The Spanish government has launched a new regulatory framework that will result in subsidized tariffs for ground-mounted solar energy projects drop 45% this year, killing future investment in the trade, which industry leaders expect will be frozen in the next few years.

"We expect new ground-mounted projects will be paralyzed because there won't be any new investments," says Tomas Diaz, communications director of a trade lobby Asociación de la Industria Fotovoltaica (ASIF). "Last year, many projects were cancelled. Banks did not provide financing because of the regulatory uncertainty and electricity companies' growing campaign against the sector," he said, adding that utilities are working to bolster subsidies for their own renewable projects, most of which involve wind power.

Indeed, the Spanish solar industry has seen investment plunge in the past two years with only 100 MW of generating capacity having been installed in 2009 and 2010 - compared to 2,700 MW in 2008.

In addition, approximately 75,000 jobs have been lost with countless firms moving abroad to find new growth opportunities.

The industry is so frustrated that it has sued Spain's government, arguing that that new regulation is way too harsh and even "unconstitutional" as the tariff cuts are expected to apply to both new and existing projects, meaning the industry may have to make retroactive payments.

A recent study showed that Spain stands to lose €4.9bn until 2020 as well as 40,000 "quality and stable" jobs because of the new law. However, if it where to change the legislation and boost tariffs, 1000 - 1500 MW of solar generating capacity could be installed annually, resulting in as much as €14bn in proceeds. Proceeds would come from the reduced need to import energy from neighboring countries, CO2 reduction benefits, higher tax revenues, labor social security contributions and other energy distribution and transport savings.

Cutting Renewable Energy Spending

The new decree is on the brink of becoming law, with the Spanish congress expected to approve it in mid- or late November.

Spain has needed to curb spending as it was hit with one of the biggest recessions ever to rock the country in its long history. The government wants to cut renewable subsidies, which reportedly cost public coffers €6.2bn last year. Of this, €3bn went to the solar power industry, which meets just 2% of Spain's power needs, according to government representatives. Moreover, there are claims that the industry has engaged in "fraudulent" management of state subsidies, which it disputes.

Madrid's decision is also the result of the sector's rapid development in recent years, in which 3,800 MW of generating capacity was installed, nearly half the 2020 target of 8,673 MW. As of the first half of 2010, 39% of Spain's electricity came from renewable sources, bringing the country very close to its 2020 goal of 47%.

"We can certainly do 4,000 MW by 2020," Diaz says, adding that not everything in the law is bad for the sector. Indeed, he said the tariff cuts for rooftop projects still make them profitable and he expects investment to increase sharply next year for these projects.

Rooftop projects will see 35 MW of capacity installed this year but that should surge to 250 MW in 2011 and 260 MW in 2012 as investors pour into the space, where there already are a flurry of planned projects, observers say. The new law will see tariff drop 5% for small installations and 25% for large ones. Regarding ground-mounted projects, Diaz says these projects may become profitable again in a few years when solar system prices fall strongly.

Moving Abroad

Still, many companies whose business depends on ground-mounted projects will need to look for opportunities elsewhere. And given, their know-how and technological expertise, this should be feasible, industry participants say. These firms are expected to firm up markets in places such as Italy, France, Germany, Eastern Europe and the U.S. where ground-mounted projects are still viable.

"Approximately 50% of our companies are present in the foreign markets so ground-mounted companies are going to do whatever they can to grow even more there now," Diaz points out, adding that most Spanish firms are currently operating in Italy, Czech Republic, France and the U.S.

While Spain is expected to see 100 MW of solar power installed this year (down from a meager 70 MW in 2009), France, Italy and Germany are forecast to add 500 MW, 1,500 MW and 7,000 MW, respectively.

In addition to the lawsuit, which the government would not comment on, ASIF continues to pressure the government to be easier on the sector. After all, Spain has Europe's highest insolation rates.

Greenpeace is highly critical of the government. "Spain's government is making a historical mistake by deterring investments in our country's photovoltaic industry because the economic, employment and CO2 emission-reduction benefits will now go to other countries."