Retroactivity in renewables, international discredit for Spain - El País
20/06/2010
We all know that the Ministry of Industry is holding a dialogue with the different renewable energy associations. It is seeking to define a new model for the electric system capable of reducing the existing tariff deficit without increasing the cost of energy for consumers, or increasing it by as little as possible.
Senior Ministry staff and the minister himself have made a number of public statements in recent weeks in which they put forward different hypotheses for mitigating this tariff deficit. Many of them involve reducing the tariffs that will be received by future renewable energy facilities under the special regime. A reduction in tariffs that have already been approved for photovoltaic facilities that are operational, committed or pre-assigned has even been considered.
This is the basic idea behind the concept of retroactivity, a notion accepted by the Ministry, at the meeting held with photovoltaic associations last Wednesday, in which it proposed a retroactive reduction of 30% in the tariff which the Ministry itself approved for facilities that are already in use. The Ministry argues that this reduction is because of an alleged overproduction by photovoltaic facilities, which is completely false and destroys the fundamental argument used by the Ministry.
The Association of Photovoltaic Businesses, of which my company is a member, has always expressed its rejection of this notion, which it considers unlawful. It is a measure that seriously endangers the more than 23,000 million euros invested in the sector. Furthermore, with the retroactivity almost irreversible damage is being caused to the image of our economic policy in the international markets.
Aside from other considerations, there is a false argument that is frequently used when talking about retroactivity and which should be clarified. I refer to the alleged high profitability of old photovoltaic assets. It is false because these investments were made at old costs, with different risks, and the returns on these assets were modest at the time. The revenues are in line with the forecasts, with the positive and negative variations caused by the solar radiation, which in general offset years of more sunshine with years of more rainfall. There are no levers that now allow them to lower the tariffs.
The strong growth in the photovoltaic sector in 2008 has permitted both its national and international consolidation and the immediate and sharp fall in the cost of components since then. However, this subsequent fall in the cost of components does not mean that the previous prices were not much higher. In fact, the return obtained by investors who started up facilities in 2007 and 2008 varies from 6.5% to 8% over 25 years, which is fully in line with what the Electric Sector Act defines as a “reasonable return”.
All the investments made before September 2008, under Royal Decree 661, had a much higher investment cost than current investments, due to the lesser development of technology, the higher manufacturing cost of the panels, the high price of silicon and the higher installation cost of the plants, often particularly high prices due to the huge demand created by the fact that, in Spain, if the plants were not connected by 29th September, they did not have a tariff, and at that time the subsequent economic regime was not known.
A substantial part of the 23,000 million euros in accumulated investment in the photovoltaic sector arose in those years. The average leverage of these projects varies between 80% and 90%, with the interest rates closed on long-term hedges and with spreads that are much lower than at present. The result is a debt of almost 20,000 million euros, distributed mostly among national and international banks and other lending institutions and with no possibilities of refinancing.
With these circumstances, in projects that are as capital-intensive as photovoltaic projects, where there are also very low operating costs, there are no levers that make it possible to absorb a reduction in tariff conditions compared to those that were the used at the time of making the investment decisions. These are sunk costs, which cannot be modified, and which, if they cannot be recovered because of a regulatory modification in tariffs, would entail equity losses that are completely unrelated to the management and decisions of the investors.
We have said several times that the retroactive cut in premiums will sink solar energy, and, unfortunately, this is the case. In fact, the entire renewable energy sector would be in serious danger of disappearing. Market conditions would become totally arbitrary, with the goalposts changing at any time. Who is going to want to invest in Spain with that kind of uncertainty? This can spread to other regulated sectors, such as infrastructures, where the Ministry of Development has been offering returns of up to 10% in recent weeks.
Worryingly, the rumours about the possible retroactivity of the regulation on renewables are reaching the international financial markets, aggravating the loss of confidence in Spain and placing at risk the entry of capital into our country.
As well as undermining international confidence in our country and condemning the renewable energy sector to extinction, the result of the retroactivity will be devastating for the autonomous communities and town and city councils, which would be left without one of the very few instruments currently available to them for obtaining revenue and creating jobs.
As far as photovoltaic solar energy is concerned, now that Spain has achieved an outstanding international position and after the efforts this has represented in investments, it would be a sad paradox if retroactivity and legal and investment uncertainty were to wipe out, just two years later, this entire industrial and technological fabric. Just when the advances in technology allow for a gradual and significant reduction in the cost of photovoltaic energy and when our national and international experience could have started to bear fruit in creating jobs and generating wealth.
The regulatory uncertainty has already paralysed more than 10,000 million euros in new projects, both photovoltaic and using other renewable technologies. This is a significant figure at a time when public investment is falling and when there cannot be enough support to create jobs and stimulate growth in the country.
Rafael Benjumea is CEO of Fotowatio Renewable Ventures.
External source: http://www.elpais.com/articulo/empresas/sectores/Retroactividad/renovables/descredito/internacional/Espana/elpepueconeg/20100620elpnegemp_6/Tes
See document
