Friday, June 21, 2013

Spain's Rajoy Again Targets Energy/Financial Sector to Cut Spain Debt

Businessweek attempts to understand the situation in Spain is reporting on rumoured new actions to reign in a "tariff deficit"

Rajoy Targets Endesa to EDP’s Revenue to Cut Spain Debt: Energy - Businessweek:
Spanish Prime Minister Mariano Rajoy’s government is preparing to cut the regulated revenue of electric utilities and renewable-energy generators, threatening their profits as it tries to curb the nation’s debt.
Power producers Iberdrola SA (IBE) and Endesa SA (ELE) along with wind-plant owners Acciona SA (ANA), Enel Green Power SpA (EGPW) and EDP Renovaveis SA face an earnings decline should their reimbursements be reduced for selling power below market rates, according to JPMorgan Chase & Co., Morgan Stanley (MS) and Macquarie Bank Ltd. The analysts see solar operators being hit hardest.
Decreasing income for wind- and solar-power plants may undermine some of the 55 billion euros ($73 billion) of loans they’ve taken from banks such as Spain’s Banco Bilbao Vizcaya Argentaria SA (BBVA), according to Macquarie. Rajoy’s moves follow concerns among governments from Japan to Germany that the prices paid for clean energy subsidies are too high.
Rajoy is working to rein in a 26 billion-euro ($33.7 billion) debt owed to utilities, a state-guaranteed payback to them in return for selling electricity to consumers at too low a price to cover all their costs. The debt has grown for a decade because regulators cap rates, or tariffs, at levels not high enough to reimburse services such as power transmission and generating from more expensive renewable sources.
The entire article can be read at Businessweek

The Oxford Institute for Energy Studies released a comment this month which explains some of the complex issues in Spain and the enormity of the challenge there, and elsewhere, in finding market mechanisms for systems with significant amounts of variable renewable energy systems (vRES).
Relevant to this post, is the explanation of what a "tariff deficit" is.

Living with Intermittent Renewable Power: Challenges for Spain and the EU | David Robinson (.pdf)
Regulation and the tariff The regulatory system in Spain differentiates between the costs of energy from the competitive wholesale market, and the so called “access costs’, i.e. the remainder of the recognized costs of the system, including regulated network costs, the cost of supporting renewable energy and other costs, for instance the extra costs of providing energy in the islands. The costs of energy from the competitive wholesale market are passed through to all customers in the free market and in the regulated market. The other recognized costs (access costs) should be recovered from all customers through the regulated access tariff. The tariff deficit in any given year refers to the difference between the access costs that are recognized by the government as being recoverable, and the access tariff that has been set to recover them. In any given year, the tariff deficit will be larger, the lower the access tariff compared to the access costs. This can occur for a number of reasons, for instance because government is unwilling to pass on the full costs to customers in the access tariff, or because electricity demand has fallen below the expected level for that year, or because climatic conditions lead to more renewable energy production than expected (which affects the deficit because the renewables receive a feed-in-tariff that is paid in €/kWh). In 2011, the tariff deficit was €3.8 billion and in 2012 it was €5.1 billion.
The accumulated tariff deficit refers to the sum of the annual deficits over a number of years.  Most companies (e.g. the transmission company and the renewable energy producers receiving FiTs) recover all their entitlements in the year the costs are incurred, but the largest electricity companies (mainly Endesa, Iberdrola, Gas Natural Fenosa) do not. They finance the tariff deficit and are entitled to charge interest; this adds another cost to the tariff deficit. At the end of 2012, the accumulated deficit was in excess of €25 billion, to be collected from customers over the next 10-15 years.
The government is very concerned about the tariff deficit On the one hand. international financial markets treat the deficit as sovereign debt and government naturally wants to avoid increases in the tariff deficit for that reason. On the other hand. the government is reluctant to increase prices to final customers. especially in current economic conditions. Although they have taken measures to limit the deficit, the latter continues to grow. New measures are expected soon and are the subject of much speculation.
My understanding is that instead of having rates vary on a monthly basis (as Ontario does due to the Global Adjustment), in Spain the prices were set in advance and dropping demand coupled with declining market prices (exacerbated by a massive build-out of necessary supply) resulted in tariff deficits - which the companies performing the massive build-out could then profit from by financing the debt with a guaranteed profit margin as the quality of the debt wasn't determined by market realities but by the assumption the state would make good on the debt as it would on direct government debt.
One profit from acquiring the rich feed-in tariff contract, and another from financing the subsequent debt!

Overbuilding became a revenue opportunity in multiple senses - and the problem appears intractable precisely because it has now entangled Spain's financial system well beyond the electricity sector.

Spanish downturn a disaster for green energy | Global Post/Agence France-Presse
"There are 55,000 individuals, small savers, many farmers and breeders, professionals, families and small businesses who simply believed what the state told them, which was to invest in solar energy," Martinez-Aroca said.
"Then we were ruined," he said, denouncing a "swindle and deception by the state" which lowered payments for such panels by 40 percent.
The consequences are far reaching.
"The solar energy sector's debt to banks with is now 20 billion euros," Martinez-Aroca said.
Spain's banks are hardly in a state to withstand the blow; they have already had to take more than 41 billion euros from a European credit line to recapitalise balance sheets laden with bad loans since a 2008 property market crash.

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