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Spain Cuts Green Energy Losses

Walter Russell Mead, Via Meadia

Spain is the latest European country to regret its foray into green energy production. On Friday the Spanish government announced some contentious reforms to its regime of green energy subsidies, which were among the most generous in Europe.

Those subsidies (in the form of guaranteed above-market rates for producers) have been wildly successful at encouraging solar and wind farm construction. They have utterly failed, though, to help build profitable industries. Now the Spanish central government is dealing with a residual tariff deficit of €4.5 billion for this year alone. That’s the difference between the amount Spanish consumers pay for electricity and the cost of producing it.

Not surprisingly, industry groups are outraged over the move, which will cost solar and wind companies €2.7 billion per year in subsidies and hike consumer rates by 3.2 percent. From the Wall Street Journal:

The country’s main wind and solar-energy associations said the payment reductions would prompt a wave of defaults across their industries….

“We are convinced that these cuts will bankrupt a large part of our industry,” said a trade association representing large solar-energy providers. Solar companies are likely to be the most affected by reduced subsidies because they are the most heavily indebted in the renewable-energy sector.

Even countries on sound economic footing have been rolling back green energy subsidies. For Spain, these subsidies make even less sense. Its economy is still in crisis and the government budget is under intense pressure. Under these reforms power utilities will suffer and banks will probably have to write off millions in bad loans to solar companies, but the government had few alternatives:

“The measures in this reform aren’t easy for anyone, but they’re absolutely necessary,” [Industry Minister Jose Manuel] Soria said at a press conference in Madrid today. “If we did nothing, the only two alternatives would either be bankruptcy of the system or an increase of the price to consumers of more than 40 percent.”

While environmentalists will no doubt be upset, Spain made the clear choice. High electricity rates are an unnecessary and regressive tax on citizens and a serious drag on industry, and green energy has yet to prove itself competitive without substantial subsidies. Spain is right to cut its losses on its costly green energy boondoggle and to refocus its limited resources on the country’s more pressing problems.

Via Meadia, 15 July 2013