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In March 2007, European Union members agreed that 20% of energy needs will be sourced from renewable energy by 2020. Many EU governments reacted by pouring billions of euros in subsidies into their wind- and solar-energy industries. Yet in Spain, at least, the financial crisis that began in 2008 has exposed serious shortcomings in renewable-energy support policies, giving ammunition to critics who argue that both the wind and solar power sectors would not be viable without government subsidies.
Spain subsidizes renewable energy using ‘feed-in tariffs’, a subsidy mechanism whereby utility companies are legally obliged to purchase the available renewable energy at special above-market rates before they can purchase energy at market prices. Such policies typically guarantee operators of renewable-energy plants above-market rates for 10 or more years in order to increase investor confidence. According to the IEA, it is also good practice for a feed-in tariff to gradually offer lower rates year-on-year for new investments, taking into account cost reductions as technologies mature.

Currently, wind power operators in Spain can choose to sell their energy at either a feed-in tariff rate of €77 (US$ 98 ) per megawatt-hour (MWh) or the market price plus a premium of €30 (US$ 38) per MWh, up to a maximum of €90 (US$ 114) per MWh. The payments are guaranteed for the entire lifetime of the system, although tariffs are reduced a little after the first 20 years of operation. There is no pre-set schedule lowering tariffs for new investments as the technology matures.
Initially, solar power producers could sell their energy at a feed-in tariff rate set at €440 (US$ 565) per MWh, although after the onset of the financial crisis in 2008 this was lowered for any new projects to €259 (US$ 329) per MWh. Payments are again guaranteed for the lifetime of the systems, with slight reductions to the tariffs being made after a longer period than wind, 25 years. According to the IEA, feed-in tariffs are adjusted every quarter for new systems.

By comparison, the market price for electricity, which is set by the cost of energy sources such as natural gas, has been under €45 (US$ 57) per MWh for the last couple of years. This makes Spain one of the biggest renewable-energy subsidizers on the continent.

The feed-in tariffs have been very effective at boosting capacity in Spain, transforming the country into a world leader in wind and solar electricity production in just a few short years. In 2008 Spain accounted for half of the world’s new solar energy installations by wattage. Today it boasts the world’s largest renewable energy company, Valencia-based Iberdrola Renovables, which operates wind farms throughout Europe and the Americas. The heavy investment has also put it on track to meet the EU’s 20% renewable energy target by 2020. In fact, according to figures published by El País, Spain was already producing 20% of its electricity through wind and solar power in 2009.

But the crisis and subsequent European sovereign-debt-default scare has recently forced the government in Madrid to drastically cut spending by, among other things, reviewing its significant expenditure on renewable energy. In 2009 alone the country had spent an estimated €3.2 billion (US$ 4.1 billion) subsidizing solar and wind power.
The strain on government revenue is in part due to the way Spain has designed its feed-in tariff system. Usually, this type of subsidy is paid for by utilities charging more for the electricity they sell to consumers, to cover the cost of buying renewable energy at above-market prices. Therefore no money is actually paid out of government revenues: consumers bear the cost directly by paying higher electricity bills. In Spain, however, the price of electricity has been kept artificially low since 2000. The burden has been shouldered by utilities, which have been operating at a loss on the basis of a government guarantee to eventually pay them back. The sum of this so-called ‘tariff deficit’ has accumulated to over €16 billion (US$ 20 billion) since 2000. For comparison, Spain’s deficit in 2009 was around €90 billion (US$ 116 billion) in 2009 and its accumulated debt around €508 billion (US$ 653 billion).

Due to this growing cost and the need to cut spending, Spain’s ruling Socialist Worker’s Party launched negotiations with the wind- and solar-power sectors earlier this year over cuts to feed-in tariffs. In July, the government managed to reach an agreement with the wind-power sector under which it will cut the top-up rate to wind energy producers by 35% until 2013, a move that could save the country as much as €1.3 billion (US$ 1.6 billion), according to Spanish daily El Mundo.
It has been more difficult to reach an agreement with the solar power sector, which is much more heavily subsidized due to its higher feed-in tariff rate. In 2009, the solar power industry received over €2.6 billion (US$ 3.3 billion) though it supplied only 2% of Spain’s electricity, while wind received €600 million (US$ 764 million) for supplying 18% of the country's electricity.
Having already cut tariffs for new projects in 2008, the Spanish government announced in May of this year that it would again be reviewing subsidies to the solar-power industry, launching rumors that retroactive cuts were being considered, which sent shockwaves through the sector and froze new investment.
After failing to reach an agreement, on 31 July the government announced plans for a further 45% cut in the feed-in tariff for new ground solar installations, the plant-type which currently makes up the majority of solar capacity in Spain. The government is also considering a cap on the amount of electricity that solar companies can sell to utilities, a change which would be retroactive.
Subsidy Watch spoke to Juan Laso, president of the Asociación Empresarial Fotovoltaica (the Photovoltaic Industry Association), who said that the reason that billions of euros had been invested in solar parks throughout the country was because Spain had guaranteed the fixed feed-in tariffs to solar-power producers for 25 years. He argued that the proposed cuts would render existing investments unprofitable and, given that most of the costs associated with solar-power production are paid up-front, could lead to many solar-power companies going bankrupt and defaulting on investment loans.

It is not clear what the future bears for Spain’s once-promising solar-power industry now that investor confidence has clearly been shaken, one of the cardinal sins of a good renewables support policy. It also seems evident that despite the best of intentions regarding environmental sustainability, subsidies to renewables can be economicallyunsustainable if they are not well-designed – to both the detriment of the public purse and the development of a future, low-carbon energy supply.