Global investors see red over Spanish law change

International CSP investors are running out of patience with the Spanish government as lawmakers prepare to pass measures that will ruin the market.

By Jason Deign

It is going to get nasty in Spain. As previously reported in CSP Today, the Spanish administration is planning new fiscal measures which the industry believes could increase its costs by up to 20%, essentially pulling the rug from under investors’ feet.

And as time runs out to address the fact that the law actively discriminates against CSP, the sector’s global backers are drawing up plans to fight the Government in the International Court of Arbitration.

At the heart of the problem lies Spain’s mammoth tariff deficit, which is due to hit €30 billion by the end of this year and which could take up to 30 years to pay off, according to the Secretary of State for Energy, Fernando Martí. Everybody in Spain agrees the deficit needs to go.

The question is how. The renewable energy lobby says taking a cut from the windfall profits that Spain’s big five electrical companies make from fully paid-up nuclear and hydro plants might help. The big five, meanwhile, argue for cuts to renewable energy subsidies.

So far, things seem to have gone more or less in favour of the big five.

Although in 2011 Spain paid out around a tenth of all the renewable energy subsidies in the world, according to International Energy Agency figures, the country’s PV industry, which accounts for the largest chunk of feed-in tariffs, has been practically paralysed by recent laws.

This has prompted international PV investors to sue the Government under the terms of the Energy Charter Treaty, of which Spain is a signatory. Now the process looks set to be repeated with CSP, and with what the solar thermal industry considers is far less justification.

The Government’s latest attempt to tackle the tariff deficit, through a proposed Law of Energy Sustainability, contains a blanket 6% tax on all forms of energy generation.

Discriminatory law

Insiders say this discriminates against renewable energy because their retribution level is fixed by law and any added costs cannot be passed on to consumers, as is sure to happen with the tax burden the electrical companies will have to shoulder for traditional power generation.

Furthermore, CSP is due to take a double hit because part of the new law will see the removal of a feed-in tariff for all energy that solar thermal plants produce using natural gas.

It might seem a minor point, but because this gas-generated power was previously eligible for a feed-in tariff all Spanish CSP developers included occasional gas generation in their daily operations and their business plans.

Cutting it out would hit CSP profits by up to 15% which, combined with the extra tax, could completely wipe out any prospect of investors making a decent return on their solar thermal interests.

The Spanish CSP industry has lobbied hard to have this proviso removed, arguing that the savings it will create are far outweighed by the value of the solar thermal sector to Spain’s economy.

All to no avail, however: the law looks almost certain to come into effect, essentially unchanged, in January. “It’s a retroactive measure because it changes the rules of the game when the match has barely started,” says one source close to the industry.

Foreign investors, which hold more than a third of the equity tied up in Spanish CSP plants, are not prepared take the change lying down. According to press reports, close on 50 institutional investors with holdings in the Spanish CSP market are currently drawing up battle plans.

International arbitration

One investor told CSP Today: “There are a number of funds that are looking to take the Kingdom of Spain to international arbitration precisely because of this change to the regulatory framework. They have left us no option.”

If the international arbitration goes ahead it will be the third case against Spain since it signed the Energy Charter Treaty, according to reports. And the impact on investor confidence in the country should not be underestimated.

“In our case it is becoming more and more difficult to get anything past our investment committee due to the uncertainties in Spain,” says Jaime Hector, a partner at London-based CSP investor Eiser Infrastructure Partners.

“And in sectors where the remuneration depends mainly on the government, current government actions make it almost impossible.”

Another consideration is how such perceptions might affect the country’s already-battered credit rating.

Borja Monforte, associate director of Europe, Middle East and Africa Utilities and Transport at Fitch Ratings, believes that current measures proposed in the draft law do not include retroactive changes.

But, he adds: “A possible retroactive change to renewable energy in future could have a negative impact on the mood of foreign investors. It is hard to say whether this would further affect the risk premium but it probably would not help to reduce the differential.”
 To respond to this article, please write to Jason Deign

Or write contact the editor, Jennifer Muirhead