Spain’s recent decision to stop subsidizing new renewable energy projects as part of managing its debt crisis has been hitting the headlines. Renewable energy skeptics will surely spin this as added proof that renewable energy is simply not economical, as they’ve been warning us all along. But we believe that conclusion is misguided and ignores the real lessons to be learned from Spain’s story, which is one of remarkable success and flawed policy that needs repair.
A first fact to note is that Spain’s $31 billion debt in the power sector is not only attributable to the country’s renewable energy program. The coal and grid support programs also make up part of this figure.
Secondly, while Spain has seen massive renewable energy installation and development in the past decade, the country is in a different position from rest of the EU states in that they have tended to build large, centralized solar and wind plants, which have gas back-up systems sized at twice their peak capacity and no ability to export. The result is added financial constraints.
Thirdly, Spain’s flawed feed-in tariff structure at the core of their renewable energy program contributed to tremendous growth – but also to instability – of the Spanish solar market. In May 2007, following a first weak attempt at incentivizing renewables, Spain implemented a revised program that offered very generous rates with the long term certainty that made the plan very attractive to investors. With the addition of Spain’s strong sunshine, there was a big rush. The good news was that this kick-started the Spanish renewable electricity industry and quickly made Spain a major international player.
The bad news was that there were several weaknesses in the feed-in tariff law that undermined Spain’s success:
Spain made the error of tying its feed-in tariff payments in part to the government budget and tax system, which had neither the flexibility to make quick pricing adjustments, nor the cash flow to cover the costs of success - especially when Spain was hit hard by the global recession that began in 2008. Germany and several others, by contrast, pay for their feed-in tariff entirely via the ratepayer system, which allows for quicker responses to the need to adjust prices.
Spain had no digression or rate adjustment mechanism built into their renewable energy law. Grappling with the need to control the solar rush, the country turned to issuing a sudden hard 500 MW cap on solar development in 2008. The result was a market crash and domestic job loss of 20,000.
Spain’s feed-in tariff contained a loophole wherein higher rates were offered for systems of less than 100 kw, but there were no controls in place to prevent gaming of this offer by large project developers who would daisy chain small projects together to take advantage of higher rates.
Spain deserves credit for benefiting the rest of the world with the dramatic reduction of renewable energy prices, particularly those for solar PV. We all win because of that early large investment. Our guess – and hope – is that as they revise their renewable energy program, Spain will discourage larger, centralized plants in favor of smaller distributed generation that offer better value for the technology. The nation may also look at expanding offshore wind or markets that allow for the export of peak powers, which could leverage its big solar arrays. The bottom line in lessons learned from Spain is not that renewable energy is uneconomical, but that the right policies need to be in place to prevent boom and bust cycles.
This piece was written by Diane Moss and Angelina Galiteva, Founding Board Directors, Renewables 100 Policy Institute.
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