Investors in European renewable energy projects face the greatest regulatory risk in Spain, followed by Italy, say the respected financial analysts, Moody’s Investors Service. We present an exclusive extract from their latest report.
Background
While Spain and Italy are presented with the toughest challenges, in contrast, France, Germany and the United Kingdom have strong regulatory frameworks, and are unlikely to impose large-scale changes to subsidy regimes that might affect existing assets. European Union (EU) governments subsidise renewable energy to ensure they can meet binding targets for clean energy output by 2020, as without support, much renewable output would not be viable.
Governments have responded in different ways to the growing burden of these subsidies, which is often borne by electricity consumers. Regulatory risk is an important credit consideration but, if properly mitigated with a robust approach to operating risk management and strong project finance structural features, it does not preclude renewable energy assets from achieving investment grade ratings.
Subsidy regime stability drives perception of regulatory risk
Lenders relying on governments’ renewable energy subsidies for their debt repayments are exposed to the risk that this support may be withdrawn or reduced. In assessing this risk, which varies across markets, we distinguish between: (1) the terms and conditions of the revenue mechanism, and its implications for cash flow stability; (2) the government’s track record of upholding the support; and (3) the likelihood that such support will continue at the promised levels.
The terms and conditions of renewable support mechanisms vary amongst the European markets, with implications for lenders. Some markets expose creditors to a degree of market price risk, while others do not. Some limit a project’s exposure to production variation. Others allow revenues to be reset after a certain period.
Governments have shown different tendencies when it comes to intervening in renewable energy markets. The cash flows servicing debt repayments may be affected by: (1) limits on the production hours that qualify for subsidies; (2) new taxes (as in Italy and Spain); (3) the removal of favourable tax incentives (e.g. Levy Exemption Certificates in the UK or depreciation allowances in Spain); or (4) an outright retrospective change to the incentive regime (as in Italy, Spain, Czech Republic, and Greece).
