Paralysis hits Spain's solar industry

Solar siesta

09 November 2009 17:09  [Source: ICB]

Shadows move over Spain's solar industry as government subsidy cuts paralyze the market

FOR A few months, Spain was the bright star on the horizon, blazing new trails at an astonishing pace for solar power companies around the globe.

Rex Features

Supported by generous state subsidies, Spain's photovoltaic solar industry was a global leader in 2008, accounting for nearly half of the world's growth in solar-powered wattage. But by the end of the year, the industry was in a state of paralysis after the state dramatically scaled back its incentives, sending a warning shot across an energy sector still trying to figure out how to translate government support into sustainable growth.

"At this point, it is a precautionary tale," says Paula Mints, associate director of energy practice at US-based consultancy Navigant Consulting. "[They] oversold the market and made the government unhappy."

Eager to fulfill renewable energy commitments and banking on its copious amounts of sunshine, the Spanish government guaranteed above-market electricity rates, known as feed-in tariffs, for companies that could begin generating solar power within certain deadlines.

The government was unprepared for the subsequent investments that came pouring into the country. Aiming to achieve almost 400 megawatts (MW) of solar power capacity by 2010, the three-year target was achieved within three months of the new tariffs, quickly calling into question the viability of the new incentives.

"The entire (solar) world has to have an incentive to exist but they set up a system that was too generous," says Mints. "If you can sell your penny for $1,000, everyone's going to bring their pennies."

The government upped its 2010 target to 1.2 gigawatts (GW) but the market blew past that, ultimately installing over 2.6GW of solar power in 2008, more than what had been installed in the entire world the year before. "People went crazy - they were given the green light to go," says Reese Tisdale, solar research director at US-based consultancy Emerging Energy Research. "At that point it was the best opportunity in the world as far as a position to make money .They opened the door and people kicked it down."

WHAT WENT WRONG?
In retrospect, many industry observers believe the biggest problem with Spain's system was the lack of mechanisms built into the tariffs to adjust rates in response to changing market conditions.

"The tariff system was defined for certain conditions and the market's explosive growth resulted in a reduction in costs for photovoltaic systems," notes Enrique Soria, director of the renewable energy division at Spain's Research Centre for Energy, Environment and Technology (CIEMAT). "Some sort of regulation of the sector was probably necessary."

In 2007, as the mortgage crisis upset real estate markets around the world and oil prices skyrocketed, investors sought refuge in other sectors, jumping onto the green energy bandwagon. With its generous subsidies and long swathes of empty, sun-baked land, solar in Spain looked like a sure bet.

Companies set up large-scale, ground-based solar farms, where thousands of panels are mounted on the ground. Producers kicked into overdrive, rushing to supply what seemed like an inexhaustible demand for solar panels in what was ultimately an artificially created market.

"The paralysis has practically been near total" Javier Anta, president, ASIF

Surging Spanish demand kept polysilicon - the industry's raw material - prices high, while greater efficiencies and advances in the technology were reducing costs, leading to very high profit margins for producers and their investors.

In 2008, solar-generated wattage in Spain grew by 385% from the previous year, according to Spain's Photovoltaic Industry Association, known as ASIF.

Lacking mechanisms to scale back the tariffs, the government was inundated with more development than it could handle, leading to an abrupt reversal of policy.

SOLAR ECLIPSE
In September 2008, the government put the brakes on what it considered to be an out-of-control market.

Feed-in-tariffs were reduced between 25-29%, depending on whether the panels were located on rooftops, which the government preferred, or the ground. A registry was set up to preapprove projects that could qualify for the tariff. A maximum installation cap of 500MW was put in place for 2009 that would be allocated in four quarterly registration rounds.

Many companies rushed to connect to the grid before the new regulations took effect, leading to multiple allegations of fraud. The new tariffs coincided with the credit crisis, meaning that financing for many capital-intensive projects evaporated. And finally, bureaucratic confusion muddled every step of the new registration process.

According to ASIF, the new regimen had an immediate chilling effect on the sector, paralyzing the market in Spain and sending shock waves that are still reverberating throughout the industry.

This year, a maximum of 150MW of solar capacity is expected in Spain, a stunning drop from last year's 2.6GW, according to ASIF. During the first half of 2009, no more than 12MW were installed, said Javier Anta, ASIF's president, in an article published in September in Spanish daily newpaper El Economista.

More than 25,000 jobs in the sector were lost and some companies have abandoned the sector or disappeared. "The paralysis has practically been near total," said Anta.

Polysilicon prices, which grew steadily from 2006 to 2008, have more than halved as panels earlier this year were said to be piling up in warehouses across Spain.

PANEL PRODUCERS HIT HARD
Germany's Q-Cell, the world's second-largest solar cell manufacturer, announced in August that it would lay off 500 employees. Chinese integrated solar energy firm Yingli Green Energy reported losses in both its first and second-quarter earnings reports.

Analysts at both investment firm HSBC Global Research and consultancy iSuppli had forecast in research notes published at the end of this summer that the solar panel market would remain oversupplied until 2012.

"Oversupply is prevalent across the value chain," said HSBC. "Prices have fallen sharply, by 30-40%, year to date. This has led to lower revenues, margin erosion and an industry that is struggling generally."

MOVING FORWARD
While the boom-to-bust experience has provided a sobering lesson to the industry, many still believe solar energy will play an increasingly important part of Spain's energy mix going forward.

"In my personal opinion, solar energy will have an important role in Spain," says Soria. "I believe the current situation is temporary and won't affect long-term tendencies."

The current tariffs provide incentives for more rooftop panels to be installed on top of homes and buildings; installations that don't take up new ground nor require new connections to the grid.

ASIF is proposing that Spain change its regulations to allow consumers to produce their own energy with solar panels on top of their roofs, rather than be forced to acquire the energy through the electrical grid.

In Spain, solar-generated power has to come through the grid to benefit from the tariff. In the US, homeowners can install panels and directly generate power for their homes - resulting in less usage of the electrical grid.

Most importantly, the industry hopes for stability. "Stable, sustained and sustainable growth that looks at the long-term is preferable to exponential and vertiginous growth that leads to stop-and-go measures," says ASIF spokesman Tomas Diaz.

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By: Jasmina Kelemen
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