Whether from violent upheaval or policy reform, solar is particularly vulnerable to changes in the political landscape. Andy Colthorpe explores how developers can protect projects against the worst
You can't insure against possible Armageddon. Literally, as former US president Bill Clinton pointed out when talking in January about the inequality of financing in the energy sector. Addressing the ThomasLloyd Clean Tech Congress Europe, Clinton said new-build nuclear facilities in the US are paid for by consumers over 30 years and effectively insured by the government, since “no insurance company will insure one”.
Solar plants represent relatively few operational risks by comparison to nuclear and obviously do not have the looming dread of the carbon pricing bubble to contend with that fossil fuels do. In many territories the greatest risk to a solar power plant is whether or not it will be left to do what it does best – quietly and cleanly generate electricity over many years.
The political situation of a country is ultimately critical in that respect. Broadly speaking there are two ways politics can pose a serious risk to PV plants – through policy changes and political upheaval.
The first of these impacts on support schemes designed stimulate the accelerated growth of solar while costs come down. When policy changes direction, that nascent industry can immediately be at risk.
Pietro Radoia, analyst at Bloomberg New Energy Finance, tells Solar Business Focus that from his work tracking investments into secondary markets for revenue generating assets such as PV plants, he can see that there is “always political risk”.
“The most relevant risk comes from retroactive cuts, which have happened in countries which have tended to over-subsidise the technology, such as Spain or the Czech Republic, that have undergone a boom and a bust situation,” Radoia says.
In early June, a renewable energy bill that retroactively caps the returns of PV investors gained approval from the Spanish cabinet. A law firm representing 1,500 investors has already lodged a complaint with the European Commission in Brussels, as have the local government of Murcia and UAE renewables firm, Masdar.
Legal action may prove to be many investors and plant owners’ only real recourse. Like nuclear but for drastically different reasons, retroactive support cuts are widely considered uninsurable in most of the world’s major PV markets. Jamie Fleming, underwriter at renewable energy insurance firm GCube, explains why.
“This is something that’s been requested of us for a number of years now, since the first countries started to make these cuts,” Fleming says. “So for example Spain was one of the first; more recently Czech Republic, Romania – it’s not a good risk from our perspective. We see it as a business risk of investing in a country like this, there is a chance they [support measures] will be reduced.”
Fleming says that the “vast majority” of requests for political insurance cover received by GCube come from Eastern Europe. Yet although the region has inadvertently been something of an unfortunate and accidental pioneer in the field, Fleming explains that political risk is a potential banana skin even in relatively healthy markets.
“You just have to look around the world, even in the UK with the solar [support] reduction. From our perspective it’s not something that we can cover. It’s not something that any of our competitors offer either, however this is what we get asked most of the time.”
Insurer Swiss Re also tells Solar Business Focus in a brief statement that in not providing cover for “retroactive tariff cuts or revocation of renewable energy support schemes”, it too is “reflecting market practice of the political risk insurance market”.
GCube does however offer one type of insurance that could be used to protect a PV plant from this kind of ill political wind. If a government was taken to arbitration court for a retroactive FiT reduction by the insured party but could not honour the decision, the GCube policy would “step in”. Fleming admits however that this scenario, requiring the double trigger of a FiT reduction followed by a successful day in court against a national government, is “not a particularly easy scenario you can see occurring” but concludes that “there is a kind of loose, weak cover for it if necessary”. The upcoming EC cases over Spain could set an interesting precedent.
Pietro Radoia says that while the threat of retroactive tariff cuts of the extreme nature we have seen so far may begin to settle down, this will not stop politicians from trying to take their pound of flesh from PV plants.
“What governments are trying to do now is trying to increase taxation or put forward a series of smaller measures, which would affect revenues of these assets to a lesser extent. This is really the policy risk [now].”
The second main kind of political risk to a PV plant comes indirectly, out of the wider political landscape, for example where a power plant has been seized or switched off by a government in the wake of serious civil unrest. GCube also began offering insurance on this kind of risk in March, claiming it is the first company to do so. Despite the aforementioned interest from Eastern Europe in the first area of policy risk, GCube is targeting markets in Latin America, Africa and other emerging economies where political instability goes hand in hand with rapid economic growth, as a priority.
GCube may have to continue to focus on one area of Eastern Europe for a little longer, however. The case of PV plants left stranded in the Crimea as the region was annexed from the Ukraine by Russia at the end of 2013 is an extreme example of this second type of risk.
Austrian developer Activ Solar, a client of GCube, has built five large-scale PV plants in the Crimea and several in the Ukraine. GCube’s cover includes protection against expropriation, forced abandonment and forced divestiture. Jamie Fleming believes the situation of the Ukraine plants meets all of these criteria.
Fleming was unable to discuss the ongoing Activ Solar case any further, except to confirm that the future of the company’s plants in Ukraine and the Crimea remain “uncertain”. Pietro Radoia at BNEF claims that having also spoken to Activ Solar some time ago, the company is “trying to get out of Ukraine” and has already had to shed jobs.
The events in Ukraine highlight how well intentioned solar development can fall foul of politics. Ukraine’s simmering dispute with Russia latterly has been dominated by arguments over the price of Russian natural gas imports to Ukraine. The development of the country’s fleet of large PV projects was intended to buy some independence from Russia; that objective has partially failed with the loss of some of the biggest plants to Russia.
Michael Bradshaw, professor of global energy at Warwick Business School, specialising in Russia, points out that the energy industry as a whole remains at the mercy of politics, but believes that one of PV’s strongest buffers against political meddling will be the extent to which it offers individual countries energy security. Ultimately that didn’t work in the case of Ukraine because of Russia’s military intervention, but Bradshaw says that without Ukraine’s long running political problems its decision to pursue the renewables route was a sensible option for attaining some independence from its neighbour and will continue to be so.
“Long term, developing solar, wind, whatever, it can be part of a solution for Ukraine to make it less dependent on imported gas,” Bradshaw says. “All of this insecurity over gas supply should presumably be saying to Ukrainians, well, lets look at alternative sources of energy supply. Let’s look at renewables and what role renewables can play in Ukraine.”
BNEF’s Pietro Radoia agrees that solar’s ease of deployment, falling costs and the fact it provides countries with some measure of energy security may provide it with a political safeguard.
“It’s not the most stable source in terms of the load curve of PV. You can’t switch it off whenever you want, definitely you really have to plan it… [But] it certainly does represent some kind of security of energy supply. Until recently it was expensive, it’s not so much any more. It’s quite competitive with other sources of generation and it’s quick to deploy.
“You take the case of the UK, the agreed strike price from Hinckley Point nuclear – I think it was £93 per MWh in 2020 that’s pretty expensive and solar is at that level already. The government is hedging against increases in power prices so they’ve agreed on the strike price but PV is at those levels already.”
But perhaps more powerfully, certainly in the case of the UK, Radoia says solar’s success could be its best political protection – not owing to its popularity with voters, but instead due to its popularity with investors.
“The fact that there are so many institutional investors, high-level investors, where British people have been putting their savings in these funds which ultimately invested in solar, it’s quite hard to introduce any kind of measures that will negatively impact the solar sector,” he says. “That’s important to take into account.”