REFF 2010: Guarded optimism

Elizabeth Block

Euromoney’s 12th annual Renewable Energy Finance Forum opened on Monday, 20 September, with more than 350 delegates, up slightly from last year and the second largest audience to date. However, despite a cast of top speakers, the mood was somewhat subdued. Much of the gloom can be attributed to one EU country: Spain.

The rain in Spain may stay mainly on the plain but the threat of retrospective FIT hung heavily over REFF. I wish I had counted the number of references to Spain over two days. Fortunately, on the second day, Asier Mata, global head of business development at Gestamp Solar, rode to the rescue.

Gestamp Solar is part of Spain’s Gestamp Corporation. Its renewable division has six companies, Gestamp Solar, Gestamp CSP and Gestamp Biomass, as well as industrial companies Gestamp Wind Steel and Gestamp Solar Steel. Gestamp Solar, which develops large-scale solar energy projects, resulted from the merger of Asetym and Gestamp Solar.

“The FIT era will be highly reduced in Europe in three or four years,” Mata announced. In the meantime, as everyone knows, Spain, which introduced the FIT policy for the solar market back in 1998, followed this with Royal Decree 661 in 2007. The generous terms of this FIT, especially in regard to PV, attracted such a rush of money that the authorities took fright. September 2008 brought a revision to 661, with different tariffs for ground-mounted and rooftop. In 2008 nearly 2.7 GW of solar PV plants was installed.

It is the rumours about retrospective changes to the 661/07 decree that have caused so much uncertainty, along with fears of FIT cuts elsewhere in the EU.

“In March 2010 the government began to talk of retrospective action for the tariff of the 661/07l decree,” Mata said,.

Right now several Spanish PV and renewable energy associations, AEF, ASIF and APPA, are bringing great pressure to avoid any retroactivity. According to Mata, several solutions have been presented to the Ministry of Energy. Most important is the move to transfer some plants that “irregularly achieved” the 661/07 decree to another decree, 1578/08.

If the developers and owners of the irregular plants voluntarily migrate to the tariff of 1578/08 decree, which is considered possible, they will not have to give back the incentives received but will receive the new tariff from now on. If they do not do so, the Ministry will implement legal action and the “irregular” plants detected will automatically lose any incentive – forever. They will also have to give back the incentives.

An agreement would save around €1,500 mil per year. This could, in the view of Mata and the associations, be enough to avoid any idea of retroactivity.

The draft for the new decree has been sent from the Ministry of Energy to the National Spanish Energy Commission (CNE) for revision and so far the feedback has “not been negative”. “We expect some legal certainty from now on concerning the FIT policy in Spain and other countries, regulated in the appropriate way,” Mata said.

In any case, Spain’s tariff is expected to cut the current tariff by 45% for ground mounted installations, 25% for large rooftop installations and 5% for small ones. This will push the companies to be more competitive. The new tariff law is expected at the end of October or first November.

Now back to the beginning of REFF. It opened with Lord Browne, the ex BP peer, now MD of Riverstone LLC, a private equity group: “Now is a good time to invest in renewables.” He said that the project finance market may be “unthawing” but I think he meant “thawing” – much more optimistic. He said that private equity can play a “key role” as entrepreneurial activity is “critical”. Riverstone now has $4.5 billion in equity capital devoted to renewables, including Seajacks International, AES Solar Energy, Emerald Clean Power, etc.

Tom Howes, policy officer at DG Energy, part of the European Commision, answered that big question: what if member states fail to meet their legally binding targets. “We will take them to court if they fail.” He also said that the national renewable energy action plans are still coming in, despite the deadline of June 2010. Sever or eight member states actually plan to exceed their targets, he said.

Less optimistically, Yves de Boer, the former executive secretary of the UNFCCC, now with KPMG on climate, warned that failure to advance international climate change negotiations could push emissions up b 50% by 2050. However, he said that, while the world “did not move” at COP 15, there were some significant advances. “All the industrial nations have now set targets and the developing nations have submitted action plans.” He said we now have “nearly global coverage” in terms of plans.

During REFF, there were many appeals for more innovative financing structures that would help bring in institutional investors. It depresses me that the financial community, so imaginative when it came to credit derivatives swaps and other now derided instruments, can be so up-tight when it comes to renewables. For example, Jay Boardman, CFO of Areva Wind, said: “We can imagine other kinds of funds to handle the risk. We want to work to create work packages to streamline the process and simplify the interfaces.”

And Mortimer Menzel, a partner at finance house Augusta & Co, one of the sponsors, said:”We need the banks back – or a bond market in Europe for this type of investment. It should be possible to package debt obligations for pension funds.”

One problem, according to Thomas Ruttner, a managing partner at Platina Partners, is that investors don’t know which box to put renewable projects in – private equity or infrastructure. “For investors, we are still an unknown quantity,” he said. “Exit strategy is a big concern.”

Again, there were some notes of optimism. Michael Linse, a partner at Kleiner Perkins, said: “I am bullish. Cost reductions in renewables have been dramatic and the growth capital outlook is positive.”

And Ted Brandt, CEO of Marathon Capital, said that the capital costs of wind and solar in the States are coming down faster than expected. “We need longer term policy,” he said, referring to the expiration of ITC grants in 2012.

The feasibility of the supergrid was much discussed and Dr Eddie O’Connor, founder and CEO of Mainstream Renewable Power, had told us that he’s formed Friends of the Supergrid, with “friends” like Siemens, Mainstream and Areva. See – www.friendsofthesupergrid.eu

Crystal ball – what lies ahead?

The second day of REFF featured streams on wind, solar, tidal and “digital energy”, including smart grids, integration of renewables and EVs, and Jonathan Johns of Climate Change Matters chaired the concluding “crystal ball” session. He echoed Asier Mata’s comments by pointing out that the journey from support mechanisms to grid parity was critical: “Rooftop solar has the advantage that grid parity is defined by the retail price of electricity whereas for other technologies, away from the point of consumption, it’s the wholesale price. If we allowed net metering from remote locations, it would transform the investment landscape, bringing in huge amounts of capital from general industry keen to own their own generation capacity.” “ This is what happened in India,”added Andrew Garrad, president of GL Garrad Hassan, from the floor.

Kirsty Hamilton, associate fellow in renewable energy at Chatham House, said that industrial policy is rising up the agenda and, together with energy policy, will be a stronger driver than climate as the UN process recovers.

“Governments are realising that renewables can be part of manufacturing, and that is positive in an age of austerity,” she said. “I predict a conceptual change on the energy sector - governments realising that finance is different from economics – they should start to come to REFF.”

And Liam O’Keefe, MD and head of project finance at Credit Agricole’s global loan syndication group, expressed optimism on project finance, which he sees as “recovering” faster than other debt markets. “It’s secured lending,” he said. “We can raise billions as there are many banks that do project finance – many more than the 20-30 European commercial banks currently active in renewables.”

If targets are to be met, those billions must roll in – well before 2050.

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