After a tumultuous start of the decade, Spain and Portugal are back in rating agencies’ good books thanks to reforms allowing for sound and stable regulatory frameworks.
In 2012-2013, Spain enacted drastic retroactive renewables subsidy cuts that left many investors stranded with non- or sub-performing assets. The outcome of a related arbitration process, which came to light last week, found the country in violation of international treaties. Portugal has also faced its share of trouble, after financial woes exacerbated by the global financial crisis led it to apply for a bail-out in 2011.
Yet about half a decade since the turmoil, both countries’ have “predictable and stable” regulatory frameworks for gas and electricity transmission and distribution, according to Standard & Poor’s. In separate reports released this month, the rating agency described these as “mostly supportive”.
In the case of Spain, such confidence is underpinned by new, six-year regulatory frameworks covering July 2014-December 2020 for gas, and December 2013-December 2019 for electricity. “It is easy to project long-term remuneration, while maintaining a fair return. The electricity remuneration is RAB-based, while gas remuneration is based on a parametric formula, allowing for market-based growth,” S&P noted.
It added that the market now benefits from “tariff certainty” and deemed the sector largely capable of recovering most of its costs. “Generally speaking, the Spanish regulatory frameworks are converging toward other stronger European regulatory frameworks such as those in Germany, France or the UK.”
The agency lamented, however, the absence of an independent regulator as well as the remaining tariff deficit in the system, whose cumulative amount it placed at €23 billion for electricity and €2.4 billion for gas.
Portugal also exhibited strengths, although sometimes at a different level. “Electricity and gas operators benefit from the regulator's solid track record of stability, supported further by the EU's supervisory framework,” S&P argued.
It added that the regulatory framework provides near total coverage of costs as well as protection against volume and commodity risk, and observed that tariff deficits in the Portuguese system are borne through tariffs by consumers, not by the grids.
The country’s relative weaknesses lied in its somewhat short regulatory period (three years) and the extraordinary taxes on grid operations imposed since 2014. “Although limited, [these] constrain operators' profitability, because they are not pass-through, and we believe this weighs on utilities' creditworthiness.”