Spanish Lesson For Obama: Green Energy Transition Unaffordable, May Soon Crash
Lawsuits may force Spain to bring its renewable energy experiment to an end, a green policy fiasco that has gone terribly wrong due to astronomical costs. It’s a powerful lesson for the White House that has often cited the Spanish model as one to emulate.
Only recently, Spain was widely praised as the champion of wind energy in Europe. What is more, all over the country new solar parks were built and renewable energy had become the main source of energy supply on the Iberian Peninsula. Those days, however, may soon be over. That’s because Spain’s industry ministry intends to drastically cut back on subsidies for “clean energy.” The whole country has to cut back, the industry ministry argues drily, and energy producers have to do too.
This argument seems irrefutable since the figures that are now assessed by the government are astronomical indeed. The subsidies that are going to flow into green energy projects on the Iberian Peninsula amount to a staggering 200 billion euros. Approximately 56 billion euros have already been paid out. The lion’s share of this sum went into rather generous feed-in tariffs for wind and solar energy which, since 1995, have attracted numerous investors from both home and abroad.
The remaining 143 billion euros are due to be paid out in the next 20 years for green energy projects that have already been connected to the grid, foremost for solar farms.
Given these sums, it would appear that industry minister Jose Manuel Soria has come to the conclusion that the only option left is to put his foot down. He now plans to cut green subsidies for the energy sector by about 20 percent, to 7.5 billion euros per annum. The minister, however, has not reckoned with affected green investors who are up in arms and fighting the planned subsidy cuts.
Moratorium on new solar farms
This is not the first time that Spain intends to take advantage of solar investors retrospectively. Numerous foreign investment funds, especially from the US, have invested heavily in Spain’s renewable energy in recent years, expanding solar energy production significantly. They were lured by promises by the then socialist industry minister who had agreed a fixed rate of return of 14 percent per annum for solar park investments.
“The sun can be yours,” huge billboards claimed. Thousands of Spanish investors were keen not to miss this golden opportunity either. As a result, solar power production on the sun-drenched Iberian Peninsula increased from 53 to 313 gigawatt hours (GWh) between 2007 and 2010.
Surprised by the huge demand, the government of socialist Prime Minister José Luis Rodríguez Zapatero introduced a moratorium for new solar farms, guaranteed feed-in tariff were reduced to 25 years and the premiums were paid only for a certain number of hours of sunshine per year. After a change of government at the end of 2012, the new conservative administration upped the ante and introduced a new electricity tax of 7.5 percent, causing the profits for the solar industry to fall by around 30 percent.
A good opportunity for nuclear power?
This week, U.S. energy company Nextera Energy has summoned Spain before the International Centre for Settlement for Investment Disputes (ICSID) to demand redress. The U.S. company regards the new rules as a retroactive change to the original guarantees. Nextera Energy has invested heavily in the Spanish solar power plant Termosol .
Other large investors, such as a Deutsche Bank investment fund, involved in the Andalusian power plant Andasol, and French bank BNP have asked ICSID, a World Bank organization, for arbitration. Another group of foreign investors issued first lawsuits in 2011, based on the European Energy Charter which promises investment protection and prohibits expropriation.
If the investors win their case, Spain can expect claims for damages amounting to billions of euros. In such a case, the further expansion of renewable energy in Spain would then come to end end at once. The industry minister is not the only one who is aware of the potential consequences. Two traditional power generators, Endesa and Iberdrola, even see a good chance for new deals with nuclear power. They have requested an extension of the operating license for the Garoña nuclear power plant which had already been taken off the grid. Garoña is now expected to provide electricity until 2031. The investor believe that despite new security investments the nuclear power plant will be profitable. They expect that after the boom and bust of recent years the share of renewable energy will decline.