Spanish Solar PV tariff cut, not the brightest move?

By Theo West on March 23 2011

Late 2010, with budgetary pressures appearing from all angles, the Spanish government took the rash step of cutting established and guaranteed tariffs for power generation from solar photovoltaic (solar PV) panels. Was it a good idea? No.

Solar PV project finance investment shock

Project finance investors in the solar photovoltaic (solar PV) space were understandably left in a state of shock. The sudden modification of the tariff ‘rules’ was paramount to reneging on sovereign guarantees and ironic at a time when mistrust in Spain’s sovereign debt has left the government unable to repay large multi-billion sums to traditional power companies like Endesa. This cut had a very similar, negative, impact on investors’ outlook as the sudden change in tax legislation the Australian government made to the resources sector.

45% solar PV tariff cuts

There is an argument that if the Spanish government had been more circumspect about the magnitude or approach of their tariff modifications, the project finance investors in the solar PV space may have taken the changes on the chin and moved on. However, by introducing cuts of up to an astonishing 45% they did not allow themselves this possibility. This obviously left many project investors out of pocket and with these jilted investors representing funds worth USD 30 billion the Spanish government had not made any new friends.

Energy Charter Treaty claims from key project finance investors

After a period of consolidation, the bold step taken by the Spanish government is now looking a foolhardy one, as a syndicate of fifteen key project finance investors and energy companies are lodging a claim under the Energy Charter Treaty. A claim of this type has only once before being brought to an EU member state, but Vattenfall’s victory in that case and receipt of compensation from the German government does not augur well for the Spanish administration.

The future of PV project finance in Spain

So what does this all mean for project finance investors in the solar sector? Well, obviously, in the immediate future project finance investors are going to think twice and then twice again about investing in the Spanish renewable sector and they will negotiate much tighter returns if they do decide to invest. Risk, of course, spreads like wildfire and will permeate to lenders for PV project, further tightening returns. What’s more, the move by Spain will have already lead to concern for similar projects in other European countries wallowing in the aftermath of the credit crunch and the sovereign debt crises it has inevitably lead to.

The importance of professional financial modelling to mitigate risk

With increased risk, mitigation of that risk becomes all the more important in the evaluation phase which means high quality technical due diligence is very important and realistic professional modelling and associated downside sensitivity risk is not just paramount, but ultimately essential.

Legal recourse, in the event of governments pulling the rug out from under investors, will also be studied keenly and the outcome of the case brought by the aforementioned syndicate to the Spanish government will be given hawkish attention.

Possible review of Solar PV tariffs

An expected compensation win for the syndicate may not represent or indeed lead to a step-down from the new tariff position taken by the Spanish government, but should cap what has fast become an industrial and public relation debacle for the Spanish government and send a brightly flashing warning message to other countries reviewing their feed-in tariffs. UK government you have been warned.

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