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Spain’s Renewables Industry Applauds New Payment Scheme

Spain’s Renewables Industry Applauds New Payment Scheme

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Renewable energy investors could finally get the policy certainty they have been begging for—if the proposal passes.

Spain’s renewables industry is celebrating proposed legislation that could provide plant owners with guaranteed income for up to 12 years.

The regulatory framework would give renewable energy plant owners the option to stick with their current level of remuneration until the end of 2031, or switch to a formula based on the weighted average cost of capital that will be reviewed after six years.

Both options are seen as a vast improvement on the current system. Under a statutory review this year, the system would have seen a so-called “reasonable return” remuneration scheme falling about 42 percent in value, from a nominal 7.39 percent today to around 4.3 percent from 2020.

Spain’s former administration introduced the reasonable return concept in lieu of feed-in tariffs after it scrapped a generous FIT scheme in 2013. In theory, the concept allows for a fixed return on investment over the lifetime of a plant.

But it has been widely criticized by developers and investors. Detractors have noted that the investment levels for plants are based on theoretical rather than actual figures. Furthermore, the 7.39 percent is a pretax amount, which equates to a roughly 5 percent return after tax.

Plant owners have also struggled to achieve 7.39 percent in practice because of government accounting tricks.

But an even bigger bugbear is a clause allowing the government to review the level of reasonable return, in line with Spain’s national bond rate, every three years. This effectively meant investors had no long-term visibility of plant revenues.

This uncertainty spooked investors and has caused wind and solar installation rates to crater in Spain since 2013. More recently, intrepid solar developers have simply opted to ignore the regulatory risk attached to government bids and have built merchant plants instead.

However, the lack of investment in recent years means that Spain now faces an uphill struggle to meet its European renewable energy targets.

The Spanish renewable energy business association APPA estimates the country will need to invest €100 billion ($115 billion) to achieve its climate change goals.

The two proposals
The new law proposal shows Spain’s current left-wing government, which came to power last year, is keen to emphasize its commitment to renewables. Nonetheless, one feature of the draft legislation has puzzled observers.

The proposal gives plant owners the choice between a 7.39 percent remuneration rate for 12 years or an apparently vastly inferior scheme based on the weighted average cost of capital (WACC), which offers a return of around 7.09 percent and will be reviewed in six years.

Risk-happy investors might want to take a punt on the WACC being higher in 2026, but in practice the first option seems a no-brainer.

Hence it is unclear why Spain’s Ministry for Ecological Transition has even bothered with the WACC alternative, said Daniel Pérez Rodríguez, chief legal officer at Holaluz, a renewable energy retailer.

The secret appears to be in small print related to Spain’s liability from compensation claims stemming from the 2013 law. Spain faces a deluge of legal actions from renewable plant owners that lost out when FIT payments were stopped.

Under the proposed law, asset owners choosing to take the 7.39 percent option will have to accept a cap on any existing claims that effectively limits the state’s liability to within the amount it would pay under the new remuneration scheme anyway.

“If you have an ongoing legal process then there’s no advantage in pursuing it if you take this up,” said Jose María González Moya, managing director of APPA. “The government is saying: ‘Take your arbitration cases away, and I’ll give you 12 years at 7.39.’”

But will the law pass?
With most renewable asset owners expected to favor the higher-return, longer-term option, the question now is how soon the law might be passed.

This is not easy to predict given the balance of power between the ruling Spanish Socialist Workers’ Party (Partido Socialista Obrero Español or PSOE) and the opposition People’s Party (Partido Popular or PP).

The PSOE is governing with the slimmest representation of any ruling party in the history of Spain, and the PP, which crafted the 2013 regulatory framework, controls the senate.

Since the PSOE took control in June 2018, the PP has diligently stood in the way of practically all of the PSOE’s proposals. Given growing cross-party support for clean energy, though, it is expected to abstain from a vote on the renewables law.

Even so, experts believe it could be at least six months to a year before the legislation is passed. And things could take even longer if the PP and its allies find a way of forcing early elections. Renewable investors are praying that won’t happen.

Richard Heap, editor-in-chief at the analyst group A Word About Wind, which tracks wind sector investments, said: “It’s undoubtedly good for investors to have long-term visibility. [Trade body] WindEurope has spent years calling for governments to provide clarity to 2030.”

Renewable energy investors are cautiously optimistic that they’ll finally get it.

Source: greentechmedia

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Anand Gupta Editor - EQ Int'l Media Network