Spain Alternative Energy Fiasco

June 17, 2013

Spain's government was promising more than two decades of large subsidies to spur the growth of solar energy. Now, the government is said to be planning cuts in renewable energy subsidies, which is harming numerous individuals who decided to embrace the incentives provided by the government and invest in alternative energy companies, says the Wall Street Journal.

Under a broad energy-sector overhaul to be announced as early as June 21, Spain's government will reduce subsidies to renewable energy producers by 10 percent to 20 percent.

  • The move could drive tens of thousands of struggling solar energy companies and individual investors into default at a time of deepening recession and eventually boost loan losses for banks that financed the projects.
  • Spain's renewable energy sector includes wind- and solar-energy projects.
  • The proposed cuts are a far bigger threat to solar energy investors because their projects are more heavily indebted.

Those government subsidies increase the costs for running the nation's electrical system. For years, the subsidies and other overall costs of running the system have been higher than the amount of money generated by actual sales of power to households and businesses. This resulted in a "tariff deficit."

  • Reducing the tariff deficit helps cash-strapped Madrid's fiscal picture because the government likely would have to devote less money to filling that gap in future years.
  • Spain's electricity system has registered deficits during most of the past decade. By May, the total accumulated deficit had reached about €26 billion ($34.04 billion).
  • The government has promised to narrow the annual gap this year as it struggles to bring down its budget deficit and limit the rise in household electricity bills.

Since 2010, the government has taken steps to curb the tariff deficit, including imposing a temporary limit on the hours of electricity generation for which most solar energy producers receive payment above market rates. Producers say the limits adopted since 2010 could cut their revenue by as much as 40 percent this year.

  • José Donoso, managing director of the Spanish Photovoltaic Union trade association, says the subsidy cuts would also lead to a wave of defaults in the renewable energy sector because companies managing many of the 60,000 or so solar power installations in Spain would have trouble servicing their debt loads.
  • Spanish banks could refinance some of those loans, but they are already facing a rising tide of corporate defaults in other industries.

Source: Ilan Brat and Christopher Bjork, "Spain Said to Be Poised to Cut Renewable Subsidies," Wall Street Journal, June 6, 2013.

 

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