Renewable Energy Bankruptcy Threatens Spanish Banks
In another sign of the turbulent times for the renewable energy sector, Spain’s Abengoa has declared bankruptcy. The bankruptcy is notable for several reasons. First, it suggests how difficult the transition from conventional energy firms to solvent and stable renewable energy companies will be. Second, it shows how connected the economy is and how turbulence in the energy sector could easily spread to other sectors of the economy creating a broader economic slowdown at any point going forward.
Abengoa’s problems today stem from overly aggressive decisions made during the years of heavy expansion that renewable power saw in Spain. Abengoa’s bankruptcy is significant given the size of the company; the firm employs 24,000 people and is involved in a range of renewables businesses from biomass conversion to seawater desalinization. U.S. investment bank Citi led a secondary shares offering earlier this year which looks like a major embarrassment for the firm as this point. While Abengoa’s shares have had a tough year thus far, investors still appeared to be caught by surprise to some extent by the bankruptcy filing as its Spanish shares plunged by more than half after the filing.
Abengoa’s financing has been something of a black box according to analysts and that certainly has led to greater confusion among investors. Still, the firm is not alone in that approach to its capital structure as a number of other companies in the renewable sector follow the same pattern. Broadly speaking Abengoa’s bankruptcy suggests the renewables space is still more dependent on subsidies than many firms would like to admit. It’s unclear what it will take to get many firms operating on their own in a stable and solvent fashion. Renewables in general tend to require large amounts of upfront investment and hence often require significant amounts of debt investment. The problem is that debt becomes an anchor anytime a subsector becomes oversupplied with output or when demand falls due to recessions or secular changes in energy consumption.
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