Spanish Solar Sector – Commentary from SC Lowy Europe

In 2004, the Spanish government brought in the “Renewable Energy Plan” following new regulatory guidelines by the EU. This provided economic incentives aimed to boost generation from renewable sources. For the 6 years to 2012, installed capacity in solar thermal and solar PV grew by a whopping 138% and 82% CAGR respectively. This catapulted Spain to the third largest solar market in the world behind Germany and USA, with solar accounting for 6% of the country’s total capacity of 108GW. The growth significantly exceeded the intention of the plan, with capacity being 5 x the original target in 2010 as an example.

Whilst the government passed numerous minor reforms, there remained persistent imbalances in the system. For instance in 2012, renewable sources accounted for 35% of power generation but captured 58% of the remuneration pool. It was soon apparent that this growth was unsustainable and extremely costly, having led to a deficit of an estimated EUR 28 billion in the system. This is a huge problem for the beleaguered Spanish government who consequently overhauled the regulatory regime in 2013, structurally changing the way the energy generators were remunerated. This became more in-line with trends around the world by granting a ‘reasonable return’ on investment and guaranteeing break-even generation, rather than a subsidy for each kWh generated.

The regulatory change has proven to be extremely painful to solar energy projects, with average revenue reductions of ~20% and up to 40% in some cases. This has brought many projects to the brink of bankruptcy, particularly with newer projects that are still in the high-gearing phase. There also continues to be high political risk as the new regulation still gives ample room for the government to interfere with the remuneration regime at the end of each ‘regulatory period’. This occurs every 6 years, with the first test coming in 2019. As the debt profiles on projects are typically long-dated, with maturities far exceeding the next regulatory period, this risk is felt directly in the credit analysis. We expect debt restructurings to be prevalent, which will be challenging with the numerous stakeholders and lack of visibility.

Spanish and international banks have an estimated 30 billion Euros of debt exposure to the sector. How will the banks deal with their positions? What will restructurings look like? How will the secondary market value the regulatory risk in order to price the debt? We welcome an exchange of views on the sector.

Sources
Regulatory analysis of the Spanish power and gas sectors, Boston Consulting Group, 2013
US Energy Information Administration
Plan de Energias Renovables en España 2005 – 2010
Analysis of the new regulatory framework, BPI, 2013
Decreto Ley 9, 2013
Real Decreto 413, 2014
UNEF, 2013

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