Wall Street Journal: La nube española sobre las energías renovables

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• HEARD ON THE STREET
• MAY 17, 2010

A Spanish cloud over European renewable energy

By MATTHEW CURTIN

Investment has poured into renewable-energy projects over the past few years, much of it in response to generous government subsidies. But the Spanish government’s threat to retroactively roll back some of those subsidies amid an austerity program has raised fears that other European countries will also see renewable-energy subsidies as a potential source of cuts. That would hit profitability and jeopardize planned investment.

Spain’s subsidies have turned it into one of the world’s leading generators of renewable electricity in just a few years, with €23 billion ($28.8 billion) invested in solar power alone. Renewable-energy suppliers are paid 50% above the European Union average for the power that they supply to the network. Now the government is threatening to reduce the 25-year tariffs for existing projects. The planned stock-market listings of a number of Spanish solar-power companies have been pulled as new regulatory uncertainty coincided with the volatility in equity markets.

Spanish energy companies hope they are just being softened up for lower future tariffs. If so, Spain would be following a similar path to other European countries that have cut subsidies to reflect the falling cost of building wind farms and solar plants. Spanish subsidies are particularly unbalanced: Solar po-wer received 38% of last year’s renewables subsidies despite supplying only 2.8% of electricity demand. Wind power, which met 14.3% of demand, received 24% of the subsidies.

But could Spain go further? Generous subsidies are hard to square with austerity programs. The energy sector’s robust profitability could be a tempting target for cash-strapped national treasuries. Iberdrola Renovables, Europe’s biggest renewable-energy company, had a first-quarter net profit margin of 25%.

True, subsidies can’t be cut too far: Like all EU countries, Spain is committed to the European goal of reducing emissions of carbon dioxide by 20% by 2020 by generating 20% of its electricity from renewables. To meet those targets, the government needs to encourage huge investment in renewable and conventional power generation. But those targets are arbitrary and the environmental urgency increasingly questioned. Investors in the sector should factor in an extra degree of political risk.

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