Renewable energy fiasco

The reform of electric power rates, particularly the cutbacks in the premiums applicable to renewable energies, is causing legal problems for the government. The latest episode is the application for arbitration filed by the Masdar group, a subsidiary of the Abu Dhabi Investment Authority, owing to the cutback in remuneration suffered by a solar power installation in Andalusia. This is not the only case; other firms similarly affected have brought demands for arbitration against the damage caused them by the cutbacks in premiums. The compensation thus demanded is massive, and the risk of losing the lawsuits is high.

This pressure in the courts might have been avoided had the Industry ministry organized the new system of payment to renewable energy producers with better legal sense. The most neutral calculations indicate that Spain was, indeed, paying excessive premiums and subsidies to energy sources such as thermosolar and photovoltaic producers, and that precisely such premiums, in excess of market rates and probably of economic rationality, were one of the causes of the unrelenting rise in the tariff deficit, the difference between the cost of producing electricity and what Spanish consumers are actually charged for it. The attraction of renewable energies is obvious: in some cases they favor advanced domestic technology, increase investment, and may substitute energies of more polluting sorts. But their financing, subsidized to a rash extent, was unsustainable.

Many companies had bought into the renewable-energy industry in function of the high premiums: the seller appropriated the surplus generated by the public subsidies, leaving to the purchaser the serious problem of amortizing his investment with payments which, since the recent reform, are much lower. This damage is considerable, though it comes under the heading of regulatory costs or legal insecurity. But what may well incline the arbitration against the government is the presumption of retroactivity. The cutbacks in the premiums must be applied, not to the whole useful life of the energy investment, but only to the period thereof that begins when the cutback is decided.

The courts may punish the attempt to apply the cuts retroactively with onerous compensation payments, frustrating the reform’s intention of producing savings. It is likely that some companies, set up in the favorable climate of the initial subsidies, may have to shut down. This eventuality might have been avoided by opening negotiations. But now it is too late.