Once bitten, not quite twice shy

Incomprehensible. Irresponsible. Irrational. These were just some of the reactions from renewable energy investors when the Spanish and Italian governments undertook a slew of retroactive cuts to the sector’s subsidies in the first half of the decade, paralysing growth after a boom in solar and wind installations. And while the effects were certainly more severe on those investing in solar, wind developers and asset managers still emerged with their hands burnt and wallets lighter.

The two countries quickly became no-go areas for greenfield renewable investments and a symbol of what can happen to industries that become too reliant on generous government subsidies. In onshore wind alone, Italy added 6.2GW of new capacity while Spain added 11GW between 2006 and 2012, according to figures from The International Renewable Energy Agency. From 2013 to 2016, Italy would subsequently add 1GW and Spain just 219MW. The two countries had reverted from promised lands to the wilderness.

However, changes are afoot following some surprising government announcements. It began in June last year, when the Italian government announced that €9 billion would be available in new renewable energy subsidies, except for solar, over the next 20 years via the auction system. One has already taken place, awarding 800MW of wind. Meanwhile, Spain announced in December a 3GW auction would take place in the first half of this year, a vast improvement on its much-criticised 500MW auction held in January 2016, where approximately half of the auction is expected to be wind-based. Remarkably, in both countries, the governments restarting renewables are largely made up of the same political parties that took away the incentives in the first place.

While it has only been a relatively short space of time that Spain and Italy have been absent from Europe’s primary wind market, much has changed in the meantime. First and foremost, the framework has shifted away from the feed-in tariff system granting subsidies to any power plant to the auction-based system where only a certain amount of capacity is on offer.

“With the old incentive scheme the government didn’t have control over the future installed capacity,” says Francesco Cacciabue, partner and chief financial officer at investment firm Glennmont Partners, which has a 335MW wind portfolio in Italy. “Now the government is aware from the beginning what the costs will be and the price is much closer to the market price.”

His colleague Peter Dickson, also a partner at the company, concurs. “It’s finite capacity as well, so it’s a much more measured and structured impact. It’s completely transparent and the disbursement from the users is predictable for the government” he explains. “Those things are different from before. When you look at the Spanish situation, they had no limit on capacity and therefore the government had no control over it. It’s not exactly the same in Italy, but some elements are similar.”

Another significant change since Spain and Italy’s boom years is the cost of the projects. The cost of wind has fallen significantly, with IRENA estimating last year that wind costs have dropped by between 30 and 40 percent since 2009. Indeed, Italy’s 800MW wind auction saw prices fall to €66 per MWh, a 25 percent decrease from the €88.9 per MWh in 2014. Spain’s moratorium on auctions was broken at the beginning of 2016 and a small 300MW tender for wind saw the previously unknown firm Forestalia scoop projects at prices so low it required no subsidy. Forestalia’s bid was written off by the country’s wind association AEE as “not reflecting the reality of the sector”.

The problem that both countries face – Italy to a lesser extent – is convincing investors to return to markets where the issues were so severe that courts are still hearing legal cases on them, both in terms of wind and solar investments. With the same governments still in place, the threats to investments – in theory – remain. In the Spanish case, the national renewable energy association APPA even denounced the launch of the auction and said they would like to be provided with legal certainty beforehand.

“There was no urgency to announce this auction, since the renewables sector, after a moratorium that lasted five years, could wait a few more months for a more orderly and rational development,” José Miguel Villarig, president of the APPA, stated. Villarig was critical of the conditions of the auction which will hand out a fixed subsidy regardless of the type of technology.

Firms either currently or previously engaged in legal action against the Spanish government, including Acciona and Greentech Energy Systems, declined to comment on whether they would consider a return to the market. The latter is also engaged in arbitration proceedings against the Italian government. However, the reaction from those who suffered is not entirely lukewarm.

“We decided to stop our activity with renewables because of retroactive changes,” says Eusebio Güell, partner at investment firm SL Capital, which has since 2012 moved into energy efficiency. “The business model was completely changed and we decided to go to other fields.

“We need to find the [appropriate] business model again. Probably in the future, maybe in a year or a few years, we can go back again.”

In Italy, the response has, on the face of it, been quite positive. The 800MW tender for wind last year after former Prime Minister Matteo Renzi announced the new subsidy system for renewables was vastly oversubscribed, drawing bids totalling over 2GW. The winning bids, though, were largely from Italian utilities. It is unclear if foreign investors without the large economies of scale afforded to local utilities were among those to lose out in the auction.

“One of the reasons we didn’t participate in the last auction is we had a feeling – that was then proved right – that it was going to be quite a busy one,” Cacciabue says, explaining Glennmont’s position. “We won’t completely rule out in the future participating in auctions in Italy, or other locations.”

Daniel von Preyss, co-head of private equity infrastructure at Impax Asset Management, argues the greater effect of the less severe wind cuts in Italy was “more the perception of the market risk”. He adds that the firm is seeing very strong interest from both domestic and international investors in the Italian market.

What remains uncertain for these investors is when they might get another opportunity. While the Italian government renewed its support for the industry for another 20 years, there is no visibility as to when the next auction might take place.

“To have a renewable energy auction in Italy we need a decree of the Ministry of Economic Development, that also establishes the MW cap for each technology. At the moment, we don’t know if or when the Ministry will do it,” a spokeswoman for state energy agency GSE told us. In Spain, the government has given no indication as to whether the 3GW auction will be followed up with anything, with the AEE estimating that Spain needs to install 5.9GW by 2020 to meet its EU renewable energy targets. The Spanish government did not respond to requests for comment.

With there being few things investors hate more than uncertainty, the respective governments will need to prove to those waiting in the wings that the wind is behind them once again. ?