How the sun set on Spanish solar

There are of course a long list of items on a limited partner’s checklist when they are considering making a commitment to a fund – but some are more important than others. From conversations with GPs targeting the European renewable energy space, it is clear that the regulatory risk impacting underlying investments is now right up there with a management team’s track record as one of a small handful of potential deal-breakers.

It doesn’t take a genius to work out that regulatory risk has accelerated up the priority list following the extraordinary developments in the Spanish solar photovoltaic (PV) industry. With imaginative timing, the Spanish government announced in a royal decree just before Christmas that the hours applicable for solar PV plants to benefit from the country’s highly generous feed-in tariff regime would be retroactively reduced.

Technically, this allowed the government to claim that it had not adjusted the tariff itself – only the applicable hours. The argument doesn’t appear to have washed with investors in Spanish solar PV projects. Nor is this surprising. The Asociación Empresarial Fotovoltaica (AEF), a Spanish solar industry body, said that many solar PV firms would be forced to file for bankruptcy. At risk is an estimated €15 billion worth of debt and equity with exposure to the sector.

Premature sigh of relief

Investors were particularly affronted by the fact that a prior royal decree, issued just a month before (in consultation with the sector), had avoided proposing retroactive measures. “On November 24, we all thought the worst was over,” reflects Peter Rossbach, managing director at London-based renewable energy investor Impax Asset Management. “The investment community took the view Spain wouldn’t go further to uproot the principles upon which we invest.”

And then came the u-turn. Why? The reason investors point to is the pressure being applied on the government by those Spanish utilities which were bearing the working capital burden of solar PV projects. This working capital burden was due to be refinanced by way of a Spanish government bond issue, which fell through in the fourth quarter. With the refinancing now postponed to some future date, the government had to find some other way of appeasing the utilities in the meantime – and did so by manipulating the economics in order to reduce their costs going forward.

At least a couple of important responses have arisen in the aftermath of the latest decree. One is a pledge from the AEF to fight any new law all the way to the European Court of Justice. Infrastructure Investor understands that the basis of any court case would be the distinction between a concession agreement (these kinds of adjustments have often been seen in Spanish road concessions for example) and laws governing private incentives (where such adjustments are allegedly unprecedented).

One response from investors, meanwhile, is to prioritise the wind sector – which does not require subsidies – over solar. “We will focus our investments much more on wind,” says Rossbach, whose firm recently acquired a large multi-country portfolio of wind assets from Conergy, the German solar company. “We see about four potential wind deals a week. There are a lot of distressed sellers who may have funding issues or for whom wind is not core business.”

Other investors, conscious that approval of the new decree was awaiting a Parliamentary vote (imminent at the time of going to press), were hoping for another u-turn. “The government backed down on solar thermal and will probably do so on PV,” said one. “I think a lot will depend on the level of pushback and from whom.”