OREANDA-NEWS.  Spain and Portugal are within sight of restoring financial sustainability to their electricity systems as measures to cut costs and increase revenues bear fruit, Fitch Ratings says in a new report. The main risks to system sustainability are adverse macroeconomic trends and legal intervention.

We expect electricity system tariff deficits (TD) to reach the sustainability threshold of 100% of annual regulated revenues in 2019 in Spain and 2018 in Portugal. This ratio is a key performance indicator in Fitch's TD securitisation ratings.

Our base case forecasts see Spain's TD stock continuing to fall from its EUR28.8bn peak at end-2013 to EUR19bn at end-2018, and Portugal's TD stock stabilising at EUR5.3bn this year before falling to EUR3.6bn over the next three years.

Spanish and Portuguese policy makers have sought to tackle the imbalances created when electricity system costs (for example of large renewables projects) rose much faster than revenues, which were dampened by low demand during the recessions between 2011 and 2013. Key corrective measures have included gradually removing regulated consumer tariffs, allowing access tariffs to increase with energy costs, and reforming subsidies for renewables investments.

As a result, end-2014 regulated revenues are expected to have exceeded regulated costs in Spain for the first time since 2005. We think the same will happen in Portugal this year. Market liberalisation should keep the systems in equilibrium, so that higher-than-expected energy costs will not result in large increases in debt.

Regulatory and legal intervention risk remains greater for Spain than Portugal. The Spanish regulator is less independent than its Portuguese counterpart and its ability to set access tariff adjustments is limited and may be subject to greater political interference. Moreover, some investors in Spanish renewable plants are mounting legal challenges to retroactive cuts to remuneration for special-regime generators.