Spain: Legal cases will help or hinder investors

Spain's wind market ground to a halt last year. You all know why.

Between 2011 and 2014, the Spanish government made a series of devastating retrospective cuts to feed-in tariffs for renewable energy projects, including wind farms.

These did serious damage to investor confidence and pushed many leading Spanish firms to seek growth overseas. Investor confidence has not yet returned, and those cuts mean that no
new wind capacity was built in Spain in 2015. None.

Those cuts also opened the way for a host of legal cases by investors against the Spanish government – 33, in fact – which are being considered under the terms of the Energy Charter Treaty.

The result of the first of these was released in January and found in favour of the Spanish government. This case was specific to the 2010 changes for the solar sector, and the ruling was that there was no reason to suppose that feed-in tariffs in that sector would remain unchanged. That result does not bode well.

However, HgCapital director Luis Quiroga told a session at the WindEurope summit in Hamburg last week that he expected four more cases to be decided in the next 12 months.

This includes one where HgCapital is leading a group of 16 major investors in Spanish solar, including the likes of Element Power, Hudson Clean Energy and Impax Asset Management. The companies claim they made investment decisions in the solar sector on the basis that the rules would not change.

Quiroga said the group was “throwing everything we have at this” and that it expected to win: “When those investments were made, people expected the feed-in tariff to be stable and not changed retroactively through the life of the feed-in tariff,” he said.

If the group wins, it would set an important precedent for investors in Europe. It would demonstrate that investors have a reasonable expectation that rules will not change – and, while this case relates to solar, the precedent it sets for the wind sector is clear.

Of course, if the group loses then it gives governments in Europe the freedom to change their energy policies at short notice, whatever impact that has on developers and investors. If that happens then extra business uncertainty will certainly follow.

Marco Messeri, managing director of power, utility and renewable energy in Europe at Goldman Sachs, told the session that it was difficult to quantify the precise impact of retrospective changes because it was impossible to know how much firms would have invested without those changes.

Even so, he said lack of certainty on support mechanisms would increase the perceived risks of investing in renewables and harm investment flows. This pushes up the cost of capital for investors and developers.

David Jones, head of renewable energy at Allianz Capital Partners, agreed: “Our investment decisions are made in good faith that the governments will honour the commitments they have made to the incentive mechanisms that we need for our returns,” he said.

Jones added that investors needed confidence that the Energy Charter Treaty would support them, but pointed out that it only dealt with cross-border disputes. He said the European Union needed rules that covered disputes where, say, a Spanish investor is able to take legal action against the Spanish government.

And Luis Adao da Fonseca, partner and co-founder of Portuguese investor Exus Management Partners, said the ultimate impact of such uncertainty on subsidies would be on the prices paid by consumers. If developers cannot build schemes at the lowest cost of capital then they will end up passing on those costs to users.

“Stability is key. Stability is the ground for attracting investors in, setting a low cost of capital, and setting a low cost of energy,” he said. Ultimately, if these subsidy cases go in favour of the Spanish government, the public will lose out as much as investors.

Spain's wind market ground to a halt last year. You all know why.

Between 2011 and 2014, the Spanish government made a series of devastating retrospective cuts to feed-in tariffs for renewable energy projects, including wind farms.

These did serious damage to investor confidence and pushed many leading Spanish firms to seek growth overseas. Investor confidence has not yet returned, and those cuts mean that no
new wind capacity was built in Spain in 2015. None.

Those cuts also opened the way for a host of legal cases by investors against the Spanish government – 33, in fact – which are being considered under the terms of the Energy Charter Treaty.

The result of the first of these was released in January and found in favour of the Spanish government. This case was specific to the 2010 changes for the solar sector, and the ruling was that there was no reason to suppose that feed-in tariffs in that sector would remain unchanged. That result does not bode well.

However, HgCapital director Luis Quiroga told a session at the WindEurope summit in Hamburg last week that he expected four more cases to be decided in the next 12 months.

This includes one where HgCapital is leading a group of 16 major investors in Spanish solar, including the likes of Element Power, Hudson Clean Energy and Impax Asset Management. The companies claim they made investment decisions in the solar sector on the basis that the rules would not change.

Quiroga said the group was “throwing everything we have at this” and that it expected to win: “When those investments were made, people expected the feed-in tariff to be stable and not changed retroactively through the life of the feed-in tariff,” he said.

If the group wins, it would set an important precedent for investors in Europe. It would demonstrate that investors have a reasonable expectation that rules will not change – and, while this case relates to solar, the precedent it sets for the wind sector is clear.

Of course, if the group loses then it gives governments in Europe the freedom to change their energy policies at short notice, whatever impact that has on developers and investors. If that happens then extra business uncertainty will certainly follow.

Marco Messeri, managing director of power, utility and renewable energy in Europe at Goldman Sachs, told the session that it was difficult to quantify the precise impact of retrospective changes because it was impossible to know how much firms would have invested without those changes.

Even so, he said lack of certainty on support mechanisms would increase the perceived risks of investing in renewables and harm investment flows. This pushes up the cost of capital for investors and developers.

David Jones, head of renewable energy at Allianz Capital Partners, agreed: “Our investment decisions are made in good faith that the governments will honour the commitments they have made to the incentive mechanisms that we need for our returns,” he said.

Jones added that investors needed confidence that the Energy Charter Treaty would support them, but pointed out that it only dealt with cross-border disputes. He said the European Union needed rules that covered disputes where, say, a Spanish investor is able to take legal action against the Spanish government.

And Luis Adao da Fonseca, partner and co-founder of Portuguese investor Exus Management Partners, said the ultimate impact of such uncertainty on subsidies would be on the prices paid by consumers. If developers cannot build schemes at the lowest cost of capital then they will end up passing on those costs to users.

“Stability is key. Stability is the ground for attracting investors in, setting a low cost of capital, and setting a low cost of energy,” he said. Ultimately, if these subsidy cases go in favour of the Spanish government, the public will lose out as much as investors.

Spain's wind market ground to a halt last year. You all know why.

Between 2011 and 2014, the Spanish government made a series of devastating retrospective cuts to feed-in tariffs for renewable energy projects, including wind farms.

These did serious damage to investor confidence and pushed many leading Spanish firms to seek growth overseas. Investor confidence has not yet returned, and those cuts mean that no
new wind capacity was built in Spain in 2015. None.

Those cuts also opened the way for a host of legal cases by investors against the Spanish government – 33, in fact – which are being considered under the terms of the Energy Charter Treaty.

The result of the first of these was released in January and found in favour of the Spanish government. This case was specific to the 2010 changes for the solar sector, and the ruling was that there was no reason to suppose that feed-in tariffs in that sector would remain unchanged. That result does not bode well.

However, HgCapital director Luis Quiroga told a session at the WindEurope summit in Hamburg last week that he expected four more cases to be decided in the next 12 months.

This includes one where HgCapital is leading a group of 16 major investors in Spanish solar, including the likes of Element Power, Hudson Clean Energy and Impax Asset Management. The companies claim they made investment decisions in the solar sector on the basis that the rules would not change.

Quiroga said the group was “throwing everything we have at this” and that it expected to win: “When those investments were made, people expected the feed-in tariff to be stable and not changed retroactively through the life of the feed-in tariff,” he said.

If the group wins, it would set an important precedent for investors in Europe. It would demonstrate that investors have a reasonable expectation that rules will not change – and, while this case relates to solar, the precedent it sets for the wind sector is clear.

Of course, if the group loses then it gives governments in Europe the freedom to change their energy policies at short notice, whatever impact that has on developers and investors. If that happens then extra business uncertainty will certainly follow.

Marco Messeri, managing director of power, utility and renewable energy in Europe at Goldman Sachs, told the session that it was difficult to quantify the precise impact of retrospective changes because it was impossible to know how much firms would have invested without those changes.

Even so, he said lack of certainty on support mechanisms would increase the perceived risks of investing in renewables and harm investment flows. This pushes up the cost of capital for investors and developers.

David Jones, head of renewable energy at Allianz Capital Partners, agreed: “Our investment decisions are made in good faith that the governments will honour the commitments they have made to the incentive mechanisms that we need for our returns,” he said.

Jones added that investors needed confidence that the Energy Charter Treaty would support them, but pointed out that it only dealt with cross-border disputes. He said the European Union needed rules that covered disputes where, say, a Spanish investor is able to take legal action against the Spanish government.

And Luis Adao da Fonseca, partner and co-founder of Portuguese investor Exus Management Partners, said the ultimate impact of such uncertainty on subsidies would be on the prices paid by consumers. If developers cannot build schemes at the lowest cost of capital then they will end up passing on those costs to users.

“Stability is key. Stability is the ground for attracting investors in, setting a low cost of capital, and setting a low cost of energy,” he said. Ultimately, if these subsidy cases go in favour of the Spanish government, the public will lose out as much as investors.