Spain has led the way in renewable energy, but the financial crisis coupled with regulatory change is having an impact. Will Spain’s ‘green’ commitment hold firm? asks Luke McLeod-Roberts
One of the more romantic images of Spain is the figure of Don Quixote astride a trusty steed against a backdrop of windmills bleached by the unrelenting sunshine. More recently, Spain’s emergence as a leader in renewable energy has led to more prosaic images. The sight of wind turbines dotted across the central plateaus, together with long stretches of futuristic-looking photovoltaic (PV) panels harnessing apparently unlimited solar energy have become common.
The Spanish can feel justifiably proud at leading the way on green energy. Renewables are thought to contribute 20 per cent to Spain’s electricity consumption. However, the global economic downturn together with recent regulatory change is rapidly transforming the Spanish renewables landscape and, in turn, altering the focus of Spanish law firms.
“The financial crisis has hit the Spanish economy in all respects – energy is no different,” says Silvestre Arana, head of the energy team at Garrigues. “Most renewables projects are project-financed, and the level of available liquidity has dropped, so it’s difficult to obtain project finance, and financial close takes much longer.”
Garrigues claims to have closed a total of 52 project finance transactions globally throughout 2008, advising lenders, developers and contractors. However, the lack of available bank finance has drastically reduced the debt:equity ratios and slowed down projects. As a result, Spanish deal volumes could drop this year.
Antonio Baena, head of Garrigues environment – a consulting team made up of non-legal technical experts – says: “We’re used to high levels of loans on the average wind or PV project, at around 90-95 per cent of project value, with just five to 10 per cent equity. But over the past year the equity ratio has increased to 20 or 25 per cent.”
Until the downturn, there was a glut of investments in the Spanish renewables sector, with project companies seeking to take advantage of attractive government subsidies. But the payment of premiums to PV projects that were technically incomplete and the attendant accusations of corruption, generated public outcry and spurred government action.
Royal decree 1578 of 26 September 2008 changed all this. It stipulated that the premium paid by the state for PV projects not fully complete by September 2008 would fall from e48 cents/kwh to e35 cents/kwh. As a result, any project that was deemed unfinished by the September deadline and which had not applied to receive the lower premium would automatically become subject to the market premium. This currently sits at about four or five cents/kwh – a commercially unviable rate.
This has inevitably created considerable problems for project companies in the PV sector and they have been bombarding Spanish law firms, looking for clarification.
“When you’re advising a company that’s intending to buy an installation, there’s concern as to whether it was operating before the September deadline – if not, they could lose the higher premium,” says Baena.
Arana adds: “It’s been very difficult, all agreements have to be reviewed – there are tax implications. For lawyers and consultants it’s been a complete nightmare.”
To add apparent insult to injury, an additional royal decree passed earlier this month has created new rules for the remainder of the renewables sector. So the rest of the green energy world has to fulfil certain conditions within a tight timeframe or ‘queue’ to have their premiums reviewed.
Although the regulatory regime creates a headache for some, it is easy to understand why the Spanish government thought it necessary to take action.
The traditional, or non-renewable, energy sector has been charging tariffs below the cost of generation for the past six years or so, generating a o15bn (£13.2bn) deficit.
As a result, utilities have had difficulty sourcing new finance and the central government has stepped in, with a pledge to plug the gap. This will be done by increasing the end cost to consumers. The government hopes to eliminate the deficit entirely by 2013. It is conscious that a financially squeezed electorate – unemployment recently reached the four million mark – is unlikely to want to keep subsidising unfinished PV projects, at least at the rate it did in the past.
“The tariff [in the traditional energy sector] has been lower than the cost of operation, creating a deficit for the past six years,” says Cuatrecasas regulatory partner Luis Perez de Ayala. “[With the new decree] it will be easier for these generating companies to receive new finance.”
The financial situation of the renewables sector has been complicated by the fact that during the boom years the Spanish construction industry looked for new sectors in which to invest. Heavily subsidised renewables was a particularly attractive option. But with the dip in the real estate market, the falling share prices of these construction giants has had a knock-on effect on the fortunes of renewables projects.
But with a shift of policy favouring non-renewables, where does this leave Spain’s commitment to reduce its carbon footprint? Does it risk losing its status as being at the vanguard of green energy?
Recent developments in the world of water supply might suggest so. The two most prominent ideas in this field have been an ambitious programme to divert one of Spain’s rivers from the north-east to the south and a new string of desalination plants. The former project was particularly controversial because it saw a former right-leaning central government in Madrid – Jose Aznar’s Popular Party (PP) – diverting the River Ebro away from the Catalans to keep golf courses lush in the arid south east. The Catalans saw this as a neo-Falangist affront to their access to vital water supplies.
“The previous government was in favour of river diversion,” says Baena at Garrigues. “But when the government changed in 2004 the Socialist party (PSOE) decided not to carry out this ideological plan and so they abandoned it.”
But desalination is hardly the panacea it is presented as. Desalination plants consume a lot of energy – normally using hydrocarbon-based fuels. So if the jury is still out on whether Spain needs to pump more carbon into the atmosphere so that the English can play more rounds of sunny golf, what are Spain’s leading energy practices doing to reduce their collective carbon footprint?
Garrigues partners say that initiatives from the Spanish legal profession tend to be isolated cases rather than collaborative ones. “We’re the only law firm that’s publishing a corporate social responsibility (CSR) report,” Garrigues’ Baena boasts. “We put our carbon footprint in our CSR report. We were the first and we thought that others would follow, but to date nobody has taken the step.”
Uría Menéndez, however, would beg to differ. A spokesperson for the practice refers to its corporate environmental responsibility reports, detailing action taken on saving water, recycling and energy consumption.
Spanish law firms may be allaying their carbon guilt by following clients turning away from the traditionally robust domestic renewables sector towards other jurisdictions in Europe, North and South America.
Javier Valle, energy partner at Uría, who ran the firm’s Sao Paulo office between 2003 and 2007, says: “The downturn in Spain has meant Spanish developers are now seeking projects abroad – especially wind and PV. They’re looking at opportunities in Greece and watching with interest [President] Obama’s plans.
“The May 2009 royal decree hasn’t had a direct impact yet, but it’s going to be another main driver.”
The economic storm may have blown Spain’s renewables industry off course but law firms are working hard to keep the sails turning, otherwise energy lawyers could find themselves on a Quixotic adventure of their own.