Renewable energy: a new field in damage surveying

Consider for a moment a unanimous observation in the public sphere: the planet is not well. By 29 July 2019, humanity had already consumed all the resources the planet provides in a year. This timeline grows ever shorter as consumption climbs – a clear problem for which renewable energies appear to be one of the most viable solutions.  

Since 2010 and the introduction of the Grenelle law, the French State has been committed to financially supporting the photovoltaic and wind turbine industries, which were considered immature.

This set off a dispute involving several hundreds of millions of euros where the role of the public liability loss adjuster proved indispensable.

 

Photovoltaics: an industry subjected to sudden changes

Aware of the situation, the State provided support in the form of regulatory decrees updated each year based on suggestions. An electricity buyback rate schedule that allowed independent producers to turn a profit with this activity. Given the high initial costs of investment, companies would have lost money without such support. However, starting in 2008, the cost of solar equipment began to decrease. The cause? Chinese producers entered the market in massive quantities, triggering a period of global overproduction of photovoltaic panels. Stocks shot up and the price of equipment fell.

This decrease in costs, combined with rate decrees, created a real windfall for investors.

This caused the system to spiral out of control. Investment costs decreased by 10 to 15 percent while the energy buyback price remained elevated, generating new levels of profitability for producers, which were also excessive and way off CRE predictions. Faced with an increase in power station projects that were relatively serious and motivated in large part by this windfall effect, the State then imposed a moratorium in December 2010 that froze rates before decreasing them the following year.

The company charged with administering the electrical grid found itself accused of delaying the investigation of hundreds of connection application files. A legal loophole opened up and producers were demanding 20 years of net gains. Hundreds of legal cases cropped up throughout France, in Corsica, and in overseas territories. This meant it was essential for a loss adjuster to intervene.

 

Loss adjuster plays an essential role

Overall, the loss adjuster’s goal was to determine the financial and opportunity losses investors were exposed to in implementing this type of project. Everyone involved, from small producers to large firms, showed loss adjusters their financial simulations and other business plans related to their investments and their projected gains. It was up to the adjusters to study the probabilities and the various financial assumptions, including income and expenses. All of this is connected to the idea of financial discounting, the core of a damage survey. Here is what we mean.

Specifically, financial discounting is the method used to assess the economic value of future cash flow. Generated as a rate estimated between 5.5 percent and 12 percent by the Cour des Comptes and the “Agence de l’Environnement et de la Maîtrise de l’Energie” (ADEME), discounting is simply the opposite of capitalization. To do this, an inflation and profitability rate is calculated on a case-by-case basis. In addition, a risk premium is determined using a percentage of corporate risks and other events likely to occur in the business sector under consideration. The higher the risk, the higher the discount rate. In this case, the compensation value will be lower in the long term. We are then looking at a reduction. 

Let’s consider an example. We know that taking out a mortgage means paying interest on the original sum borrowed. In the case of a reduction, the amount normally received at the end of the contract would be devalued by taking into account said risks. Depending on the case, the €100 promised in 20 years might only amount to €40 now. The demands of the plaintiffs were articulated around this notion of immediate payment, a somewhat contentious choice.

 

Hundreds of cases, one court decision

Ten years later, the cases focused more on the legality of the aid promoted by the French State. Once again, the work of a loss adjuster was essential in justifying (or not) these subsidies. In this case, the adjuster had to diagnose the financial health of the photovoltaic industry. Therefore, this industry was compared with wind power, a similar industry subject to the same issues. A normative model set up demonstrated a real lack of maturity in the solar energy industry. Despite the low profitability over 20 years, subsidies are therefore necessary. However, are they legal?  

On the European level, State aids are prohibited. Exceptions exist when these subsidies are justified and intended for future industries, such as renewable energy. But do they have to be declared to the European Commission? At this point, the case took on a new dimension. None of the regulatory decrees were declared to Brussels. As a result, they are considered null and void.

On 18 September 2019, the verdict came down from the Commerce Court, the Court of Appeals, the European Court of Justice, and the Court of Cassation. This decision set a precedent for all of the cases due to their identical nature. The plaintiff cannot claim loss of opportunity on the basis of an illegal rate. This conclusion was only reached in 2019, even though the first court summons date back to 2011 and 2012. Hundreds of cases, one court decision, a financial windfall estimated at €1.5 billion in losses and interest for producers that have every chance of evaporating now.

 

In light of this example, it is hard to imagine relying on an exclusively green economy in the coming years. However, in the world of loss adjusting, renewable energies represent a source of new risks, at the interface of finance and technological innovation, the intangible and the tangible. 

 

Laurent MICHEL, Finance Loss Adjuster

GM Consultant | Stelliant group

Find out more his area of expertise