From Renewable Energy World

Spain's Solar Power Sector Falls into the Abyss

Tough days for Spain's once high-flying solar-power industry

By Ivan Castano
November 15, 2010


Madrid, Spain – The Spanish government has launched a new regulatory framework that will result in subsidized tariffs for ground-mounted solar energy projects drop 45% this year, killing future investment in the trade, which industry leaders expect will be frozen in the next few years.

"We expect new ground-mounted projects will be paralyzed because there won't be any new investments," says Tomas Diaz, communications director of a trade lobby Asociación de la Industria Fotovoltaica (ASIF). "Last year, many projects were cancelled. Banks did not provide financing because of the regulatory uncertainty and electricity companies' growing campaign against the sector," he said, adding that utilities are working to bolster subsidies for their own renewable projects, most of which involve wind power.

Indeed, the Spanish solar industry has seen investment plunge in the past two years with only 100 MW of generating capacity having been installed in 2009 and 2010 - compared to 2,700 MW in 2008.

In addition, approximately 75,000 jobs have been lost with countless firms moving abroad to find new growth opportunities.

The industry is so frustrated that it has sued Spain's government, arguing that that new regulation is way too harsh and even "unconstitutional" as the tariff cuts are expected to apply to both new and existing projects, meaning the industry may have to make retroactive payments.

A recent study showed that Spain stands to lose €4.9bn until 2020 as well as 40,000 "quality and stable" jobs because of the new law. However, if it where to change the legislation and boost tariffs, 1000 - 1500 MW of solar generating capacity could be installed annually, resulting in as much as €14bn in proceeds. Proceeds would come from the reduced need to import energy from neighboring countries, CO2 reduction benefits, higher tax revenues, labor social security contributions and other energy distribution and transport savings.


Cutting Renewable Energy Spending

The new decree is on the brink of becoming law, with the Spanish congress expected to approve it in mid- or late November.

Spain has needed to curb spending as it was hit with one of the biggest recessions ever to rock the country in its long history. The government wants to cut renewable subsidies, which reportedly cost public coffers €6.2bn last year. Of this, €3bn went to the solar power industry, which meets just 2% of Spain's power needs, according to government representatives. Moreover, there are claims that the industry has engaged in "fraudulent" management of state subsidies, which it disputes.

Madrid's decision is also the result of the sector's rapid development in recent years, in which 3,800 MW of generating capacity was installed, nearly half the 2020 target of 8,673 MW. As of the first half of 2010, 39% of Spain's electricity came from renewable sources, bringing the country very close to its 2020 goal of 47%.

"We can certainly do 4,000 MW by 2020," Diaz says, adding that not everything in the law is bad for the sector. Indeed, he said the tariff cuts for rooftop projects still make them profitable and he expects investment to increase sharply next year for these projects.

Rooftop projects will see 35 MW of capacity installed this year but that should surge to 250 MW in 2011 and 260 MW in 2012 as investors pour into the space, where there already are a flurry of planned projects, observers say. The new law will see tariff drop 5% for small installations and 25% for large ones. Regarding ground-mounted projects, Diaz says these projects may become profitable again in a few years when solar system prices fall strongly.


Moving Abroad

Still, many companies whose business depends on ground-mounted projects will need to look for opportunities elsewhere. And given, their know-how and technological expertise, this should be feasible, industry participants say. These firms are expected to firm up markets in places such as Italy, France, Germany, Eastern Europe and the U.S. where ground-mounted projects are still viable.

"Approximately 50% of our companies are present in the foreign markets so ground-mounted companies are going to do whatever they can to grow even more there now," Diaz points out, adding that most Spanish firms are currently operating in Italy, Czech Republic, France and the U.S.

While Spain is expected to see 100 MW of solar power installed this year (down from a meager 70 MW in 2009), France, Italy and Germany are forecast to add 500 MW, 1,500 MW and 7,000 MW, respectively.

In addition to the lawsuit, which the government would not comment on, ASIF continues to pressure the government to be easier on the sector. After all, Spain has Europe's highest insolation rates.

Greenpeace is highly critical of the government. "Spain's government is making a historical mistake by deterring investments in our country's photovoltaic industry because the economic, employment and CO2 emission-reduction benefits will now go to other countries."

This is exactly the type of government response that I expected all along. As we reach the end of cheap fossil fuels, governments indebt themselves more and more because of their addiction to energy. Thus, they need to save money ... and money they save by shutting down projects that would support the development of more energy.

Consequently, the abyss of declining fossil fuel reserves is accelerated by economic depression caused by fossil fuel depletion (and the inflation that goes along with it) that prevents governments from investing in new energy projects.

So we've been covering these grounds before but... how oil prices remain high if we got a depression killing the consumption/demand side of the price equation?

Spain had been extremely generous with its tariffs for solar and wind energy. I remember reading/evaluating a few wind projects located in Spain. They had the best framework with "guaranteed" returns of 15-20% for investors.

The investors were supposed to be compensated for the execution risk (i.e. the fact that the guys putting up the turbines would be clowns/start-ups with no idea how to manage/run the project).

I am proud to say that I immediately saw that the real risk in these projects, if you were working with half reputable firms like EDF Energies Nouvelles etc, was political.

You were betting that Spain wouldn't change its tariffs on you. Well, forced to find some savings, they just did. I cannot say that I find this abnormal.

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Basically, what I saying is that it's like R&D - It's an investment, yes but that means that, upfront, it's nothing but a cost. The rewards/profit, if they occur, occur later.

Here, Spain looked at places for savings. Cutting R&D is a time-honored method of trying to survive today...

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Originally Posted by Gilles de Rais

So we've been covering these grounds before but... how oil prices remain high if we got a depression killing the consumption/demand side of the price equation?

Because the still continuing growth in the emerging markets, especially China and India, overcompensates the slump in Western Europe and the U.S. up until now.

I don't expect the price of oil to ever come down much anymore, unless we get a short recovery with rapidly rising oil prices, which would then be followed by a short-lived valley. The oil depletion will prevent the price from decaying, and the economic depression resulting from each price increase will reduce the demand more or less in sync with the depletion. The price of oil may slowly rise to $120/barrel (at today's Dollar value), but I doubt that it will rise much higher than that, because our economy cannot take a higher price over an extended period of time without crumbling.

Originally Posted by Gilles de Rais

Spain had been extremely generous with its tariffs for solar and wind energy. I remember reading/evaluating a few wind projects located in Spain. They had the best framework with "guaranteed" returns of 15-20% for investors.

Wind power is marginally profitable at an oil price of $80/barrel, photovoltaics and even CSP (concentrated solar power) still haven't reached grid parity. Thus, subsidies continue to be needed if these technolgoies are to be developed and brought to market. Without them, there is no market yet. Spain (and the U.S.) did beautifully in terms of CSP plants during the second oil crisis of 1979, but then, the companies went mostly bankrupt when the oil price fell again to $10/barrel. They saw a renaissance in 2008, when the oil price rose rapidly. At that time, most people expected the oil price to remain high, and consequently, a "guaranteed" return of 15-20% was not unrealistic. When the oil price came back down to $36/barrel, the dream was quickly over.

Originally Posted by Gilles de Rais

The investors were supposed to be compensated for the execution risk (i.e. the fact that the guys putting up the turbines would be clowns/start-ups with no idea how to manage/run the project).

This criticism is unjustified. I have looked in detail at the specs of a number of the Spanish plants, and they are as professionally done as any others around the globe. That they could not predict the oil price development correctly is not their fault.

Originally Posted by Gilles de Rais

I am proud to say that I immediately saw that the real risk in these projects, if you were working with half reputable firms like EDF Energies Nouvelles etc, was political. You were betting that Spain wouldn't change its tariffs on you. Well, forced to find some savings, they just did. I cannot say that I find this abnormal.

The issue is that most large-scale power plants require a lot of up-front investment with a long turn-around time for the money. A nuclear power plant, for example, costs billions of Dollars to build, it takes 10-15 years before the first electricity will ever be put on-line, and then, the plant is supposed to run for 40-50 years almost for free. Thus, an investor must have a very long-term perspective to put money into such an endeavor. Most banks won't do it for just that reason.

In contrast, small-scale power plants (such as photovoltaics) have a much shorter turn-around period, but unfortunately, are much less efficient overall. Thus, they are not profitable without subsidies, and consequently, private-sector investors won't usually put money into these plants.

For these reasons, we cannot leave it up to the markets to solve the energy problem for us. They won't ... at least not in time.

Thus, the problem is indeed a political one, and governments, in times of hardship, are also quick in reducing their time horizon, i.e., if money needs to be saved somewhere, it will be saved on projects with a long turn-around period.

Consequently, our energy crunch problem won't get solved until it's too late, and therefore, we should realistically expect tough times ahead.

Originally Posted by Francois Cellier

Because the still continuing growth in the emerging markets, especially China and India, overcompensates the slump in Western Europe and the U.S. up until now. I don't expect the price of oil to ever come down much anymore, unless we get a short recovery with rapidly rising oil prices, which would then be followed by a short-lived valley. The oil depletion will prevent the price from decaying, and the economic depression resulting from each price increase will reduce the demand more or less in sync with the depletion. The price of oil may slowly rise to $120/barrel (at today's Dollar value), but I doubt that it will rise much higher than that, because our economy cannot take a higher price over an extended period of time without crumbling.

So I disagree with the logic but I kind of agree with the conclusion - Although I think oil prices can collapse like they did in 2008, I do agree that it would be fairly short-lived affairs unless something drastic happens in China. Which isn't entirely impossible, btw. They got bubbles brewing there...

Quote:

At that time, most people expected the oil price to remain high, and consequently, a "guaranteed" return of 15-20% was not unrealistic. When the oil price came back down to $36/barrel, the dream was quickly over.

That's not what I meant/the terms I saw. The profits were 'guaranteed' because the state was 'guaranteeing' the take off price. There wasn't a direct competition with oil prices or even electricity prices. The whole thing rested on the Spanish gvt not changing its take off tariffs.

Quote:

This criticism is unjustified. I have looked in detail at the specs of a number of the Spanish plants, and they are as professionally done as any others around the globe.

This wasn't meant as a criticism of Spanish firms in particular. I've seen small start-ups trying to get into the business both in Spain and Italy and, yeah, some of them did lack a track record as a companie, no matter the experience management might have boasted so that's what I call "execution risk". There was also some risks related to NIMBY/legal stuff etc but, as i said, it's all grouped under "execution risk" as far as I am concerned as an investor.

Quote:

For these reasons, we cannot leave it up to the markets to solve the energy problem for us. They won't ... at least not in time.

Oh, I fully agree. It's definitely one of these "market failures".

Quote:

Thus, the problem is indeed a political one, and governments, in times of hardship, are also quick in reducing their time horizon, i.e., if money needs to be saved somewhere, it will be saved on projects with a long turn-around period.

Yes, exactly.

Quote:

Consequently, our energy crunch problem won't get solved until its too late, and therefore, we should realistically expect tough times ahead.

I can't say I disagree. I still think your logic is not exactly on-target but there is no doubt that while delevraging might keep on inflicting pain for the years to come, if and when we emerge from it, we might face new crisis such as shortage of oil/very high oil prices.

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Originally Posted by Gilles de Rais

Oh, I fully agree. It's definitely one of these "market failures".

By definition, markets cannot fail.

Quote:

By definition, markets cannot fail.

In fact, they do. In the days leading up to St Patrick's day this year, the market for shamrocks failed.

A long, hard winter meant that Trifolium dubium, the official shamrock, was in short supply. In an efficient market this would not raise a sweat. Shamrock prices would rise until supply matched demand and the market would clear. Even if this meant that the final shamrock sold for €1,000, the market would have been successful.

Sadly (for one does not normally think of Ireland as a rogue economy), that is not what happened. In fact, traders fraudulently substituted bogus products, such as the perennials Trifolium repens and Medicago lupulina, for genuine leaves.

While Irish authorities are too busy right now dealing with market failure in respect of Irish banks, it is clear that, in due course, a regulator must be appointed to ensure that, in future years, the shamrock market operates fairly and honestly.

Originally Posted by contracycle

By definition, markets cannot fail.

Tsk. After the "price is value" thingy, this is becoming ridiculous.

"Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. [...] Market failures are often associated with information, non-competitive markets, externalities or public goods. [...] Economists, especially microeconomists, are often concerned with the causes of market failure, and possible means to correct such a failure when it occurs [...] Mainstream neoclassical and Keynesian economists believe that it may be possible for a government to improve the inefficient market outcome, while several heterodox schools of thought disagree with this..."

But note that even the heterodox schools don't disagree that market failures occur. They just disagree that they can be solved by gvt intervention.

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Originally Posted by Gilles de Rais

Tsk. After the "price is value" thingy, this is becoming ridiculous.

It is true that capitalist dogma is indeed ridiculous.

Quote:

"Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient.

By what standard? Can I assert that a market has failed if it has not delievered to me everything I desire? Becuase that's really the implicit argument here.