Catching some rays

When the Spanish government moved to encourage investment in solar energy, it got more than it bargained for. And, as a result, Spanish photovoltaic (PV) solar energy now presents a significant opportunity for energy-focused private equity firms.

“Feed-in tariffs” are used by governments to foster investment in renewable energy projects. The tariffs guarantee the price for which renewable energy will be bought – at above market price – for a certain period of time. The inflated cost of the energy is then either passed on to the energy consumer or – as is the case with the Spanish regime – borne by the government.

The feed-in tariff introduced in Spain in 2007 was a compelling proposition. It offered a 40-year inflation-indexed tariff of €400 per megawatt hour. This outstripped other feed-in tariffs across Europe in terms of longevity and price. To put it in perspective, other European countries were offering around €90 per megawatt hour.

The government's aim was to get 600 megawatts of PV solar energy hooked up to the grid. The resulting stampede to take up the tariff led to 3,223 megawatts of capacity being installed before the deadline in September 2008. Annual installations of PV plants rocketed to 2,511 megawatts in 2008, up from 88 megawatts in 2006, according to the European Photovoltaic Industry Association (EPIA).

“It was a mad rush to meet the …deadline,” says Tom Murley, head of London-based private equity firm Hg Capital's renewable energy team, describing the number of projects launched by various different parties. “A lot of Spanish construction and real estate businesses that historically formed a large part of the Spanish economy began developing and building like mad.”

The Spanish government has since capped growth in the PV market and reduced the tariff going forward, but the building rush during 2007 and 2008 has led to a vast and fragmented market waiting to be consolidated.

Hg Capital is one firm actively acquiring PV projects in Spain. It picked up its sixth project in May this year: a 5.25-megawatt plant outside Toledo.

Kent, England-based Foresight Group is another private equity investor looking to consolidate the market. It made its first acquisition in the country in May: a 9-megawatt plant operated by BP Solar, which it bought from Banco Santander. “Because the assets have been operating since October 2008,” says Jamie Richards, head of Foresight's solar fund, “they have very visible track records, and in many cases these will be better base cases than their banks will have forecast.”

The race to consolidate these assets is not, however, a simple land grab. Many of the projects on the market are simply too small to merit the spadework of an acquisition. Others were built by “second tier” organisations using sub-standard equipment in order to meet the deadline and hence lack the quality levels demanded by investors. “The two factors of quality and scale,” says Richards, “mean that of the 2,500 megawatts of projects, only around 10 percent make potentially viable acquisition targets.”