Renewable Energy in Spain: Renew or Perish 

February, 2011 - Antonio Fernández and Adrian Thery

As a result of its climate, Spain enjoys a strategic position within the European Union for the
production of renewable energy, hence its long-standing commitment over the years to promote
research and development in such energy sources.

To that end, one of the clear methods of encouragement used was to place a premium on the sale price obtained by producers for this type of energy, acting as a strong incentive to invest in the industry, and this has resulted in thousands of investors in recent years deciding to set up plants for the generation of this type of energy using entities known as "renewable energy companies”.

It is estimated that there are currently around 50,000 renewable energy companies in Spain, most of which follow the same pattern: the investor finances most of the investment using bank loans to be repaid at an accelerated rate under business plans that rely on stability in the premium for promoting this activity and the possibility of selling the entire energy output that the plant is capable of generating, from a technical and operational perspective.

However, the premises on which the business plans were based have changed radically. Two recent pieces of legislation (Royal Decree 1565/2010 and Royal Decree-Law 14/2010) have reduced the photovoltaic rate and limited the output qualifying for the incentivized regime, thereby considerably reducing the revenue forecasts for such companies, in such a way that revenues will no longer be sufficient to keep pace with the speed at which bank loans are scheduled to be repaid under the business plans and as agreed with the financial institutions.

Regardless of the distrust that such changes are causing in investors and the discredit thereby entailed on the markets, the fact is that renewable energy companies need to move with the times, in other words, they need to adapt their business plans and loan repayment schedules to the new market conditions. They have various ways of doing this.

Firstly, they can bridge the financial gap that has opened as a result of the new situation by injecting fresh equity, or by obtaining further financing on top of existing borrowings, which would be harder.

Secondly, a more reasonable option would seem to be to refinance the existing debt in order to reschedule repayments, slowing down their pace so that it is brought into line with the new revenue forecast. In this regard, in order to maintain the confidence of the financial institutions in the new plan, it must be borne in mind that the recent legislation mentioned above repeatedly stresses that the sufficient and reasonable profitability of these companies is, in any case, guaranteed.

Lastly, since the envisaged refinancing solution requires the unanimous approval of the creditor financial institutions, where unanimity is not achieved but a majority are willing to support the plan, it will always be possible to resort to an insolvency proceeding with a prepacked creditors arrangement which contents, if voted for by the majority, can be imposed on the dissenting minority.



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