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April 11 (The following statement was released by the rating agency)
The European Commission's latest guidelines on support for renewable energy will weaken the risk profile of new projects by exposing them to both price and volume risks, Fitch Ratings says. In the longer term, however, the guidelines should help provide a stable regulatory environment by reducing the risk of incentives becoming unsustainable.
The guidelines are intended to reduce market distortions and limit the cost to consumers by introducing market-based mechanisms to support renewables. These include competitive bidding processes for allocating support and replacing feed-in-tariffs (FITs), which provide a guaranteed price for electricity, with feed-in-premiums, which pay a premium on top of the market price. The guidelines, which will only apply to future projects, are in line with the direction already taken by several European countries, including Germany and the UK.
The main change in the risk profile of renewables as a result of the introduction of market-based remuneration will be the exposure to price risk. Exposure to merchant power prices in market-based support systems will lead us to analyse a project's economics on the basis of stressed power prices or floor prices, where applicable. In contrast, the revenue of projects with guaranteed FITs is only exposed to the plant's technical performance and volatility in the relevant natural resource.
Renewables have also typically benefitted from priority of dispatch, providing generators with certainty that they can sell all the power they produce. This, together with higher marginal cost of production, has created challenges for traditional power providers, for example by forcing the mothballing of gas-fired plants in Germany as they have been priced out in the merit order.
The commission's intention to create a level playing field within the industry may therefore result in renewables generators no longer benefitting from preferential grid access. Generators may become exposed to greater volume risk including possible curtailment of production in situations of low demand or grid overload.
We will therefore evaluate the financial impact of non-compensated curtailments in our rating analysis. However, the marginal cost of production of wind and solar power is likely to stay below that of fossil thermal plants. This in turn means that these proposals offer little relief for the generation segment of incumbent utilities, which continue to suffer in most of the EU and especially Germany.
Regulatory stability and transparent policies give developers and industry sufficient time to plan investments. This is as important as the level of support. Regulation is most likely to be stable if the implemented policies strike a balance between environmental targets, security of supply and price affordability. These guidelines should aid stability in the long term, but the impact will depend on how they are implemented in individual countries.