Rajoy Targets Utility Revenue to Curb Spanish Debt Loan

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 and Endesa SA along with wind-plant owners Acciona SA, Enel Green Power SpA 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 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, 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.

“We expect regulated revenues to come down for both traditional and renewable operators, though the scale of each reduction remains uncertain,” Morgan Stanley analysts Carolina Dores and Anna Maria Scaglia said in a research note. “We would avoid stocks with large exposure to electricity” in Spain. Dores declined to be interviewed, citing company policy.

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.

Decision Due

Decrees with measures to reshape the power system are likely to be sent to the Cabinet for approval this month, according to an Industry Ministry spokesman who asked not to be named, in line with a government policy. Industry Minister Jose Manuel Soria said at a hearing in congress on June 19 the decision might slip until the middle of July.

“The increase of unforeseen costs seriously threatens the stability of the power system,” Soria said at the hearing in Madrid. “It’s threatening the power system. It also threatens, if it continues to grow, the stability of the financial system.”

The cuts due in the next few weeks covering the tariff deficit will be followed by a more comprehensive package of changes to rein in costs in the wholesale power market after Parliament’s summer recess, according to JP Morgan and the solar lobby group UNEF.

Utility Impact

Spokesmen at each of the electric companies declined to comment. The Association of Spanish Banks has met with ministers to discuss energy reforms, said Encarna Perez, spokeswoman for the group that represents BBVA and its competitors. UNESA, which represents Endesa, Iberdrola, Gas Natural SDG SA, EDP and EON AG, said utilities are already suffering from recent measures that reduced revenue by 3.2 billion euros over the past year.

Renewable energy operators that earn about 6 billion euros a year in subsidies fear more cuts are on the way. Like conventional generators, they were already hit by a 7 percent tax on their revenue in December and a lower allowance for inflation in February.

Spain’s biggest solar power operators are Fotowatio SL and Grupo T-Solar Global SA. Jorge Barredo, president of the solar lobby group UNEF, expects a cut of about 1.2 billion euros for renewables including limits to earnings of photovoltaic plants. PV plants have been losing 700 million euros a year in revenue since 2011 because of limits on the hours they can earn subsidies.

Returns Threatened

The nation’s six top electricity companies this year have returned 4.1 percent through June 19, compared with a 6.1 percent return by the benchmark Ibex 35 index in the period. Power demand has declined with the recession in Spain, adding to a surplus of generation capacity that’s already as much as 60 percent higher than what’s needed.

Generators “can’t cope with more cuts” because they’re already at the “threshold of profitability,” Eduardo Montes, president of utilities trade group UNESA, said by phone.

The regulated system, which includes transport, distribution and clean energy subsidies, created a 5.6 billion-euro shortfall last year, according to data from the power regulator known by its initials CNE. The other half of consumer bills comes mainly from prices set in the wholesale power market, where companies trade electricity and traditionally have made profits.

Analyst Forecasts

JP Morgan expects immediate measures to cut the regulated power system’s revenue as much as 2.2 billion euros. Renewable energy led by solar may take up to 1.4 billion euros of the cut, lowering 15 percent to 16 percent of what generators earn, the bank said in a June 18 note. It expects earnings to drop 5 percent to 7 percent at Iberdrola and Enel SpA and by as much as 10 percent at Endesa.

Morgan Stanley sees the government eliminating its forecast of annual gaps of about 4 billion euros by splitting the cost between itself and power generators. It said the distribution-grid operator, Red Electrica Corporacion SA, is the most exposed, followed by Endesa SA. They could see 2014 earnings reduced by 36 percent and 21 percent, respectively, in the worst-case scenario.

Macquarie said Acciona’s earnings could fall 35 percent if wind revenue per megawatt-hour is cut by 10 percent. With the same assumption, earnings may drop 22 percent at EDP and 4 percent at both Iberdrola and Enel Green Power. If solar gets a similar 10 percent reduction, Acciona’s profit may drop 50 percent, the bank estimated.

Bank Risk

Banks including BBVA have been warned to prepare for refinancing loans to the industry, which top 25 billion euros for both solar PV and wind projects and another 5 billion euros for solar thermal projects, according to Macquarie. BBVA declined to comment.

Shai Hill, head of European power research at Macquarie, said he sees a risk of a “radical” restructuring to the power system in a way that would hurt the lowest-cost generators the most -- nuclear and hydropower plants.

“If you beat up wind and solar significantly more, we will see multiple project-level bank debt defaults,” Hill said.

Soria, the industry minister, has said the measures seek to reduce the cost of the regulated power system. The so-called tariff deficit has surged since Spain boosted subsidies for solar power in 2007 and adds to the government’s liabilities, undermining efforts to trim the euro area’s third-biggest budget deficit.

Soria’s Hints

Neither Soria nor other ministers have given details about what measures they plan, saying only that they will cut revenue from all regulated activities and guarantee reasonable returns for all technologies.

“We are not considering a revision of the feed-in tariffs for renewables,” Soria said at a conference on June 11, according to El Pais. “It’s about paying them according what the law states, which is a reasonable remuneration, and that there are no differences among regulated activities.”

The annual tariff deficit, which generates off-balance sheet liabilities for the state, reached its highest level since 2008 last year.

Budget Deficit

Spain’s overall budget gap for 2013 is forecast to be 6.6 percent, according to the International Monetary Fund, trailing only Ireland and Slovenia among the nations sharing the euro. Spain is seeking to reduce the call on taxpayer funds without boosting the cost of power paid by consumers again.

Luis Crespo, president of the Protermosolar lobby group for solar-thermal project developers, said banks have been warned they “will have to do something to avoid getting many installations in payment defaults.”

“It seems the government has told banks that they will cut payments to renewables and that if they don’t improve financing conditions, operators won’t be able to keep their commitments,” Crespo said. He also said not all technologies should get the same returns because some are more risky.

Spain has joined Germany, Italy and the U.K. in reducing subsidies for clean energy amid concerns the cost of incentives is driving up power bills for consumers. In Spain, subsidies accounting for almost half of its 20 billion-euro regulated power system, a level the government deems unsustainable.

A “new regulatory model” with measures that “won’t be liked” is absolutely essential, Soria said May 20 in a meeting, according to its minutes.

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