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Renewable Retrenchment
What We Can Learn from Spain's Solar Snafu

Five years ago, Spain was a darling of the global green movement. By promising above-market rates to green energy producers, it hoped to grow fledgling sources of renewable energy. The plan worked, in that it spurred massive growth in new wind and solar farm construction, but it failed to produce a profitable industry. Consumers weren’t paying the true cost for this wave of zero-carbon electricity—last year they paid €4.5 billion less than what the cost of production actually came to—and the Spanish government was forced to hike prices and slash subsidies. The government is now taking flak for that decision, however necessary it may have been. The New York Times reports:

“When a government changes the terms of existing contracts, that’s a bad move,” said Toby Couture, a solar energy consultant with E3 Analytics in Berlin, who believes that the government will have trouble when it wants to develop public-private partnerships to fund water treatment plants, highways or pipelines, for instance.

“There are reasons we live by contract rules,” he said. “If you keep changing the rules of the game, then, after a while, your friends don’t want to play. The government has lost credibility.”

And, of course, it’s not just the government that is losing something in this about-face. Solar producers, the ones who shouldered the heavy up-front costs of solar panel arrays in the hope of taking advantage of the high long-term rates the Spanish government was guaranteeing, have had the rug swept out from under them.

The folly of such a decision is starkest in Spain, but is also on display in Germany, where Angela Merkel is preparing to walk back similarly unworkable feed-in tariffs for green energy. And while the NYT might paint the Spanish government’s about-face as some kind of disastrous mistake, the real error at the core of this fiasco was trying to artificially prop up an energy source that can’t currently compete with fossil fuels. The takeaway for the rest of the world is clear: don’t be seduced by solar’s siren song. Its promise of clean, renewable energy comes, given current technology, at a prohibitively high cost.

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  • Bruce

    The moral of the story is that you can’t distort and subsidize unviable markets forever. Hopefully, the Federal Reserve is paying attention given that they have distorted all financial markets and that time bomb will go off at some point.

  • Scott Morgan

    Not important but isn’t the idiom (cliche) either having the rug pulled out from under you or having a problem swept under the rug? I don’t believe I’ve heard of having the rug swept out from under someone. I guess that’s what happens when my lazy son won’t lift his legs as I try to vacuum around him :).

  • Jacksonian_Libertarian

    The Government Monopoly is incompetent at making economic decisions which should be left to the free market, which has the “Feedback of Competition” to inform them.

  • Michael Ferrin

    “[T]hink of what’s happening in countries like Spain … where they’re making real investments in renewable energy. They’re surging ahead of us, poised to take the lead in these new industries.” (Barack Obama, Jan. 2009)

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