The renewable energy sector in Spain The renewable energy sector is in a process of constant evolution, driven not only by the need to address climate change, but also by regulatory and economic pressures. In recent years, regulations and policies have played a key role in defining the profitability margins of renewable energy plants. These policies, while they have greatly encouraged investment, have also generated uncertainty at times, especially in view of the review of the profitability of renewable energy for 2020.
Introduction to renewable energy profitability regulations
Since the implementation of the electricity reform by former minister José Manuel Soria during the regulatory period 2014-2019, the government has been firm in its decision to adjust the so-called 'reasonable profitability' of renewable energy plants. With the arrival of 2020, a review of the parameters set during this period became inevitable, bringing with it various speculations and concerns on the part of associations and companies in the sector. The most critical aspects This regulatory framework is what links profitability to the 10-year sovereign bond plus 300 basis points, which originally resulted in a 7,38% profitability in 2014.
In this sense, at the end of 2019, the crux of the remuneration of renewable plants revolved around the revision of the value of the sovereign bond during the 24 months prior to May 2019. However, the government had already made it clear that it had no intention of modifying the three additional basis points that had been taken as a basis to ensure this profitability, which opened the way to a foreseeable reduction in the same. This decision puts a sector in a compromised situation that had already suffered significant cuts in previous years, which had generated great uncertainty among investors.
Evolution of regulatory standards
The regulations, since 2013, directly related the remuneration of the plants of renewable energies with the Spanish sovereign bond plus 300 basis points. This model was designed to offer relative stability in long-term profitability, but the significant drop in the interest rate on Spanish bonds since 2014 (from 2% in 2014 to 1,3% in recent years) has dashed the hopes of many investors who, today, are faced with the expectation of a future with lower returns.
Despite opposition from various players in the sector, everything indicated that the Executive would carry out this review. With a sovereign bond below 2%, the profitability of renewables could fall by more than two percentage points compared to what was granted in 2014, placing companies and investors who had based their financial planning on more favourable parameters in a difficult situation.
Despite requests from employers to modify this regulatory context, the Ministry of Energy has remained firm in its position, which predicts a new reduction that will inevitably reduce the profit margins of renewable plants from 2020 onwards.
Impact on the sector: lack of profitability and its financial consequences
One of the major problems facing renewable energy companies in Spain is the dependence on regulatory cuts which, not accompanied by a clear transition strategy, affect investors unequally. For many companies, the expectation of reasonable profitability has become an unattainable possibility, which could lead to serious financial problemsAccording to estimates by financial experts, if the reduction in sovereign bond yields is confirmed, the photovoltaic, wind and solar thermal sectors, among others, could face a spiral of financial uncertainty, putting the financing of long-term projects at risk.
This situation is aggravated by the fact that many of the plants that were built before 2010 depend almost exclusively on this profitability linked to sovereign bonds. Consequently, if there is no adjustment in the regulations, these plants could see their viability seriously compromised. Renewable energy associations point out that, if profitability falls below certain thresholds, some of these facilities would not be able to continue operating without incurring considerable economic losses.
Profitability of renewables: past, present and future
Until now, the profitability of renewables in Spain has been variable, mainly dependent on government policies and decisions. In 2013, the spanish government defined a specific profitability model that, according to some analyses, may not have been entirely in line with expectations. As the years have gone by and market conditions have changed, renewable energy companies in Spain have had to deal with numerous challenges, continuously adapting to government policies and market fluctuations.
Between 2014 and 2019, The interest rate on Spanish sovereign bonds has suffered a considerable decline, largely due to the ECB's economic stimulus and debt-buying policies. As a result of these policies, the interest rate plummeted from 4% to levels close to 1,3%, directly affecting the future profitability of renewable energy plants that are financed through this type of incentives.
Furthermore, the reform implemented by Soria has been another key factor in the transformation of Spain's energy sector. Although the aim of this policy was to eliminate subsidies for renewable projects and attract new investments through other mechanisms, the result has been very uneven, especially for older plants, which do not have the necessary means to adapt to the new market conditions.
The future of profitability in Spain after regulatory reform
From 2020 onwards, the reduction in the profitability of renewable energies is expected to have a substantial impact on the sector, affecting around 20.000 megawatts of installed capacity. In addition, the lack of changes in regulations means that previous investments, such as those made before 2010, will lose their economic viability if they continue to be linked to the conditions of the pre-2020 sovereign bond. Consequently, it is possible to foresee a wave of lawsuits and complaints from international investors who will see their interests compromised by these cuts.
Moreover, sectors such as photovoltaics or wind energy may not be able to withstand such a drastic cut in their remuneration without affecting their business models. Some plants, according to bank calculations, could end up in a “bankruptcy situation”, It is estimated that more than 40.000 billion euros are committed to this type of investment. Industry experts stress that the uncertainty created by these cuts could lead to significant financial problems that directly affect investors and the growth plans of the renewable sector in Spain.
What does the flood of lawsuits against the Spanish government really mean?
This new scenario poses not only economic challenges, but also political ones. In recent years, various associations, investors and international corporations have denounced the Spanish government for cutting the premiums linked to green energy. The most recent of these cases was the ICSID (International Centre for Settlement of Investment Disputes) litigation, which condemned Spain for these continuous and repeated cuts. This situation leaves the country in a delicate position, since investors could go to court again if expectations regarding the future profitability of renewables are not adjusted.
Given this situation, some state lawyers have recommended not imposing further cuts in profitability, while other sectors of the government, especially the energy ministry, defend this measure as essential to maintain the annual budget. However, if the government decides to continue with this policy, A new wave of litigation is expected by the affected companies, which could further compromise the stability of the sector.
In short, the drop in profitability for 2020 highlights the difficulties in implementing sustainable and financially viable energy policies. While in other regions of the world, advances in clean energy and its remuneration have taken off, in Spain regulatory obstacles persist. If an appropriate balance is not found between financial sustainability and energy development, we could be facing a repeat of the problems of 2013 in the renewable sector.
Looking ahead to the coming years, finding solutions to the profitability problems of renewable energy will be crucial to ensuring the sustainability of the development of clean energy sources in Spain.