Solar Czech-out

Flying the renewable flag for Central and Eastern Europe, the Czech Republic has fast become the latest country to reap the benefits of turning its attention to the sun. With an appealing feed-in tariff, banks that are willing to lend and competitive development costs, private equity firms have spent 2009 acquiring solar plants for tens of millions.

But trouble is on the horizon. The Czech Government, like Spain and Germany before it, has become cautious about the sheer pace at which the solar sector is growing and is now threatening to reduce the feed-in tariff that led to the country to reach the impressive position as eighth-largest solar producer in Europe.

The Czech Republic is not a country readily associated with sunshine but this small CEE country has many outside influences that have led to its focus on renewables. The EU renewable targets that were set out in March 2007 have been a major driver behind the Czech’s focus on solar. According to the targets, EU countries must cut their carbon dioxide emissions by 20% from 1990 levels by 2020. At the time that they set these ambitious targets, only 6.5% of the EU’s energy was sourced from renewables.

According to Thierry Baudon, founding partner of Mid Europa Partners, there is little doubt that the Czech Republic and the wider CEE region needs to move forward in renewables. “Across Europe they are all trying to get their guidelines in line before 2020 and CEE should be no different. The Czech Republic is six to seven years behind Germany and Spain and is massively dependent on coal,” he says.

Energy independence

On top of the Czechs’ desire to meet the EU’s renewables standards to reach full accession into the Union, the country is also trying to reduce its crippling dependency on Russian oil and gas. Back in 2008, the Russians cut the Czech Republic’s oil supply without explanation. The Russians denied that the move was politically motivated but many analysts claimed it was a reaction to the Czech Government signing a deal to host one half of a US anti-missile system.

So in order to gain much-needed energy independence, the Czechs must attract more private investment to the solar sector and ensure banks are willing to lend for the deals.

According to an EVCJ source, banks like Unicredit, Santander and Commerzbank have been lending money for solar deals and typically like to have renewable projects on their balance sheets. Unlike wind, solar needs a very small amount of capital to get up and running. “For a solar project you need €10m as opposed to €100m for a wind deal. It is far easier to get debt for solar deals,” says Peter Richards, sector partner, energy & environment at 3TS Capital Partners.

Of the deals that have been completed with this easily accessible debt and under the attractive feed-in tariff that was introduced in 2005, it is easy to see its value to the future of the solar industry. Recently, EnerCap Power Fund committed some €75m to projects in renewable energy equity in the Czech Republic and across the Central and Eastern Europe (CEE) region.

Franklin Templeton Investments’ private equity unit, Darby Overseas Investments, has also seen the light and recently made a multi-tranche investment of €15.3mi into Energy 21, a Czech Republic-based solar power plants developer and operator. Energy 21 has eight solar plants located in Southern Bohemia and Moravia, areas with the highest concentration of sunlight in the country. All of the plants were developed through the country’s feed-in tariff.

Setting sun

But deals like this look to be a thing of the past. The Czech Ministry of Industry and Trade recently announced that feed-in tariff rates for PV installations will be reduced for new projects commissioned from January.

And as the Government reduces its incentives, Czech banks are also rumoured to be looking at tightening their lending. “The banks are going to be more discerning and they will determine what projects get built. You will see a shake-out of projects that actually reach the built stage as fewer banks are looking to take on risk.” says Michael White, partner at Enercap Capital Partners.

The lessons are there for the Czech Republic to learn from. You only need to look back to Q4 2008, when Spain’s solar industry ground to an unexpected halt due to poor foresight on the part of the Government. The feed-in tariff that was responsible for the country earning the reputation as literally the hottest European country for solar power was reined in and as a result private equity firms headed east for Italy, leaving Spanish solar PV plants available to UK private equity firms to acquire at discounted prices.

“The future lies in its regulation. The Czech Republic is the most attractive country for solar investment in the CEE region right now but if the Government stops the tariff it will put an end to solar investment in the country,” says Burak Dalgin, vice-president of Darby.