January 11, 2011

A Cautionary Tale: Spain and Solar Power

Spain was at the forefront of the solar revolution in 2006 and 2007, but its subsidy policies proved ruinously expensive and have now been repudiated by the Spanish government, as this article from Bloomberg relates. One Spanish family (Vilimelis), the head of which grew pears on five acres of land, was persuaded by his son to set aside part of his property for solar panels. Spurred by the government's promised subsidies, the son obtained
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.

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. . . .
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.

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?” . . .
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 of irradiation 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.

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. . . .

When Zapatero came to power in April [2004], his Socialist Party pushed green energy as a new source of economic growth. Under his program to create “the sustainable economy,” he funneled 6.3 billion euros into developing renewable energy and embarked on a 250 billion-euro transport plan that aims to complete a 10,000-kilometer (6,000-mile) high-speed rail network by 2020.

He also introduced subsidies of up to 20,000 euros for buyers of electric vehicles as part of a 4 billion-euro package of tax deductions, grants and subsidized loans to spur the modernization of the country’s auto industry.

In 2007, the Spanish parliament approved Zapatero’s plan to introduce a feed-in solar tariff -- called that because it fixed the price at which producers can sell their power to the grid -- for photovoltaic plants at 10 times the wholesale rate. Spain’s number crunchers failed to anticipate the spiraling cost of an open-ended incentive, says Charles Yonts, a renewable-energy analyst at CLSA Ltd. in Hong Kong.

“Spain is the poster child of how things can go badly awry,” he says. “Far too much money was being paid out.”

Chinese panel manufacturers, thanks to their lower labor costs and ability to step up production, are best placed to benefit from any solar revolution, Yonts says.

Four of the five best-performing solar stocks this year are headquartered in China, including Qidong-based panel manufacturer Solarfun Power Holdings Co., according to data compiled by Bloomberg.

In November 2007, Zapatero unveiled a solar plant at his official residence in Madrid, with photovoltaic panels made by Spain’s Isofoton SA.

“We are a world power in this field, we are capable of exporting our technology and competing across five continents and we are today at the forefront of the renewable-energy industry,” he said.

The surge in investment put Spain at the center of the solar-energy business just as Bilbao-based power company Iberdrola SA became the world’s largest producer of wind power, using turbines produced in Spain by Gamesa Corporacion Tecnologica SA. Iberdrola is the largest shareholder in Gamesa, with a 15 percent stake.

As the state’s renewable-energy costs spiraled, Zapatero reduced the subsidy for new solar parks by about a quarter starting on Sept. 30, 2008. The move virtually eliminated any new solar investment in 2009, according to the Photovoltaic Industry Association.

Isofoton, the panel maker Zapatero deployed as a symbol of the Spanish solar industry, suffered an 83 percent sales slump and its losses almost tripled to 226 million euros in 2009. In June of this year, the closely held company was taken over by Madrid-based Affirma Energy Engineering & Technology SL and South Korea’s TopTec Co., which invested 50 million euros to strengthen the company’s balance sheet.

Zapatero said Spain’s clean-power industry employed 180,000 in 2007. During the next three years, jobs fell by a third to 116,000, according to a study by the Madrid-based Trade Union Institute of Work, Environment and Health.

Lawmakers in Germany may be repeating some of Spain’s mistakes, Chase says. New solar-generating capacity in Germany reached 713 megawatts in the first quarter, almost 10 times the amount installed in the year-earlier period, thanks to government subsidies, she says. . . .
In April, after the budget deficit ballooned to 11.2 percent of GDP, Industry Ministry officials announced that the government was considering cutting the subsidies for existing solar facilities -- even though the law guaranteed those rates for 25 years.

The suggestion triggered outrage among the owners and operators of photovoltaic systems and caused investors to flee solar energy investments. . . .

No comments: