By Angus McCrone
Bloomberg New Energy Finance
Sometimes it is more comfortable to be proved wrong than proved right. When we published analysis last summer warning that the feed-in tariff regimes in Germany, Italy and – particularly – Spain might prove an expensive way of achieving additional renewable energy capacity, we did so in the knowledge that it would not be a welcome message for many in the industry.
Any hope that we might be proved wrong has now melted away in the furnace of the European sovereign debt crisis that started in Greece and is threatening to singe other countries from Portugal to Ireland, and Spain to the UK.
The collapse in tax revenues in the recession and the emergency fiscal action taken in 2008-09 to prevent a re-run of the Great Depression has left many government budgets and national debts in parlous shape. Meanwhile with the pain of tax rises and spending cuts to come, electricity consumers are more likely to notice, and object to, hefty increases in their bills.
Concern about the coming squeeze is one reason why clean energy share prices have languished behind the broader market in recent months, as we noted in this column in April. A sector that relies on government-set incentives is exposed when those administrations have to wield the clippers.
Investors have now concentrated their gaze, through worried brows, on events in Spain. Traditionally one of the leading countries in renewable energy deployment, Spain is currently seeing an almost-complete standstill in PV solar investment, as developers await Madrid’s decision on its feed-in tariff.
The government has allowed the market to believe that it is considering not just deep cuts in the tariff for future projects – such action would be justified given the sharp falls in PV hardware prices since 2008 – but also reductions in the tariffs already promised to existing projects.
There is a swirl of rumour surrounding the deliberations of the Spanish government, much of it probably ill-founded. At one point, Miguel Sebastian, the industry minister, said that “retroactivity” was not under consideration. At first, this reassured investors – until they realised that the minister meant only that tariffs already paid out would not be clawed back. Madrid appeared to be leaving the door open to cutting future tariffs for existing projects. A leaked presentation, estimating the cost over 25 years of renewable power tariffs at a mighty EUR 126bn, found its way to Bloomberg New Energy Finance.
The uncertainty in Spain is likely to clear in June, when a decision is announced. In the meantime, nerves are on edge. Initial public offerings by T-Solar, Renovalia and Engyco have been put temporarily on ice or more formally postponed. The stock prices of big Iberian developers Iberdrola Renovables and EDP Renovaveis have suffered, falling 23% and 25% respectively since the beginning of March. By comparison the WilderHill New Energy Global Innovation Index, or NEX, has slipped 16% during that time.
What is clear to experienced investors is that any Spanish move to cut tariffs for existing projects would be disastrous for the sector in Europe. Banks have lent non-recourse finance to wind and solar projects on the basis that government tariffs are guaranteed for 10 or more years. If a major country ditched this commitment, the supply of debt would be under grave threat even in countries where such a move would be almost inconceivable, such as Germany. If debt dried up, then European governments could kiss goodbye to their chances of meeting 2020 renewable energy targets.
The probability is that the government of Jose Luis Zapatero is, in fact, engaged in the well-worn practice of expectations management. Put out a rumour about savage cuts, and hey presto the eventual harsh cuts seem almost gentle by comparison. In addition, Madrid must know that reneging on past commitments would likely trigger a wave of legal action against it from investors in existing projects.
The agony over the Spanish decision has highlighted the wider issue of whether feed-in tariffs are the best device for bringing about renewable energy deployment. In this column last August, we cited the example of wind and solar tariff auctions in China as another alternative. Despite our humble questioning of feed-in tariffs, emerging economies such as Malaysia and Namibia are considering introducing them for new sectors and the UK’s just elected Conservative-led government may offer them for offshore wind as well as for the small-scale generation projects that have been eligible since last month.
However there has also been some movement the other way – in Latin America. Brazil, Argentina, Peru and Honduras are bucking the pressure from lobbyists to introduce feed-in tariffs and experimenting with tender-based (auction-based) processes. These have also been used in California and Canada. Tenders are more complex than feed-in tariffs, but the advantage is that they include a strong element of price discovery. The price achieved under tenders can be much lower than under a tariff scheme. In Brazil, for instance, the fixed tariff (Proinfa) scheme for wind – no longer available – offers a price of $141/MWh, fully 61% higher than the prices achieved during the recent auction of $81/MWh, which are highly competitive with gas-based power prices.
In the past, tenders have often failed to deliver installed renewable energy capacity – often a utility will sign a contract with someone who has bid so low that they cannot complete the project at that price. The utility then shrugs its shoulders and tells the regulator it did its best. The new wave of Latin American tenders includes a penalty for non-delivery, which should focus the mind of the bidder, and that problem is also reduced by the provision of pre-permitted sites. Another problem that is often cited with tenders is that market participants “game” the system – colluding to refuse to bid or to place high bids.
This is a problem that affects all government contracts – there are legal remedies, should any country be prepared to use them. Bloomberg New Energy Finance’s position is not that feed-in tariffs are worse than any other system, but equally nor are they de facto better. They can be made to work, as can renewable portfolio standards (combined with certificates or not), tenders, tax credits or other approaches. It may be possible to limit the cost to future taxpayers and electricity consumers by trimming feed-in tariffs more frequently than before, as seems to be happening in Germany and the Czech Republic. It might be possible to combine them with another mechanism such as a levy on developers’ excess returns.
The important thing is that, for the sake of reducing emissions from the energy sector while price gaps exist between renewable and fossil fuel power, the debate must go on.