As renewables projects go, the 20MW solar photovoltaic Solaris energy park serves as a pathfinder project, financed through the capital markets and benefiting from the highest tariff available for the technology in Spain

Deutsche Bank led the hybrid capital markets portfolio project, financing the facility in El Bonillo (Albacete) - a project being promoted by Abastecimientos Energéticos (Abaste).

Project Solaris is the latest in a recent line of PV solar projects in Spain - a market where this cutting edge technology is building a presence that looks set to continue as well as setting a precedent that should be followed by other sunshine countries.

While solar PV does not have a long history globally, it does have an impressive track record in Spain which is becoming something of a testing ground for different technologies.

Back in April, Germany's EPURON opened a €13 million, 1.5MW solar PV system at La Junquera. Financing included debt from WestLB and equity from a group of private investors buying 100kW sections of the project.

That same month, US-based PowerLight entered into an agreement with Agrupacion Solar Llerena-Badajoz 1 and Solarpack Corporacion Tecnologica to design and build a 4.8MW solar electric power plant in Llerena, Seville.

In February, Iberdrola announced plans to invest €206 million this year - €610 million through to 2009 - in renewable energy projects in the Spanish region of Castile and Leon.

The company is planning to install two thermal solar facilities in the region - with a combined output of 100MW - and three small PV projects totaling 3.5MW.

At the start of the year Dexia and WestLB closed financing on the €188 million Luzentia Promocion y Mantenimiento Renovable 20MW solar PV plant in the Murcia province.

The key shareholders of Luzentia are members of Spain's Aguado and Torres families working with Banco Gallego. The €180m debt package included €160m of senior debt and a €20m VAT tranche to bridge a Spanish tax rebate. Equity is €28m.

And then at the end of last year, in the south west of the country - between the Rio Tejo and Rio Guardiana - Qualitas Equity Partners (75 per cent owner) and Fotowatio Energía Solar (25 per cent) built one of Spain's most ambitious renewable developments to date, a €176m 20MW solar PV project called La Magascona.

This latest deal to close - Project Solaris - also follows hot on the heels of an interesting development, the €961m IPO of Spanish solar panel manufacturer Solaria Energía y Medio Ambiente. Morgan Stanley and Banesto acted as joint global coordinators and bookrunners on this deal - once again demonstrating interest in the sector.

This snapshot of the market shows a real enthusiasm for the solar PV sector and points to continued investment.

Financing

This is the first solar power project in Europe to be financed using a capital markets solution as well as being the first renewables project financing to reach financial close in Spain since the new tariff regime for renewables - Royal Decree 661/2007 - came into effect on 1 June 2007.

Deutsche Bank devised the funding solution and has utilised its capital markets underwriting capability to ensure that the transaction can be successfully placed.

The hybrid private wealth management and capital market financing was arranged by Deutsche and totals €217 million (US$292m).

It includes:

• €184.3 million (US$248m) in senior notes
• €33 million (US$44m) in the form of equity and quasi-equity instruments

The bond package includes a €26.3 million (US$35.4m) VAT facility and has a maturity of 24.5 years.

Drawdown is in multiples of 1,000 and investors are described as domestic, mostly high net worth individuals.

The bond was introduced by Deutsche Private Wealth Management in Spain and was provided on a portfolio basis to the 200 separate PV power stations through a Luxembourg issuer.

The individual power stations benefit from common infrastructure, construction, operation and management provided by companies in the Abaste group.

Tariff structure

The transaction is designed to benefit from the regulated tariffs afforded by the Special Regime under the new Royal Decree - approved on 25 May 2007 - which regulates the electricity production.

This decree entered into law on 1 June and replaces the Royal Decree 436/2004 of 12 March which established the methodology for the legal and economic framework for power production.

Pursuant to this new decree generators of less than 100kW were eligible for favourable tariffs.

The tariff is set on a fixed price scale and depends on the facility's installed capacity - being equal or less than 100kW - this power brings in €0.44/kWh for PV solar for the first 25 years. After that, it drops to €0.35.

For projects producing 100kW to 10MW of PV solar power, the tariff for the first 25 years is 41.75 cents - after that falling to 33.4 cents.

For those facilities with installed capacity from 10-50MW the tariff for the first 25 years is 22.97 cents, thereafter dropping to 18.38 cents.

As the Solaris park consists of 200 individual power stations owned by private and corporate investors introduced by Deutsche Private Wealth Management, Spain - it benefits from the highest tariff banding.

The individual power stations benefit from common infrastructure, construction, operation and management provided by companies in the Abaste group.

Legal matters

Abaste was advised on the transaction by Herbert Smith and Garrigues. Deutsche Bank was advised by Linklaters.

'This transaction - in this case the first capital markets financing of a solar power plant - demonstrates once again how important innovative funding solutions have become for project developments,' said Linklaters partner Andrew Jones.

'It is also exciting in that it brings the benefits of the international capital markets within reach of private investors.'

Madrid-based Linklaters partners Ignacio Paz and Iñigo Berricano said: 'Solar energy is becoming a significant part of the Spanish market, with participants using increasingly sophisticated international financing techniques, as evidenced by the successful IPO of Solaria and - now - by Project Solaris.'

Garrigues senior associate Guillermo Munoz-Alonso says of the deal: 'It was an innovative transaction combining private banking with a bond structure.

'The combination of English and Spanish law was interesting and challenging to make the two compatible. We had to adapt it to the features of the new regulation - which we managed to do in a short period of time.'

Conclusion

If the pace of investments continues in the Spanish PV solar market, there will likely be a few more such projects financed and constructed in the country in the coming years.

With the changed tariff system now in place and the abundant availability of resource (sunshine), the Spanish market is the most fertile in the world for this technology with some of the best conditions in Europe.

The tariff system also lends itself to the capital markets for financing and it is likely that this model will be repeated in coming years, putting Deutsche in a strong position having worked on the first one.

By the end of the decade, the industry will be well on its way towards appointing a dominant technology and market leader.

There are many countries that would benefit from PV solar and its obvious advantages in countries where land is cheap and the climate is dependable.

PV solar is also a tempting proposition for countries that need to power remove habitats and for companies - like the oil majors - that need power sources in inhospitable environments.

As with wind power, storage remains an issue - but this is being tackled and technology is moving at such a pace that it should not be long before the problem is relegated to the role of early days teething trouble.

The Spanish government is clearly keen to encourage renewables adoption in a country where 28 per cent of the power generation comes from coal-fired facilities [2005 stats - see image below].

Spain is not alone in its ambitions in this sector, but it is clearly leading the charge.

The PV solar market is developing in Portugal, Germany, France, Italy, the US, Canada, UAE and South Korea.

Good news travels fast and it will soon start to gain a purchase in more African, Asia, the Middle East states and Australia.