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The Spanish renewable energy market has been at a standstill for several months now following Miguel Sebastian’s, Spanish Minister of Industry and Energy (known in local energy circles as Torquemada, leader of the Spanish Inquisition), announcement that a new law would dramatically reduce, even retroactively, the FIT (Feed in Tariffs) subsidies awarded to renewable energy assets for the stipulated 25 years. If this were to happen the shock waves would be felt around the globe.

During close to several centuries it was said that “the sun never sets on the mighty Spanish Empire” which indeed spanned the globe, much like the Spanish renewable energy industry does today, but it is looking more like a total eclipse if Sebastian’s plans become a reality. Just like the fall of anything great, the decay comes from within and if his plans to heavily reduce FIT levels across all technologies and even reduce those of already operating plants just two years into their 25 year government contracts, the effects on renewable energy could be devastating in world markets.

If a supposedly very legally secure country takes such action it will not only send yet another shock wave through the already battered Spanish economy but it will severely affect the huge amounts of foreign investment in Spain. The investment market’s reaction will no doubt be skeptical as this sets a precedent and will react in a negative fashion and capital will pull out of emerging markets that are just beginning to enact new subsidy schemes.

According to the Ernst & Young report Cleantech Matters in late 2009 “Government involvement in cleantech will intensify as governments in Europe, Asia and the Americas view cleantech as a potential source of economic growth and lasting job gains.

Government regulation and standard setting has always been considered important but in coming years, government spending on clean technology and its adoption could create significant demand in virtually every subsector”. But, what will happen if the country who in the last 5 years has built the most capacity , created the most jobs and developed one of the strongest renewable energy industries (including parallel sectors like financing services, developers, consulting engineering and consulting companies…) pulls out?

Leaders across the world set Spain as the example to follow in developing a strong, clean industry, Obama and Al Gore (USA), Lula (Brazil), Manmohan Singh (India), Berlusconi (Italy), what will they say now? Many of these countries have invested heavily in Spain in cleantech. What will they do when suddenly their assets and investments providing healthy returns lose investment attractiveness overnight?

World leader in 2008 with 2,600 MW installed, the Spanish market went down to a very low 69 MW installed in 2009. The explanation can be found in the complex administrative procedures and delays related to the new CAP, combined with the prices decline that pushed many developers to delay their already approved projects and the effect on financing due to the economic crisis.

The 2009 market remained concentrated in the large commercial and ground-mounted systems, with little place. The expected decrease in the Feed-in Tariffs in 2010 could further delay the market recovery but EPIA expects even so a 600 MW market in 2010 with many installations coming from the allocated projects from 2009. So it may not be so bad in the end unless Torquemada steps in and takes things to the dungeons. 

Wind energy is not much better off and the investment uncertainty can be seen in the cost of capital for European onshore wind farms. Even though the European Central Bank has brought prime lending rates down to a record close to 1% the total debt cost of between 6% - 7%. This reflects investor nervousness as the project spread has grown through the crisis keeping liquidity out of the market.

The Exodus

Many companies in the sector that have evolved and have gained muscle and experience during the years of bonanza however, are turning to other countries to keep growing or merely just to survive. These are not just development or construction companies or power producers but also a host of companies that make up the entire value chain whether they are big or small.

Gestamp Wind for example, a midsized Spanish renewable company already is constructing 100 MW of wind farms in Brazil and has another 200 MW under promotional phases in the country and is promoting another 350 MW in Poland, Romania and Bulgaria. But the pain is not only in Spain, the German ABO Wind is not only in most EU countries but has recently established operations in Argentina and will no doubt soon be making the move to Brazil, Latinamerica’s most promising market.

T-Solar, one of the world’s largest photovoltaic IPPs is about to make the jump to the US where another Spanish company Fotowatio already has an office of about 35 people in San Francisco. Most of the Spanish photovoltaic companies are heavily in Italy where most of the solar activity is currently taking place.

Not only the bottom of the value chain is making the move, many Banks including Banco de Santander, law firms, advising and structuring companies as well as many investors are going international and not just within Europe. Companies and investors alike however should do well in not just doing their project due diligence even more rigorously but also keep a close watch on the regulatory risks. All in all, the summer promises to be a hot one, especially in the regulatory and subsidy arenas.

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