Investors in European renewable energy projects face the greatest regulatory risk in Spain, followed by Italy. In contrast, France, Germany and the UK have strong regulatory frameworks, and are unlikely to impose large-scale changes to subsidy regimes that might affect existing assets, says Moody’s Investors Service in a report published today.

The report, “Project Finance: Regulatory risk for EU renewables investors greatest in Spain, Italy”, is now available on “In Spain, the government has on several occasions made adverse changes to the subsidy regime for existing renewable energy producers in order to eliminate a shortfall in the revenues of the electricity system relative to its costs. This allowed it to curb the so-called tariff deficit without significantly increasing end-user electricity prices, a politically unpalatable option at a time of high unemployment”, said Christopher Bredholt, Moody’s Vice President — Senior Analyst and lead author of the report.

European Union (EU) governments subsidise renewable energy to ensure they can meet binding targets for clean energy output by 2020, as without them, much renewable output would not be viable. In Moody’s view, renewable assets in countries where green subsidies account for a high proportion of household bills, where political and popular support for the green agenda is low, and where governments are reluctant to pass on the full cost of their renewable schemes, are at greater risk of future adverse changes to their cash flows. The cash flows servicing debt repayments may be affected by (1) limits on the production hours that qualify for subsidies; (2) new taxes (as in Italy and Spain); (3) the removal of favourable tax incentives (e.g., Levy Exemption Certificates in the UK or changing depreciation allowances in Spain); or (4) an outright retrospective change to the incentive regime (as in Italy, Spain, Czech Republic, and Greece).

When assessing the likelihood that support will continue at promised levels, Moody’s focuses on support for existing operating assets. A government committed to a grandfathering principle will ensure that subsidy changes affect only assets that are not yet financed, whilst upholding the compensation granted to older assets. The risk of retrospective changes to existing assets is related not only to the government’s track record, but also to (1) political and popular support for renewables; and (2) the burden on the electricity consumers of funding the above-market compensation for renewable power.

Mr. Bredholt added “It is important to note that the regulatory regime is only one element of the credit risk profile, and may be mitigated by such factors including a robust approach to operating risk management and strong project finance structural features.”