Renewables Investors Fear Withdrawal Of Subsidies

  • Date: 19/08/10

European Governments Are Finding Themselves Forced to Scale Back Amid Budgetary Pressures and High Power Prices

[…] Spain saw a boom in photovoltaic installation in 2007 and 2008, before a regulatory change in September 2008 lowered subsidies for future installations. Capacity installed prior to this change receives a highly subsidized feed-in tariff of as much as €440 per megawatt hour of electricity produced, which is roughly 10 times the price utilities pay for power produced from conventional sources—gas, coal, nuclear and hydro power.

The government gives priority to renewable power, mandating that this must go first into the electricity pool every day. But while it forces utilities to use this expensively produced power, the government has been unwilling to raise the prices charged to consumers to keep pace. Utilities are expected to put up with the cost temporarily, stating the deficit between regulated prices and production costs as a “tariff deficit” in their books. In 1997, a law gave a guarantee to utilities that their production costs would be covered while prices remained regulated. The government therefore has an obligation to reimburse them for the tariff deficit, which now amounts to about €16 billion. But it has yet to say how exactly it intends to do this.

Spain’s government is negotiating with the opposition parties on a broad deal to reform the energy sector, including a review of the entire electricity pricing system. It has already announced cuts in aid to thermal solar plants—which use mirrors to focus the sun’s rays onto a central receiver, generating steam that powers electric turbines—and wind-power plants. But these are relatively small costs—there are very few thermal solar plants, and wind power is subsidized far less than solar-power plants.

And Aug. 1, the government announced its plans to issue a regulatory decree to cut subsidies for future photovoltaic plants by as much as 45%.

But photovoltaic-power associations, following consultations with the government, say the government is also considering lowering most current subsidies by about 30%, most likely by imposing an annual cap on the number of subsidized hours of generation solar plants can sell to the grid. Since the government had previously guaranteed to pay subsidies for unlimited quantities of power over a 25-year period, the solar industry and investors say this changing of contractual terms would constitute a “retroactive” cut.

If tariffs or hours for subsidies are cut, “I absolutely would go bankrupt,” says Pere Guerra, now a 24-year-old partner in a solar-installation company.

But someone eventually will have to pay the bill. The government may have to assume the cost of the tariff deficit debt in its budget—which is difficult to imagine, as Spain is already struggling to bring down a daunting budget deficit. If not, Madrid must let electricity prices rise sufficiently to cover past tariff deficits, while at the same time slashing renewables subsidies enough to keep electricity prices affordable.

Spanish Industry Minister Miguel Sebastian recently expressed his concern that most solar subsidies need to be paid for another 22 years. The subsidies, he said, were “fixed in years of bonanza, without taking into account that the more the sun shines, the more subsidies are paid.” Renewable tariffs need to be sustainable and shouldn’t endanger the competitiveness of Spain’s industry, he says.

But Spain isn’t the only country in trouble, although it is considering the most-radical solutions. Other European countries find their subsidy regimes increasingly unaffordable, putting in jeopardy both investors’ capital and ambitious green goals.

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