What are retrospective and retroactive changes to support schemes?
Retrospective changes are changes brought upon by laws – in this case- to renewable energy support schemes which, while taking effect only from the date of publication, change existing rights and obligations of RES producers and investors. A reduction of a current Feed-In-Tariff (FIT) level for already existing projects would be an example. Those changes apply to the future but change the status of already made investments and therefore strongly affect what an economic operator, such as a renewable energy producer, may have legitimately expected in terms of return on benefits and seriously challenge the business case based on the agreement already concluded. This has led in several countries such as the Czech Republic and Spain to thousands of bankruptcies in the renewable energy sector.
European law offers some protection against these changes since Member States may have to justify the changes they are making. Those principles of European law directly apply to Member States when they are implementing European legislation, such as the Renewable Energy Directive 2009/29/EC.
“Retroactive changes” (as opposed to “retrospective changes”) is the expression widely used to designate these abrupt changes impacting past investment. However, from a legal perspective, retroactivity means that a law is applied to facts that have occurred before the publication of the law. Thus, a certain transaction has been completed before the new law was published and thus the legal consequences of the law applicable at the time of the transaction are invalidated. Therefore, the appropriate legal terminology to identify the changes renewables support schemes are facing is “retrospective changes”.
The impact of retrospective changes: Making RES target achievement more expensive
As we are experiencing in several EU Member States, retrospective changes made to renewables law and policy can change the revenue streams expected by renewable producers which they based their investments on. As a consequence, investors and producers are unable to pay back their bank loans. This has led renewable energy projects to bankruptcy in the past, thereby further destroying the trust and investment climate in the sector. Introducing retrospective changes immediately increases risk premium for new projects. Investors become reluctant to invest in the sector, seeing renewable energy projects as a risky investment. In the same way, banks become more cautious before financing such projects, lend money at higher interest rates and therefore increase the cost of capital, making renewable energy projects “artificially” more expensive.
What is a moratorium?
The term moratorium refers to the suspension of activity or an authorized period of delay. In the context of support to renewable energy, it means the suspension of support. Moratoria can be introduced by law or in fact, for definite or indefinite time. The Spanish law of January 2012 would be an example of a moratorium introduced by law. Not holding any new tenders in a tendering scheme would be de facto a moratorium. In France, a moratorium was introduced suspending and cancelling the application of all new renewables projects to a support scheme from a date even prior to the date of the publication of the moratorium, and thus with retrospective effect. However, even if not retrospective, the adoption of a moratorium entails major damage to the industry by abruptly stopping all support to the sector and letting the industry without market and therefore leading to massive bankruptcy and job losses.
Which renewable energy technologies are concerned?
The photovoltaic (PV) industry has suffered the most from retrospective changes due to the very quick, strong and unexpected decrease of the PV module price (60% decrease over just a few years). What is, in itself, good news (the decrease of PV module prices) has turned out to be a difficulty for the industry as national support schemes did not or not enough foresee regular or well-tuned price digressions, leading EU Member States to introduce retrospective changes. However, it is worth noting that all renewable energy technologies have been affected by similar retrospective changes and moratoria. Additionally, experience shows that even if a retrospective change has been introduced on one specific technology, investment confidence is damaged for all other RES technologies.
Information kindly provided by the Keep on Track! Project.