Feature

The risks in solar investment


Jason Wright

Europe's Photovoltaic markets are expected to grow despite economic uncertainties, particularly in the sunny southern climates. But Jason Wright, senior director of risk advisory firm Kroll, says investors must also be keenly aware of the administrative and regulatory issues concerned, as well as the potential for fraud and mafia involvement.

The global solar photovoltaic (PV) market is forecasted to grow up to 50% a year, which is an enticing prospect for investors, but there are a number of significant risks that need careful consideration.

International investors are skilled in assessing the macroeconomic pitfalls in the solar PV sector, but do not always take into account a whole series of risks that are more difficult to put a figure on: politics, an uncertain regulatory environment, bureaucratic delays and, in some countries, the risk of corruption and fraud.

The importance of specific national problems on investment decisions can be demonstrated by the way in which countries with similar feed-in tariffs (FiTs) have very different levels of investment. These issues do not mean the photovoltaic sector is too risky to be worth investing in but they do raise the need for caution when choosing an investment.

The European market, particularly the southern countries, highlights the variety of risks present in the sector. A recent study by Emerging Energy Research (EER) shows that, while Germany was the leading solar power market in Europe in 2009 with 67% of the newly installed solar PV output, Southern Europe is expected to lead the sector out of the slowdown of 2009. Researchers at EER anticipate that the Southern European market, mostly driven by France and Italy, will grow to around 25% of the global market.

However, such projections do not take into account the current crisis in sovereign debt in Southern Europe and the relationship between this crisis and the FiTs offered by governments. This issue is made more significant by the fact that Germany, the most significant player in the solar PV market, is likely to cut its FiT for solar PV power from the beginning of July.

Investors who are not aware of the political context against which decisions are being made are overlooking one of the most significant investment risks in the solar PV sector in Southern Europe.
Lessons from Madrid

In this context it is instructive to look at Spain, which demonstrates how investment can stall not just through actual FiT reductions but through political uncertainty and the threat of such reductions.

Spain's high profile boom and bust in the solar PV market in 2008 and 2009 was caused by the country's highly advantageous FiT being cut for future plants two years ago. In fact, Spain attracted more investment for solar panels in 2008 than the rest of the world put together, as it failed to put a cap on the amount of applications for installations. Despite the subsequent crash, investment and installation were expected to recover and remain strong, while remaining below the level of Italy.

Recently, however, the Spanish Government has been under enormous pressure in the bond markets and this has led to further pressure on the solar PV sector. This time the Government is contemplating reductions for the thousands of installations that are already operating in the sector. The announcement on 29 April that Miguel Sebastian, Spain's Industry Minister, is negotiating reductions in the FiT had an immediate impact. T-Solar Global SA Group, one of the world's biggest solar PV plant owners, put its Spanish stock offer on hold and Solar Opportunities postponed a €130 million deal. Shares of solar producers also lost value as a result of the threatened measures.

Unpaid bills

One of the main problems is the way that Spanish consumers pay for electricity. In essence, part of their payments are delayed and the Government guarantees repayment to the power suppliers in the interim period. The cost of those bills, many of which remain unpaid for a long period of time, is substantial.

Industry groups, such as the Spanish Photovoltaic Industry Association, accept that the Government has the right to lower FiTs for future installations, although this damages its credibility with foreign investors who prefer continuity and clarity before committing to an investment.

However, reducing FiT for current installations undermines the economic basis of an investment and could potentially breach legal agreements. The Government claims that the 2007 law on renewable energy production gives it the right to revise FiTs for existing plants, but some investors and executives invested on the belief that the law guaranteed their prices for 25 years. Many claim that incentives such as those in Spain were key factors in pushing them to invest in that country as opposed to elsewhere in Europe.

Greek debt

Many expected Greece to be a strong growth market in 2010, albeit starting from a fairly low basis. From the point of view of its climate Greece should be an excellent country for solar PV investment and the country has introduced some highly favourable FiTs, although investment has been hampered by slow and bureaucratic authorisation procedures leaving a large number of projects still to be approved. However, the recent austerity programme forced on Greece by the European Union and the International Monetary Fund (IMF) is likely to affect subsidies given to solar PV projects.

Considering Greece and Spain's problems for solar PV investors, Italy seems the main potential motor of the solar PV market in Southern Europe over the next couple of years. Italy has a significant solar PV sector and good opportunities for growth. Although it does share some risk factors with Spain and Greece in terms of government debt (indeed its debt is the highest in Europe and only topped globally by the USA and Japan), its deficit is relatively under control in comparison with other Southern European economies. For now, therefore, it is less likely to need to make the dramatic moves seen in Spain.

But Italy does have other risks for investors, which are, perhaps, more difficult to judge accurately than the political, regulatory and government debt risks discussed above. Among these risks are issues of bureaucratic delays, corruption and organised crime, particularly in the south of the country.

One issue in Italy is the existence of regional differences, meaning that investors need to cope with separate sets of regulations according to where they are investing. The authorisation process can also be unwieldy and slow, particularly in the south. Considering the number of authorisations in the process of being granted in Italy in the solar PV sector compared with those actually connected to the grid, it is clear that the process of getting projects running is much more difficult in the south.

Producers of solar power in Italy are also encountering large delays in connecting to the grid — sometimes of up to a year. Should investors continue to move away from Spain towards Italy, it is not clear whether the bureaucratic process will be able to cope with an increase in applications for solar PV plants.
Crime and corruption

The Italian regions have responded to these criticisms by claiming that they are under pressure to distinguish between speculators and investors, and in particular to try to avoid further involvement in the sector by the mafia. “We want an ethically responsible approach by investors,” says Rosanna Interlandi, Head of Sicily's environment department. “We want to know who our interlocutors are. Investors must appreciate this.”

Investors in Italy's renewable energy market tell many stories of dubious project partners. A number of police investigations have been launched into the wind farm sector in the south following allegations of connections between major players in the sector and the mafia. It is unfortunate that the regions best-suited for solar PV development are those in which organised crime is most common.

In addition, the boom is leading to an increase in investment by real estate firms into land suitable for solar development, which has led to prices increasing as much as six-fold in some areas over the last couple of years. It is significant that some allegations of fraud in renewable energy projects in Italy have focused on contracts involving the land used for the development. It has even been alleged that landowners are being pressured to sell by organised crime gangs, prior to projects being sold to large cleantech groups or international investors.

Investors who do end up buying into projects that have been tainted by mafia involvement or fraud face the nightmare of potential investigations, delays, suspension of projects, extortion and even physical threats. In such cases being certain of your business partner is an essential part of risk management.

The vulnerability of investors is only heightened by the existence of alledged connections between local government officials, unscrupulous developers and even, occasionally, mafia groups. Solar PV projects can be particularly vulnerable to theft and damage as it is difficult to protect solar panels. Faced with such difficulties some investors have been considering large-scale projects involving concentrated solar power (CSP), such as Desertec which plans large-scale CSP and other renewables in Northern Africa and the Middle East. While security concerns are also important here, the risks are more likely to come from terrorism than organised crime.

Every investor needs to know the political and regulatory context of the country in which they are investing and that can vary from region to region even within a country. Investors certainly need to understand exactly who they are getting involved with when they select partners or intermediaries, which can be a far more important factor than the exact level of the country's FiT.

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