The sun's gone in

The renewable energy space threatens to become a lot less attractive. Here's why.

Towards the end of May came news that FCC, the Spanish construction giant, had decided to freeze new investment in renewable energy.

“The group has decided to slow…investments in solar thermal energy until they [the government] clear up any uncertainties about the bonus policy,” said FCC president and chief executive Baldomero Falcones before a shareholders’ meeting. To those with a vested interest in the Spanish solar industry, the announcement was the equivalent of an alarm going off.  

The “bonus policy” refers to the subsidies provided by governments to investors in renewable energy. These subsidies have provided a necessary kick-start to industries which will help European governments meet a European Union target of 20 percent of energy production emanating from renewable sources by 2020. One banking source recently told Infrastructure Investor:  “Renewable energy is a nascent industry. Governments had to promote it or the technology simply wouldn’t have developed.”

In Spain, the regime for investors in solar projects was particularly enticing and encouraged a flood of capital. According to an article in the New York Times, Spain accounted for 40 percent of the world’s total solar installations last year. And now the flood has stopped. In autumn last year, in recognition of the financial cutbacks demanded by the new post-Crisis ‘age of austerity’, Spain effectively turned off the taps by making its regime much less attractive.

Moreover, there are fears that Spain may implement dreaded retroactive subsidy cuts – and it’s this threat which goes to the heart of Falcones’ dramatic decision. He also said the following: “It’s important not to break the pre-established [subsidy rules], because the country will lose credibility, and that is very difficult to recover and costs the economy.” The threat of retroactive subsidy action was also cited by media reports as a factor in the pulled recent IPOs of photovoltaic plant operators Grupo T-Solar Global and Renovalia.

The implications of this for infrastructure investors are significant. As Infrastructure Investor highlighted in a cover story earlier this year, renewable energy infrastructure is increasingly on the radar of infrastructure funds. Smaller funds have for some time been busily building up portfolios of assets in the renewable space. These portfolios are now just beginning to attract the attention of large, global infrastructure funds – particularly as competition from utilities appears to have lessened as they focus on balance sheet restructurings.

Of course, investors in areas such as solar always knew there was ‘regulatory risk’ in the form of generous tariff-based incentives being made, shall we say, less generous.

But the consensus view of fund managers has tended to be that retroactive legislation would be unlikely. How could a country be taken seriously if it gave with one hand and swiftly took away with the other?

That unlikely scenario now appears closer to reality. It’s a phenomenon that may spread beyond Spain – not only Spain is in a budgetary predicament, after all. And it poses infrastructure investors a pressing question: just how much risk are you comfortable with?