Recently the Spanish renewable energy sector was shaken by a salvo of legislative changes which together may profoundly affect its return on investment. The photovoltaic energy sector has been punished most severely by this development. In the early days of last December we published an article on RD1565/2010, and in the first days of this January month we published an article on RDL14/2010. You can check out these posts for a closer analysis of the content of the aforementioned legislative changes. in this post we will analyse the retroactive effect of these measures, and the legality of such retroactive effect under Spanish Law.



RD661/2007 gave way to several sentences of the Spanish Supreme Court on the issue of retro active application of cuts in Feed in Tariffs. Although none of these legal actions have succeeded in their efforts to invalidate the aforementioned Law, they several helpful criteria. If you would like to read these sentences yourself, here they are: Sentence Tarragona powerSentence Consultora de Financiación Integral y AsociadosSentence Nueva Generadora del Sur and Sentence Eolicat.

The legal certainty principle does not imply that any regulation is unmodifiable. The legislator is endowed with a margin of appreciation to apply modifications in the execution of its energy policies. The Electricity Sector Law L54/1997 entitles the government to establish the methodology, calculation and actualization of the retribution for renewable energy with objective transparent and non discriminatory criteria. The framework of this law obliges the government to assure a reasonable profitability for the lifespan of these installations. The Law defines reasonable profit as the return on investment in reference with the cost of money in the capital markets. In other words: the government can modify the legislation as it deems necessary, as long as the installations adhered to the special regime are not materially affected in their return on investment. This formula is used in some variations in all sentences quoted herein before. The right of the government to modify legislation is motived by arguments of public economic interest.

The next step is the definition of the formula "reasonable profit". Reasonable profit is according to the Sentence Tarragona Power 7%. The supreme court obtains this number from an expert report from 2006, carried out by the IDAE, the Spanish Institute for Energy Saving and Diversification. The return on investment is taken for a lifespan of 25 years, after taxes.

At any rate, the court rules that under no condition retro activity as such will result in nullity of the new legislation. However, if an installation subject to the altered legislation is suffering damages as a result of the modifications, this may cause civil liability of the State. Taking into account the aforementioned, we would be talking about damages if the return on investment of the affected installations would fall below 7% in 25 years. Another question would be whether the new legislation is based on objective transparent and non discriminatory criteria. If this weren't the case, the new legislation may very well be unconstitutional under Spanish Law. This is not subject of our investigation however, since we were looking into retro activity.

let's make a quick "back of the envelope" calculation: According to the Expansion 50.000 Spanish photovoltaic plants are on the brink of bankruptcy. RDL14/2010 in practice cuts the FIT by 30%, and according to the article quoted herein before, published by Expansión on january 7th 2011, the sector comprises of around 100.000 projects, then half the sector for sure does not achieve a return on investment of 7%. If you are on the brink of bankruptcy, you will typically have zero or negative return on investment. If the total exposure of the financial sector in terms of lending to the PV sector was around 20 billion euros in 2009, the total investment including equity of the PV sector will be of around 25 billion euros. Thus, the damage to be claimed by 50% of the sector should be of around 12.5 billion euros, plus 7% over 25 years. The remaining question is whether the other half of the sector, although not on the brink of bankrupcy, is obtaining a return on investment of 7%. If their return is lower, quite certainly this part of the sector will claim the difference. Facing such claims, the recent legislation may proof to be penny wise and pound foolish.

We haven't yet discussed compatibility of the recent Spanish legislation with European Law, and we haven't analysed whether the legislation is based on objective transparent and non-discriminatory criteria. The coming weeks we will enter into these issues, alongside a more detailed analysis of the recent legislation in this light. Keep you posted. UPDATE: Check out the articles on EU Law here, here and here.




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