At a recent meeting with representatives from the country’s solar industry, the Spanish government, which had been dropping hints about reducing subsidies for the sector, appeared to drop a bomb instead. It would not only cut subsidies, officials said, but the cuts would be applied retroactively.

This means that every existing solar plant across the country could have its subsidies cut by 30 percent, with new installations suffering more grievous cuts in the order of 45 percent. It’s easy to see how the government’s proposals upset an industry that has reportedly spent more than €18 billion in the last three years in Spain, according to data from New Energy Finance (NEF), a consultancy.

The precedent of retroactivity will seriously affect Spain’s reputation with national and international investors

If implemented, the measures will have far reaching consequences. According to NEF, banks have financed about 80 percent of Spanish solar plants on the back of base cases which the government now threatens to change.

This would be particularly catastrophic for the likes of BBVA, which is said to be the biggest lender in the sector with some $3 billion in loans granted; Santander, the second-largest lender with some $2.3 billion committed; and Caja Madrid, which lent $1.9 billion to the sector, according to NEF data.

Open hostility

So it’s unsurprising that the local industry reacted with open hostility to the government’s proposals. Javier Garcia Breva, head of renewable association APPA, accused the government of “bipolar behaviour” adding that “the precedent of retroactivity will seriously affect Spain’s reputation with national and international investors”.  Others bluntly said they would take the government to court.

However, some senior industry figures are appealing for calm, indicating that nothing is final until the law is approved (this was scheduled for the end of June). “It wasn’t a concrete proposal. We are confident that the government will rectify its approach and won’t approve a decree with any element of retroactivity,” Rafael Benjumea, head of Spanish renewable energy firm Fotowatio, told NEF.

The head of the energy team at a well-known international bank echoed Benjumea’s comments, adding: “It’s cultural – if these negotiations were being conducted in the UK, things would be kept under wraps until the actual decisions were taken. In Spain, negotiations always leak and now nerves are running high.”

Discounting retroactivity, however, the banking source says the cuts are actually needed to balance the market. “In Spain, tariffs have been extremely generous and you have many cases where investors are netting returns above 15 percent,” the banker explained. “But that has meant the solar market has been inundated by non-market players, who have entered the industry to make money easily.”

Generous subsidies were instrumental in turning Spain into a solar powerhouse. In its original plan, the government intended to generate some 400 megawatts of electricity from solar panels by 2010. It hit that target by the end of 2007, reports Environment & Energy, a trade publication. In 2008, it temporarily overtook Germany to become the world’s largest solar market.

Now that Spain – like many other European countries – is implementing painful austerity measures, it has vowed to cut subsidies to renewables, reported to make up close to €6 billion of the country’s €16 billion energy bill. Solar, being a mature market, was chosen as the prime target.

“Until retroactivity shows up in the final decree all of this is little more than speculation,” the banker warns. By the time you read this article, the accuracy of the prediction may be known.