Will KKR, Munich Re T-Solar Investment Kickstart Renewables M&A In Spain?

By Peter Kneller

The Spanish solar market has been experiencing some strange goings-on of late, most notably KKR and Munich Re’s investment in Grupo T-Solar’s 168MW Spanish and Italian solar portfolio.

The deal – one of the largest investments in an operational solar PV portfolio in the renewable energy sector’s short history - took place against the background of increased regulatory pressure in the country’s solar market.

The bulk of installed solar PV plants installed in Spain are subject to Real Decree 661/2007, the legislation most affected by the Spanish government’s change in law enacted at the end of 2010. Under the new law, plants under this decree – typically built and connected to the grid before the end of 2008 - have had a cap put on the number of hours they are entitled to a premium feed-in tariff for energy generated.

The move effectively takes 30% off the revenues of plants built under the decree for the next three years, and 10% thereafter, though government extended the length of time plants could collect the tariff from 25 years to 30 years to soften the blow. Developers that constructed plants on a highly levered basis – with 80% to 85% in debt financing - are seen as most at risk from the change in law, as the cut in tariff and therefore revenue makes it extremely difficult to service debt.

Reasons For Investments
Given these constraints, how can investments such as KKR and Munich Re’s in Grupo T-Solar be explained?

The answer, in part, is due to the large number of owners willing to put assets on the market. In the main, they have been driven to do so because asset prices and general market conditions have shown no signs of improving. Investors in such assets are faced with the option of sticking it out for the long-haul or crystallising some return on investment now.

Owners also have development pipelines which cannot be constructed without additional equity. For instance, Isolux has long been looking to sell a stake in Grupo T-Solar to drive its development pipeline. Isolux had planned on listing its solar division in 2008, which would have been one way of raising fresh capital. However, with markets obviously not conducive to an IPO, particularly that of a renewable energy entity, Isolux has had to find alternative sources of equity.

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