Spain's Solar Deals on Edge of Bankruptcy as Subsidies Founder

From Bloomberg

German Vilimelis heard about Spain’s solar gold rush from his brother-in-law in 2007.

Across the plains around Lerida, the northeastern Spanish town where they spent weekends, farmers were turning over their fields to photovoltaic panels to capitalize on government solar- energy subsidies. Vilimelis persuaded his father, Jaume, who made a living growing pears on 5 acres (2 hectares) of land in Lerida, to turn over a portion of his farm for the project, Bloomberg Markets reported in its November issue.

Vilimelis, 35, a procurement manager for a consumer goods company, pooled his family savings and mortgaged his apartment to obtain a loan of more than 400,000 euros ($558,500) to cover the investment. Within nine months, the family’s 80-kilowatt generation unit — 500 solar panels on seven racks angled toward the sun — was feeding power into the national grid.

Solar investors such as Vilimelis were lured by a 2007 law passed by the government of Prime Minister Jose Luis Rodriguez Zapatero that guaranteed producers a so-called solar tariff of as much as 44 cents per kilowatt-hour for their electricity for 25 years — more than 10 times the 2007 average wholesale price of about 4 cents per kilowatt-hour paid to mainstream energy suppliers.

Thanks to the incentives, the family met the monthly cost of the loan and even earned a small profit. Once the debt was paid off in 2018, Vilimelis looked forward to making even more money during the 15 additional years of subsidies guaranteed under Spanish law.

‘You Feel Cheated’

Now Vilimelis and more than 50,000 other Spanish solar entrepreneurs face financial disaster as the policy makers contemplate cutting the price guarantees that attracted their investment in the first place.

“You feel cheated,” he says. “We put our money in on the basis of a law.”

Zapatero introduced the subsidies three years ago as part of an effort to cut his country’s dependence on fossil fuels. At the time, he promised that the investment in renewable energy would create manufacturing jobs and that Spain could sell its panels to nations seeking to reduce carbon emissions.

Yet by failing to control the program’s cost, Zapatero saddled Spain with at least 126 billion euros of obligations to renewable-energy investors. The spending didn’t achieve the government’s aim of creating green jobs, because Spanish investors imported most of their panels from overseas when domestic manufacturers couldn’t meet short-term demand.

Stark Lesson

Spain stands as a lesson to other aspiring green-energy nations, including China and the U.S., by showing how difficult it is to build an alternative energy industry even with billions of euros in subsidies, says Ramon de la Sota, a private investor in Spanish photovoltaic panels and a former General Electric Co. executive.

“The government totally overshot with the tariff,” de la Sota says. “Now they have a huge bill to pay — but where’s the technology, where’s the know-how, where’s the value?”

U.S. President Barack Obama highlighted solar energy as part of his plan to create green jobs this month with a decision to install photovoltaic panels on the roof of the White House. The government also approved the first large-scale solar-power projects on public land. Dublin-based utility NTR Plc and Chevron Corp. will build plants in California generating enough electricity between them to power about 600,000 homes.

Sun Surplus

At first glance, Spain appears to be the perfect incubator for a solar-energy revolution. Thanks to its location in southern Europe, the country’s land mass receives 900,000 terawatt-hours ofirradiation from the sun each year, according to the European Commission — more than 3,000 times the power used annually by its citizens. In contrast, Germany, Europe’s largest economy, receives less than half that amount of irradiation. (A terawatt-hour streams enough power to run 1 billion washing machines for 60 minutes.)

The challenge for Spain was to transform that free resource into an industry that made economic sense and attracted investors. The first problem lawmakers encountered was price. Solar power, like wind and other renewable-energy sources, can’t yet compete on price against electricity generated from natural gas or coal.

Power from the most-efficient photovoltaic plants costs utilities about $275 per megawatt-hour to produce compared with about $60 for a coal-fired plant, according to Bloomberg New Energy Finance. The cost of electricity from coal is held down in part by a plentiful supply of the mineral from established mines.

Miscalculation

Spanish policy makers reasoned that generous subsidies would help the country meet its goal of 400 megawatts of installed solar power by 2010 as well as spur the development of a manufacturing industry.

The feed-in tariff proved too successful in luring investors. By the end of 2007, solar installations had exceeded the government’s target, three years early, and the following year, investors pumped 16.4 billion euros into Spain’s solar industry, quintupling power capacity to 3,500 megawatts from 700 megawatts.

“They underestimated the technology — how cheaply panels could be installed and how quickly they could be installed,” says Jenny Chase, Zurich-based chief solar analyst at New Energy Finance. “When you have 40 megawatts of photovoltaic panels, you don’t think that if you get it wrong, you’ll end up with 3,500 megawatts.”

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