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The economics of merchant renewables in Iberia. Part II: Portfolio diversification – September 2020

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We are pleased to present our latest Iberia power strategic insight report.

In light of the ambitious renewables targets in Iberia, a combination of subsidised, merchant and quasi-merchant developments is likely to coexist in order to meet such targets. Although the number of projects that will be delivered through the Spanish and Portuguese auctions in the coming years is uncertain, these assets will still be exposed to merchant risk either through remuneration modalities linked to market prices, or during the post-subsidy period.

This report forms the second of a two-part analysis where we have looked at the economics of merchant renewables in Iberia. With the increasing exposure of renewables to merchant risk, strategies to mitigate these risks become crucial. In this report, we explore the benefits of portfolio diversification in Iberia.

Key insights resulting from the analysis are:

  • Over the next decade, Iberia will see a strong growth of merchant renewables alongside subsidised assets. Investors of both asset classes will face a degree of merchant risks as the design of upcoming subsidy schemes do not fully exempt contract holders from volume and price risks
  • Portfolio diversification could support further investments into the renewables space by allowing investors to maximise returns while minimising risks. Strategies for diversification include jurisdictional, geographical, technological and business model diversification
  • “Renewables years” is one of the key short-term risks and could lead to a 20% variance in annual returns for wind and solar assets. In the instance of onshore wind, diversifying through a portfolio of wind assets would lower inter and intra-annual volatility by 35% and 20%
  • Diversification also plays a key role in reducing volatility in returns due to fluctuations in commodities and system composition. Determining the optimal portfolio mix (renewables, battery, CCGT, etc) is a complex exercise, but initial analysis suggests that including batteries to renewables could reduce volatility by over 10% at the expense of lower returns. However, investors should assess the timing of battery investments to better benefit from expected reductions in costs

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