Question: T-Solar and the Solar Power Market Grupo T-Solar Global, S.A. (T-Solar) was the largest producer in the solar photovoltaic (PV) power market in Spain with an installed capacity of over 155 MWp in 28 plants with additional plants under construction in Italy and Spain. T-Solar also produced large-area (5.7 m2 ) thin-film amorphous silicon solar panels in its state-of-the-art plant in Orense. T-Solar, based in Madrid, was privately held and had invested over €1 billion in its operations since its founding in 2007. Raising capital had been easy in the booming European solar power markets in Germany and Spain. For 2009 the company had revenue of €128.7 million, EBITDA of €84.8 million, and 224 employees. T-Solar had borrowed extensively on the euro market, and its debt was said to be 10 times its EBITDA.69 T-Solar had a 5 MWp solar power plant under construction in Italy with plans for an additional 122 MWp. T-Solar and Global EcoPower of France formed a 50-50 joint venture to build 120 MWp of solar photovoltaic power plants in France between 2010 and 2013. The companies were attracted by high feed-in tariff of €0.314 per KWh plus indexation established in January 2010 by the French government. In addition to projects in Europe, T-Solar looked to India, South America, and the United States for growth.
T-Solar and Solarpark Espana won an auction to construct and operate 20 megawatt solar PV power plants in Peru with the output sold to Sistema Electrico Nacional under a 20-year purchase contract. To reduce its debt and raise capital for its global expansion, T-Solar announced on March 29, 2010, that it would raise nearly €250 million in an initial public offering. CEO Juan Laso explained, "The company wants to fund its international expansion, leveraging its project pipeline, which currently consists of 664 MWp in different stages of development, and on its sound network of partners in countries where it already operates. T-Solar's objective is to quadruple its installed capacity over the next three years and consolidate its position as one of the largest independent producers of solar photovoltaic power in the world."70 The Economic and Political Environment of T-Solar T-Solar's profitability depended on 25-year power supply contracts with the Spanish government at high feed-in tariffs intended to spur clean energy production. The tariff for solar plants in service before September 2008 was €0.45 per megawatt hour, which was 10 times greater than the price paid for coal or natural gas generated power. The high feed-in tariffs attracted an investment of €18 billion in solar power generation with a capacity of 3,200 MWp, which was six times the capacity anticipated by the Spanish government.
Spain reduced its feed-in tariff for new plants by 29 percent in 2009 and limited the subsidization of new installations. The European Photovoltaic Industry Association (EPIA), representing 240 firms, joined with Greenpeace and issued a report on the development of the solar power industry: "Global investments in solar PV technology could double from €35-40 billion today to over €70 billion in 2015, ...The estimated investments in the European Union alone would rise from today's €25-30 billion to over €35 billion in 2015. This report on the global market outlook for solar photovoltaic, named ‘Solar Generation 6' foresees that PV could account for 12% of the European power demand by 2020, and up to 9% of the global power demand by 2030."71 Germany had been the early leader in building solar PV power capacity, and in 2008 Spain surpassed Germany in new capacity installed. New installation slumped in 2009 as a result of the lower feed-in tariffs, and France reduced its feed-in tariffs by 29 percent for rooftop installations. The United Kingdom countered the trend by instituting in April 2010 a $0.62 per KWh feed-in tariff, which was 10 times the market price.72 Japan continued its subsidies for rooftop installations, and established a feed-in tariff in November 2010.73 The PV industry was helped by a large increase in capacity for crystalline silicon solar cells which led to a 40 percent decrease in wholesale solar panel prices in Europe. In addition, scale economies, particularly for PV panel producers in China, had driven prices down. The Chinese government had the goal of being the global leader in solar power.
A severe financial crisis struck Spain in 2007 as a result of a housing bubble, and most other European countries experienced an economic slowdown or recession. Many of the countries incurred large budget deficits that jeopardized their ability to borrow. The capital markets reacted by driving up interest rates of government borrowings in Greece, which forced the European Union to establish a lending facility to provide emergency funding for the country. Similar problems developed in Ireland, which also received funds from the European Union. Standard & Poor's downgraded Portugal's debt rating, and commentators opined that Spain and Italy could be next. Share prices of European companies declined broadly. Spain had a large budget deficit, and the socialist government of Prime Minister Jose Luis Rodriguez Zapatero pledged to reduce the deficit, as the financial markets watched. The budget deficit in 2009 was 11.0 percent of GDP, and although the government met its deficit goal of 9.3 percent in 2010, achieving the European Union target of 3 percent by 2013 would be a challenge. The unemployment rate was 20 percent, and the projection for 2011 was 19.3 percent. The opposition had made gains in the 2010 regional elections in Catalonia, with national elections looming in 2012. Solar power attracted attention in the budget discussions because subsidies amounted to €2.6 billion. In addition to government subsidies, the high feed-in tariffs had increased the price of electricity, and the government became concerned about the competitiveness of Spanish companies, which had complained about the high price of electricity.
The Ministry of Industry had already cut feed-in tariffs for new solar power plants in 2009, and it had the authority to cut tariffs on contracts already in effect. Minister of Industry Miguel Sebastian told Parliament, "In dialogue with the sector and political forces, we'll make a reasonable adjustment to avoid damaging the competitiveness of industry."74 The Ministry announced that it was considering retroactive cuts on existing contracts. Speaking for the industry, Juan Laso, who headed Spain's Photovoltaic Business Association, said, "This implies bankruptcy."75 The day after the minister's statement, T-Solar announced that it was postponing its IPO. Laso stated, "The lack of clarity from the Ministry of Industry regarding the generation model it wants to foster in Spain and the legal uncertainty created by the fact that its department has publicly questioned the sustainability of the remuneration system...has generated an atmosphere of mistrust amongst investors looking at industrial plans in Spain."76 "Mark David, an analyst at Panmure Gordon, said: ‘A retroactive cut would be catastrophic for the Spanish solar market. Aside from the obvious damage to the profitability of projects and the issues for lending banks, it would stop investments in new projects in Spain. If the government cuts once, it could clearly do it again.'"77 Jamie Richards of the Foresight European Fund noted, "If the government reneges on projects in solar then why not in other sectors during these difficult times?"78
Italy planned to reduce its feed-in tariff for new solar projects by 18 percent, Germany was considering a 15 percent cut for new solar power plants, and within a year of introducing its feed-in tariff the United Kingdom announced that it would review its tariff a year earlier than planned. The Czech Republic chose a different approach to deal with solar power subsidization. The government authorized a 26 percent tax on the revenue of solar plants with capacity above 30 KWp that had begun production in 2009 or 2010. The EPIA condemned the decision, stating -the retroactivity changes the conditions guaranteed to the operators of solar power plants already on the grid in 2009 and 2010. Current law guarantees them a [feed-in tariff] FIT already set for these years. A special tax of 26% retroactively reduces that guaranteed FIT -it substantially interferes with the legitimate expectations of operators of solar power plants. One may therefore expect a number of litigations and arbitrations against the Czech Republic government79 Commenting on Germany cutting its feed-in tariff, James Britland, an analyst for Allianz RCM, said, "Things were too liberal in Germany. The government realized it was costing them too much money. The volume rise was too big as installations were way higher than expected. Spain had a gold rush in solar, and Germany saw a similar thing was happening to them last year."80
The German feed-in tariff was €0.39 per KWh under a 20-year contract, which was eight times the market price. "The difference is passed on to consumers, who pay an average $5 extra each month in electricity fees per household."81 By December 2010 the Spanish government was expected to cut retroactively by up to 30 percent the tariffs on contracts already in effect. Tom Murley of HgCapital in the UK, representing 20 funds that had invested in the Spanish photovoltaic industry, said, "If they proceed on this path, they'll endanger not only our investment, but the whole sector."82 In response to a call by the European Commission for more harmonized policies for supporting solar power, the EPIA issued a statement: "EPIA fully supports this general objective, in particular the importance to adapt instruments in order to avoid excessive returns on capital." "PV investment profitability should be assessed on a regular basis and support schemes adapted accordingly in a predictable manner," said Eleni Despotou, Ad-Interim Secretary General of EPIA. "Welldesigned and evolutionary support schemes are the key market drivers for a sustainable photovoltaic (PV) deployment. We think that Feed-in-Tariffs should evolve within a predefined ‘corridor' that could help avoiding stop-and-go policies or retroactive measures," she added."83
1. From the investor's perspective evaluate for T-Solar
a. The market risks
b. The nonmarket risks
2. What should T-Solar do about the anticipated retroactive change in the contracts?
3. Should T-Solar support the "corridor" proposal?