COLUMN-Renewable-energy tax hike can be justified: Gerard Wynn

Thu Aug 2, 2012 7:11am EDT

(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON Aug 2 (Reuters) - Developers have made big returns from subsidies on renewable energy projects, raising the question whether new tax increases are justified in a continuing financial crisis or merely state opportunism.

Investors are arguing the latter, but the picture is more nuanced.

The Czech Republic recently won court backing for a tax on solar projects, which Bulgaria is considering emulating, while Spain plans to raise an additional 6 billion euros ($7.38 billion) or so a year from new taxes on power generation.

The measures all have the effect of cutting returns to projects, so it could be argued that they are similar to retroactive cuts in subsidies that, in the case of renewable energy, guarantee a power price premium called a feed-in tariff.

Struggling EU and euro zone countries may be tempted to follow suit after offering overly generous subsidies that have left consumers nursing liabilities that will last 25 years or more.

Developers can do nothing about retroactive cuts that lower returns on committed capital and undermine faith in government policy and targets.

Such cuts are different to tweaks that reduce support for future projects - now a mainstream policy among EU countries - while protecting subsidies to existing operations.

One test is to weigh the latest proposals in context.

The picture is mixed. Spain faces a crippling budget deficit and has increased taxes and cut spending across its economy. Bulgaria and the Czech Republic, meanwhile, are straying more on the side of opportunism, specifically targeting solar programmes in what appear to be clumsy attempts to reverse past decisions and claw back subsidies at the expense of private capital.

FAIR?

Recession-plagued Spain last month unveiled new austerity measures designed to slash 65 billion euros from the public deficit by 2014, as Prime Minister Mariano Rajoy yielded to EU pressure to try to avoid a full state bailout.

Measures included adding 3 percentage points to taxes on goods and services, alongside reduced benefits for civil servants in attempts to cut Madrid's deficit and borrowing costs, which have also reined in school and hospital budgets.

Against that backdrop, planned taxes on energy revenues appear justified in principle, depending on how far they bleed operators: bankrupting them would only undermine cash-strapped local regions and banks.

Also critical is whether the taxes are applied fairly. Details so far are sketchy in a deadline slippage, but they reportedly apply to all technologies including thermal fossil fuel plants, nuclear power, hydropower and solar and wind projects.

By contrast, a Czech solar tax is more targeted: it came into effect in December 2010 and applied retroactively to projects commissioned in the previous two years. The constitutional court upheld the tax in May after solar plant operators threatened to sue.

Bulgaria is mulling over similar additional taxes or fees on solar installations.

Both the Czech and possible Bulgarian measures are more in the context of broader packages to reduce or eliminate solar power support, rather than being part of desperate measures to bolster more general fiscal austerity programmes.

GROWTH

Governments across Europe are pulling back from renewable subsidies for new projects as green energy becomes more competitive after sharp falls in equipment prices.

Britain and Germany have as much as halved support for solar power in the past six months, while Spain scrapped support altogether in January.

Madrid faces a different budget problem. In most countries utilities pay the solar power premium and pass on the cost to electricity consumers. In Spain, however, the treasury shoulders the liability, which is swelled by artificially low retail power prices that are meant to stimulate growth and competitiveness and control inflation.

The full liability is the difference between those regulated retail power prices, or tariffs, and the cost of power generation, transmission and the renewable energy premium.

The government now bears a "tariff deficit" of about 25 billion euros, which it ultimately owes to utilities. Spain has sought to reduce this deficit by raising power prices, eliminating support for new renewable energy projects, retroactively trimming the amount of subsidy on existing projects and now by raising energy taxes.

It is fine to scrap a programme if you cannot afford it, but cutting returns to existing projects because you miscalculated a subsidy appears fickle and over-reaching.

For Spain, however, the circumstances are exceptional and the test will be how fairly it applies the new taxes and whether it can avoid bankrupting developers and undermining a bigger goal to save the economy. ($1 = 0.8132 euros)

(Editing by David Goodman)