In the summer of 2007, when most of Spain was still blissfully unaware of the financial storm about to be unleashed, the government of Jose Luis Rodríguez Zapatero decided to create a solar energy industry.
Over the course of the next year, half the solar power installed globally would be in Spain. In its bid to encourage development of solar power and reduce dependence on fossil fuels, the then-government followed the EU model of so-called feed-in tariffs by which it agreed to pay a large premium for electricity from renewable resources, a policy that encouraged many small investors to put their money into solar farms. When it was announced in 2007, Spain's premium payment for solar power was the most generous in the world at around 68 euro cents per kilowatt-hour - with few strings attached.
State backing seemingly guaranteed that, after a few years, any investment in solar energy would bear fruit, while generous bank loans to make the investment would be repaid quickly and without problems. And so, in short order, solar farms sprang up throughout the country, often bought on land farmers had sold at high prices. Spain's long-term goal had been to produce 400 megawatts (MW) of electricity from solar panels by 2010; it had reached that milestone by the end of 2007.
In 2008 the country put 2.5 gigawatts of solar power into the national grid, more than quintupling its previous capacity and making it second only to Germany, the world leader. But many of the plants producing power were never going to be cost-competitive with conventional fuels, often suffering from poor design and sometimes even built in areas with insufficient hours of sunshine.
Meanwhile, the cost of the subsidized system, which eventually would find its way into electricity bills, shot up.
Spain's payments for solar power were the most generous in the world
By September 2008, with Spain's economy going into freefall, Zapatero suddenly cut those generous subsidies by around 25 percent, a move that all but eliminated any new investment in solar energy in 2009, according to Unef, the Photovoltaic Industry Association.
The move also hit some 50,000 small investors in solar energy hard. What had once been an easy-to-repay loan, had by now, in many cases, become an unserviceable debt. José Donoso, the director general of Unef, says unscrupulous "vulture" funds have already bought solar farms at bargain basement prices, taking advantage of small investors on the verge of bankruptcy.
In the long run, their investment could have been profitable, but many owners needed all the estimated earnings from selling solar energy to the national grid to pay the first years of their loan, which are the heaviest.
"Producers of photovoltaic energy had 40 percent of their revenue expropriated," says Donoso of Unef. The government's measures can still be appealed against, and when procedures allow it, the thousands of compensation claims that have been lodged will become lawsuits. "The instability created by the government has turned thousands of small investors into hostages, people trapped by a lack of liquidity," concludes Donoso.
Furthermore, the government's decisions have cast a shadow over the future of renewables in Spain, one that was further lengthened when in 2012, it decided to stop providing financial incentives for the creation of new installations. A sector that was once seen as leading the world in producing clean, cheap, renewable energy is now hit by closures, layoffs, and bankruptcies.
Spanish company Isofotón's solar farm in Málaga is one of the biggest in Europe. It has just announced that it is to lay off 380 of its 657-strong workforce. The layoffs coincide with the opening of a new plant by the Spanish firm in Ohio, employing 300 people. "We are seeing a debacle in the sector," says Carlos Martínez of labor union Workers' Commissions. Its Istas solar energy think-tank estimates that in 2007 the solar energy sector employed 26,450 people directly, and would have reached 42,000 if Spain had reached its stated goals for 2020 of 7,250 MW, instead of the current 4,500 MW. In 2010, Istas noted that the sector was employing barely 19,500 people directly. Martínez estimates that the sector has shrunk by a third. Unef says manufacturers and installers together probably only employ around 7,000 people directly and indirectly. "We are losing a key industrial sector," says a labor union spokesman.
"If demand falls and the state sector can no longer support the industry at a time when financing is much harder to find, then proximity markets will be hit hard," says Teresa Ribera, the director general of strategic development at Isofotón, explaining her company's shift toward the US and Latin American market. Ribera, a former secretary of state for climate change in the previous Socialist Party government, points the finger of blame at suspect number one in our globalized world: Chinese imports of cheap solar panels. "They have upset the sector in Europe," she says.
Installation went way ahead of what was reasonable at the time"
Ribera notes that the EU's commitment to reaching renewable energy objectives and carbon emission reductions by 2020 led to "investment in all kinds of renewables in the belief that there was no risk associated." But China had also set itself the goal of becoming the world's leader in the green industry. To do so it "aggressively financed" the production of solar panels, copying technology developed in the West, and applying it at a much lower cost.
As a result, it has not just been Spanish companies such as Pevafersa, Gadir Solar and Silicio Solar that have gone out of business, but also German players such as Q-Cells, while Bosch announced last week that it was closing its solar division. Brussels is investigating whether Chinese exporters of solar panels are guilty of dumping, and receiving subsidies that would warrant the introduction of import tariffs, following the lead of the United States.
In its haste to create a solar industry, the Zapatero government made some miscalculations: solar plants can be set up so quickly and easily that the rush into the industry was much faster than anticipated. And the lavish subsidies inflated Spanish solar installation costs at a time when they were rapidly decreasing elsewhere — in part because of growing competition from panel makers in China, but also because higher volumes produced economies of scale.
In Spain, the tariff, now adjusted quarterly, is about 47 euro cents per kilowatt-hour for electricity from freestanding solar power plants, and slightly higher for panels on rooftops.
While blaming the impact of Chinese competition, Ribera also admits that successive Spanish governments, including the administration she worked for, must also take their share of the blame. "The retroactive measures applied to solar farms in 2008 breached legal guarantees, and that drives investors away and is a disincentive to investment," she says. "Then, the moratoria on subsidies to renewables delayed much-needed change: the government needs to understand the transcendental importance of retaining an industry with high added value and thus avoiding technology dependency."
The former secretary of state for climate change admits that "mistakes were made in the past," by setting premium payments to producers of solar energy too high in 2008. "But this shouldn't lead us to think that we went too far in supporting renewables," she argues. The objective of covering 20 percent of energy needs through wind, solar, thermosolar, biomass, or biofuels by 2020 is reachable, she says.
Unesa, the electricity sector's association, representing Spain's five electricity producers and distributors, has been sharply critical of the premium paid to renewable producers, which amounts to around 6.5 billion euros a year. "Why can't we cut that figure?" asked Eduardo Montes, Unesa's president, in February. "We are paying for having invested in technology at a higher price than the present one."
The biggest game changer is allowing people to install solar panels at home
Premium payments to renewables producers, along with other costs such as the subsidizing of the electricity systems of the Canary and Balearic Islands or absorbing transport and distribution costs, are supposed to be covered by the government's price tariffs. But the decision by successive governments not to pass on the costs to the consumer, as well as lower estimates than expected, have created deficits with the big electricity companies that have grown bigger with each year. In 2012, as a result of this system, the tariff deficit passed the 5.5 billion mark, and in theory customers now owe utility companies close to 30 billion euros.
"The growth of renewable energies has been driven by a mixture of climate change policies and the need to create an industry," says Juan Delgado, a researcher at the Basque Center for Climate Change at the University of the Basque Country. Delgado, a former head economist at the National Competition Commission, believes that installation of solar power "went way ahead of what was reasonable in such a short time." He says that failure to adapt premium payments "to the real costs of technology has made our electricity bills higher," adding that the government's decision in 2008 to reduce the premium proves this: during the boom of 2007 and 2008, a premium price of 442 euros was being paid for each MW hour. Then the rules were changed: in 2010 and 2011, quarterly limits were established; if they were covered, the premium payment fell in the following quarter. The annual objectives of 400 MW were covered during those two years, and the premium fell by a third to 124 euros, a sign that costs were already significantly lower.
"In 2007, a premium payment was set that was far too high, and not just in terms of price," says Pablo del Río of the Institute of Public Policy. "Growth was also due to the fact that this was module technology, easily installed, and that experienced rapid cost reductions. More and more people wanted in because it was understood that regulation in the future would be tougher; we also have to bear in mind the financial question, in so much as it was a lot easier to get loans in those days."
But Del Río also points out that other countries overestimated initial previsions: in Germany some 7,000 MW of solar energy were installed each year, and he defends subsidizing technologies "that at the moment are less efficient, but that could be necessary and competitive in the future."
"Concern over the tariff deficit means that new premium payments from now on will be lower, although it is also likely that an additional risk premium will have to be paid due to the doubts in investors' minds created by this regulatory instability," says Del Río, who believes that in the case of more mature technologies such as wind energy, subsidies can be applied "through auctions so that it can be seen how technological improvements reduce costs."
Del Río supports the joint development of energy and industrial policies. "Renewables are a clear alternative now that we are changing our industrial model, not just because they help create jobs, but because they reduce our dependence on imported energy," he says. Which doesn't mean that it will be necessarily easier to justify support structures. "Excess electricity generation capacity at a time of falling demand during the present crisis, along with limited international interconnection will make it difficult to defend growth in any technology," he says.
For the present, generating electricity from the power of the sun will continue to be subsidized because it requires the purchase of new equipment and investment in evolving technologies. But costs are rapidly dropping.
So despite the present cloudy outlook, there is still a viable future for Spain's solar energy industry. Requests to connect high concentration installations to the national grid, even without a premium payment, are above 20,000 MW. But the biggest game changer is self-consumption: allowing customers to install solar panels in their houses to generate their own electricity. The previous government drew up draft proposals to allow for this, and it now depends on the current administration to work out a way to organize and pay for these types of consumer to access the national grid when solar energy is not possible. This is what Teresa Ribera sees from the offices of Isofotón in the Torre de Cristal skyscraper in Madrid: "Just think how many square meters of solar panels could be placed on these terraces!"