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Is a shadow falling across the Spanish solar industry?

With BP still struggling to plug its broken deep-water well in the Gulf of Mexico and end what appears to be the worst oil spill in American history, these should be sunny days for investors in the clean business of renewable energy – particularly solar/PV.

Unfortunately, as the European industry is acutely aware, solar depends heavily on subsidies. And the arrival of a new era of cost-cutting to rescue the public finances of several Member States in the Eurozone means some governments are regretting their earlier generosity. Nowhere is this more apparent than in Spain.

The problem is not just that the beleaguered Spanish government will reduce subsidies for new projects. More serious is the fear that they will slash agreed subsidies for projects built or under construction – a decision that will have massive repercussions for the sector.

Unfortunately for the industry, solar power subsidies are an uncomplicated target in times of crisis. There has been a rush of spending in Spain’s photovoltaic sector, with €23bn invested since 2002 – 25 per cent of that in 2008 alone. The annual cost of subsidies for all renewables reached €5bn in 2009 and could hit €6.3bn this year.

However, it doesn’t help the industry that profit margins on some new plants have soared as a result of the falling cost of solar panels, which makes for outsized profits. Nor is it any help that the National Energy Commission has been investigating solar plants alleged to have been producing power at night. Investigators believe what has been happening is that that wind producers have registered as solar generators to claim the higher subsidies.

Supporting solar energy through subsidies is not necessarily foolish. But Spain’s experience shows that it needs to be done with more forethought and a better assessment of costs and benefits.