Spain extends premium rates for renewable energy investors to drop lawsuits

11 December 2019 (Last Updated December 13th, 2019 11:51)

The extension would be applicable only to projects whose owners either waive-off certain court-awarded compensations or quit their judicial proceedings against Spain.

Spain extends premium rates for renewable energy investors to drop lawsuits

Spain has announced it will extend the premium rates for renewable energy, cogeneration and waste management projects started before 2013 for another 12 years. 

The extension would be applicable only to projects whose owners either waive-off certain court-awarded compensations or quit their judicial proceedings against Spain over retroactive premium cuts enacted by the government in 2013. As per the new royal decree-law (RDL), the reasonable rate of return is set at 7.398% which would be applied to these investors.

Spain witnessed regulatory change post the enactment of Royal Decree-Law 9/2013 (RDL-9/2013). During 2013 and 2014, the Spanish electricity sector underwent major legislative reform in order to guarantee financial stability in the electricity system. The removal of deficit in the electricity sector and preventing all future deficits was one of the prime aspects of RDL-9/2013. The RDL-9/2013 replaced the previous system of feed-in-tariff (FiT) where the government had to incentivise the developer for the units of electricity supplied by the developer to the grid. This had resulted in tariff deficit in the electricity sector of the country.

Following RDL-9/2013, the country enacted a compensation regime for renewable energy developers called the “regulatory periods” of six years each and on the concept of reasonable yield which was set at 7.503% for the first regulatory period ending on 31 December 2019. The reasonable yield for the second regulatory period which would start from 1 January 2020 until 31 December 2025 has been set as 7.09%. The Government will calculate the average market price of Treasury Bonds with a tenure of 10 years in the secondary market for the period of 24 months preceding May 2019 and add to it the necessary amount in order for the aggregate result to be 7.09%.

The change in the remuneration system in 2013 gave rise to a number of arbitration proceedings, most of which are still going on. Several foreign investors, mostly investment funds sued the country after the earlier government cut renewable energy subsidies for a second time in 2013 in order to reduce the power tariff deficit built up through years of artificially low prices. The subsidy cuts had affected a significant number of plants.

Until 2012, power generation from renewable sources had been primarily promoted by FiTs and a premium tariff mechanism. Renewable power generators could choose from these two mechanisms – selling the power directly and receiving a FiT, or selling power in the wholesale market and receiving a premium on the market price. From 1 January 2013, premium tariffs were cancelled, according to the RDL 2/2013. Additionally, the FiTs for various renewable energy sources were revised for 2013 under this Decree-Law. The new FiTs implemented at that point in time were to be adjusted every year, on the basis of the CPI at constant tax rates, excluding unprocessed foods and energy products, starting on 1 January 2013. 

Under, the RDL 9/2013, phasing out of FiTs for renewable energy sources was decided, which was replaced with a new system of remuneration for renewable energy sources, which gives a return of 7.503%. This change of mechanism resulted in a drop in new renewable energy installations in the subsequent years as for some projects, this return level is much lower than the returns on which finance and investment decisions were based. Spanish companies that financed plants with bank loans carrying interest rates close to or above the reasonable rate of return level fixed by the government had to fight back through Spain’s sluggish legal system. 

According to GlobalData, Spain had cumulative wind installations of 22,766 MW at the end of 2012. The industry, with installations of 3,179 MW at the end of 2000, witnessed growth at a compounded annual growth rate (CAGR) of 18% during the period 2000 to 2012, which was mainly driven by FiTs. Post phasing out of FiTs in 2013 the industry has stagnated. At the end of 2018, the total installed capacity stood at 23,534 MW, growing at a minuscule CAGR of 0.5% since 2012. In the Solar PV sector as well the scenario was similar. The industry, at the end of 2012, reported cumulative installations of 4,560 MW which at the end of 2000 was 14.23 MW, growing at a CAGR of 61%. At the end of 2018, the solar PV industry of Spain had installed 5,162 MW, growing at a CAGR of 2% in the post-FiT era (2012 to 2018). 

The foreign investors are going through global arbitration courts. The country is currently facing 45 open lawsuits against it and has so far lost 10 cases. It has not paid a penalty of 821 million euros ($906 million) set by the arbitrators for denying that it breached the contract with investors. As per the latest RDL, the country has offered incentives to investors to drop around 10 billion euros ($11.04 billion) worth of lawsuits against the country by allowing them to maintain profitability rate of 7.398% until 2031.

The new rate might improve the investors’ confidence in the renewable energy market of Spain. This would guarantee a stable regulatory framework which would allow the country to reach the targets established in the National Energy and Climate Plan (NECP). According to GlobalData, the country is expected to have cumulative wind and solar PV installations of 40,330 MW and 31,269 MW respectively at the end of 2030. The solar PV installations from 2018 will grow at a CAGR of 16% whereas the wind installations will grow at 4.5% per annum till 2030. With the extension of premium rates, the industry will witness spur in renewable energy installations.

Related Reports: 

Spain Renewable Energy Policy Report 2019–spain-renewable-energy-policy-report-2019/ 

Power Quarterly Deals Analysis: M&A and Investment Trends – Q3 2019–power-quarterly-deals-analysis-ma-and-investment-trends-q3-2019/