How to escape the financial problems of the RES market: Attempted diagnosis, part 2
A real threat to repayment of credit taken out to build wind farms has arisen. It is a problem for investors and banks. Will it launch a wave of arbitration claims against the Polish Treasury?
As we wrote in the first part of this article, the prices of green certificates for energy from renewable sources in Poland are already well below the levels anticipated when constructing the financing for wind power projects. Some investors in renewable energy sources may already have trouble making payments on schedule.
Borrowers are also attempting to renegotiate the terms of their existing credit. Decision-makers at banks should soon realise that relaxing the terms of borrowings can help avoid even bigger problems in enforcing repayment and insolvency of RES investors. And the investors often have good arguments for renegotiations. Apart from the general situation on the RES market and changes in the law, as a result of human error the security instruments established to secure loans are often imperfect.
Moreover, enforcement of receivables from projects receiving EU funding is strongly limited. And since the Constitutional Tribunal practically overturned bank enforcement titles, banks often do not hold an effective enforcement title against RES investors enabling quick commencement of execution. Finally, under the Banking Law the bank cannot terminate the credit immediately; in the event of delay in repayment, the bank should allow the borrower to present restructuring proposals. All of this can severely limit banks in the measures they take to satisfy their claims under credit agreements.
Inflexibility on the part of the bank or the inability or disinclination of parent companies to provide assistance will in practice make it necessary for investors in renewables projects to enter restructuring or bankruptcy proceedings. Restructuring may gain time for possible further negotiations with creditors, particularly lenders. But it will be difficult to reach any kind of agreement or arrangement with creditors without the consent of the bank, whose claim is usually the largest. In turn, bankruptcy may offer the only chance for members of the RES investor’s management board to avoid potential personal liability.
Banks—partners through thick and thin
Most wind power projects would never have been built without external financing. Typically this was provided by banks. Loans for large RES projects, such as wind farms, were issued in amounts as high as several hundred million zloty. The assumptions on the capacity of the investor to repay these borrowings were based on projected revenue from sale of electricity and green certificates. These loans were usually taken out at a time when certificates of origin were selling for well over PLN 200/MWh. The current price of certificates of origin, fluctuating around PLN 40/MWh, thus poses a real threat to the ability to repay bank credit.
Banks are required to regularly verify the value of their credit claims and collateral. Moreover, if there are extended arrears on the part of the borrower, the bank is required to create a special provision. Thus the condition of wind projects may soon take a major toll on the balance sheets of banks involved in financing renewables.
This is confirmed by the opinion of one of the banks filed during social consultation on proposed new executive regulations under the Renewable Energy Sources Act. The bank stressed that the scale of the auction provided for in the proposal is too small in relation to the size of the RES market and investors’ interest in moving to an auction system. The bank also cites the quick conduct of the next auction in 2017 and expresses the hope that in the near future wind farms will also be able to move to the auction system, which (in light of the market prices for certificates of origin) would enable them to survive on the market. Finally, the bank openly criticises the proposed level of the green obligation at 15.5%, stating: “This is unacceptable for the banking community. The proposed levels of the RES obligation will not generate the necessary improvement in the conditions for functioning of existing RES projects expected by the industry and financing banks, and will indeed deepen the crisis resulting from the oversupply of green certificates which has persisted on the market for several years. Their current level is only a fraction of the rates assumed in financial projections of development ventures, which are the basis for evaluating the credit capacity of the projects by the banks providing financing.”
The situation of the banks is further complicated by the specifics of the financed ventures. Typically banks hold various forms of security, which (assuming they are properly established) allow the bank to take over a financed wind project relatively smoothly. But the bank does not have qualifications or knowledge about conducting projects of this type, and thus will probably decide to take over the project only if there is a potential buyer on the horizon. Rumours are circulating on the market about potential foreign or domestic investors in renewables which would be interested in exploiting the current difficult situation of owners of RES projects. Considering the lack of prospects for an increase in the prices of green certificates on the energy exchange (TGE), the additional difficulties imposed by the “distance act” (Wind Farm Projects Act), and the potential negative consequences for the income from RES projects from elimination of the obligation to buy green energy, we will soon see how much truth there is in these rumours. Moreover, if a renewables project is financed from EU funds (which is quite common), execution against the borrower’s assets during the durability period for the project (usually five years following completion of the project) will be significantly limited. This, as in the case of errors or oversights in establishing security for borrowings, can negatively impact the bank’s ability to enforce its security.
Risk of arbitration
In the context of the major changes in the rules for conducting business and the regulatory environment for renewables, the question arises of the risk that RES investors will assert claims for damages against the State Treasury for out-of-pocket losses and lost profits. Poland is a party to 60 treaties on mutual support and protection of investment, as well as the Energy Charter Treaty. Bilateral investment treaties and the Energy Charter Treaty contain arbitration clauses permitting investors to sue the state for breach of the treaty.
The guarantees given to investors under bilateral treaties and the Energy Charter Treaty are generally similar, providing inter alia for:
- Mutual admission and support for investments by investors from the states that are contracting parties
- An obligation to protect investments by investors and a prohibition of infringement of the rights of investors from the other side which is unjustified (e.g. Germany and Spain), arbitrary (e.g. the United States) or discriminatory (all treaties)
- Fair and equitable treatment of investments (e.g. Spain and the Energy Charter Treaty)
- Creation of stable, equitable, favourable and transparent conditions for investors of other contracting parties to make investments in its area; furthermore, no contracting party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments (Energy Charter Treaty).
It is no secret that investors in renewables in Poland are considering pursuing legal measures against the Polish state. Most often what is being considered in this context is reliance on the Energy Charter Treaty because of the relatively simple procedure and the guarantees for investors provided there. This is particularly tied to the restrictions introduced by the “distance act.” Some wind farm projects are being salvaged through huge organisational and capital efforts required to prepare an application for a building permit, to be supplemented at a later stage. Under the interim provisions of the distance act, this allows projects to avoid the restrictions of the act. But many projects were not advanced enough for filing of even an incomplete application for a building permit before the distance act entered into force. These projects have been scrapped, along with the capital and work already devoted to their development. The scale of the money spent in this regard is evident from the size of the write-downs taken by Polish energy companies in connection with entry into force of the new renewables regulations (more on this in part 1 of this article). On the other hand, the Energy Charter Treaty does not prevent contracting states from employing reasonable measures limiting the possibility of investment. Considering that the constitutional court in Bavaria upheld similar distance restrictions for wind turbines under conditions laid down for that region, it could be argued that the Polish distance act is also justified.
Potential grounds for filing complaints
In the context of other changes in law, particularly modification of the existing renewables support system, an assessment of the risk of potential complaints by investors should wait for their actual effects to be seen. It is difficult at this time to predict what effect the elimination of the mandatory purchase of electricity at a fixed price from RES installations with a capacity of 500 kW or more will have on existing installations, particularly as following elimination of this obligation RES generators will still enjoy the privilege of priority in introducing power into the grid. The need to sell green energy at market prices also fits within the EU’s policy aimed at gradually making RES support market-based. Moreover, power customers should gain from the elimination of this obligation because of removal of the costs of complying with the obligation from tariffs and power company price lists.
The wording of the Energy Charter Treaty as well as the bilateral investment treaties is general and vague enough that investors could assert complaints based on a specific change in Polish law or the overall effect of the changes made in recent months. This is evident at least from the example of Spain, which according to data from the Energy Charter Secretariat’s website is or has been a party to 32 proceedings commenced on the basis of the treaty (out of 99 on the list). This number reflects the limitations on RES support introduced in Spain as well as new taxes and distribution fees for renewables. The response to these limitations and new charges has been a flow of complaints by investors and banks. But the only one of these complaints against Spain to be decided so far suggests that the battle for compensation will not be easy. The arbitral tribunal upheld the state’s right to determine the shape of its RES support system and to impose taxes and fees on producers. But as the tribunal pointed out, even after limiting the support for photovoltaics, the Spanish system was still more financially advantageous for investors than the support systems in other EU countries. At the time the award was issued, solar power in Spain enjoyed support in the form of tariffs guaranteed for 30 years, corresponding to the 30-year tenancy period for land used for installations and approximately equal to the normal operating life of photovoltaic equipment.
It is unclear how an arbitral tribunal would assess the changes introduced in Poland, considering that Polish producers can only dream of the level of support for renewables available in Spain. Thus the general provisions of the Energy Charter Treaty and bilateral investment treaties might offer an opportunity for investors in RES in Poland to recover at least some of their out-of-pocket losses and lost profits connected with introduction of new rules for operation of RES installations in Poland—but not necessarily.
Marek Dolatowski, Energy Law Practice, Wardyński & Partners
Justyna Piszczatowska, WysokieNapiecie.pl
This article was originally published on the power energy portal WysokieNapiecie.pl