European Renewables Industry Staggered First by Recession, Now by Budget Cuts

LONDON — The lingering effects of the deep economic recession and an ongoing round of sharp subsidy cuts by governments have clouded the immediate future of the European Union’s renewable energy industry, but industry experts still project growth in years to come.

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Go to Blog .Many investors vanished and projects were put on hold as the global economic downturn bit deep in 2008 and 2009. Added to these woes were the budget crises in Greece and Spain. Spain has now imposed steep cuts in subsidies for wind and solar photovoltaics (PV) and has outraged the industry by talking of making them retroactive.

The shock of this prospect sent the industry reeling. Moreover, it also gave political space for cuts to renewable programs in countries like Germany, which has declared modest reductions in its generous feed-in tariff support scheme for photovoltaic solar energy.

“The design of a feed-in tariff mechanism is innately uneconomic. They are great for investors but very difficult for governments to sustain,” said Jim Fitzgerald, assistant director in consultancy Ernst & Young’s renewable energy practice. “The real lesson here for investors is that if something is too good to be true, then it probably is just that,” he told ClimateWire.

The subsidy scheme has made Germany into the world’s leading installer of solar PV, with about 9 gigawatts of installed capacity and plans for much more to come — followed by Spain, with an equally generous scheme. (A gigawatt is roughly equal to the output of one large nuclear power plant.)

But because the price of silicon has tumbled, making solar panels cheaper, profits have been spectacularly high. The tariff cuts in Germany are expected to reduce what has been an explosive rate of expansion of solar PV. But the country is still aiming at having some 60 GW installed within the next two decades.

The expansion in Spain of both wind and solar has been equally phenomenal thanks to the huge subsidies, and equally unsustainable for the same reason. Spain installed 2.5 GW of wind in 2009 alone, taking the country’s wind capacity to 19 GW, or about half the total energy capacity.

High subsidy demand makes big holes in budgets

At the same time, the solar PV boom has taken installed capacity to more than 3.5 GW but left a gaping hole in an already overstretched national budget. For that reason, the government has negotiated steep cuts in subsidies and threatened to make the cuts retroactive. While the threat may not materialize, it “has already damaged confidence in the industry,” Fitzgerald said.

It was a point shared by Frank Wouters, head of Masdar Power, the renewable energy arm of Abu Dhabi, United Arab Emirates’ global energy company, Masdar.

“What was worrying is this threat of retroactivity. If they decide to do so, it has severe implications for the trust that any investor will have not only in Spain, but I think in Europe as a whole,” he told ClimateWire.

Several companies that had made big advances in the Spanish wind and solar PV industry are now said to be turning their eyes instead to markets further afield such as Latin America and the United States.

The threat of retroactively changing the rule of the game also raised its head during the tense negotiations inside the United Kingdom’s coalition government in recent months as the Treasury looked for cuts totaling some £83 billion over the next four years to slash a deficit of about double that figure.

There was widespread speculation that as part of that desperate search for savings, the Conservative-Liberal Democrat government would pre-emptively reduce the rates of feed-in tariffs that the previous Labour government only introduced in April and had promised not to review until 2013.

U.K. postpones a review, but worries about farmers

But in the Comprehensive Spending Review announced on Wednesday, Chancellor of the Exchequer George Osborne satisfied himself with announcing no change until 2013, when the rates would be reviewed and refocused on the most cost-effective technologies in order to save £40 million. There would only be an earlier review if the so-far modest uptake in subsidy requests suddenly surged.

That leaves open the door to an earlier change with the solar PV industry, which has been reporting a large number of farmers coming forward expressing interest in turning whole fields over to the panels in order to benefit from what the industry itself admits is a very generous tariff.

Elsewhere in the 27-nation bloc, it is a mixed picture as far as green energy is concerned. Greece, whose deficit woes sparked the European Union’s budget crisis late last year, has recently raised its renewable energy support tariffs to among the highest in Europe and guaranteed them for 20 years as it pursues an ambitious expansion policy — although observers question whether it can actually follow through, given its treasury’s almost empty coffers.