers are being required to contribute a larger share of equity capital, as lenders are willing to provide a smaller portion of the project’s funding through debt. Some lenders now refuse to provide debt financing for projects with PPAs where producers bear all negative price risks, especially if no compensation is provided for both negative and zero-priced hours.
Pepe Zaforteza, Regional Lead PPA Transaction at Pexapark, identified two key ways PPAs are adapting:
- Zero-price Floor: Settling prices at zero instead of the Day-ahead market price during negative-price periods.
- Capping negative hours: Limiting the number of negative-priced hours covered by the PPA.
Some PPA clauses are also aimed at discouraging behaviours of market participants that increase the frequency of negative pricing, by separating physical curtailment and financial compensation. For example, assets could be curtailed during negative-price hours but financial settlement against nominated electricity could still occur.
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