Renewable energy subsidies: lessons from Spain

In January, the cash-strapped Spanish government stopped subsidies for new renewable-energy projects. Previously, the subsidies had led to the country becoming a world leader in wind and solar energy, with up to half the national energy requirements met by wind and solar. What's been happening since the subsidies were cut?

Unsurprisingly, renewable energy capital is fleeing the country. As Bloomberg notes, investment in solar energy is forecast to fall from $1.5 billion (US) last year to $107 million in 2014 and investment in wind is headed from $2 billion this year to $244 million in 2014. These are massive and sudden capital reductions by any standards. Moreover, the solar projects that are still in the pipeline in Spain are predominantly headed for installation elsewhere. What preliminary inferences about subsidies and renewable energy development can be drawn from Spain's recent dismal experience?

1. Renewable energy manufacturing is still dependent on subsidies. Despite sunny predictions of impending cost-competitiveness the industry still requires government support; its ability to attract capital from the private sector has largely stagnated in recent years. While they are expensive, these subsidies (hopefully) provide incentives for the development of lower-cost new technology which will obviate government intervention in renewable energy. However, we're not quite there yet, and revocation of subsidies will lead to dramatic capital flight.
2. In wealthy industrialized democracies, it appears continued economic growth is key to government willingness to commit to environmental policy. Indications of the connection between economic growth and environmental policy have been provided in the economic literature by Antweiler, Copeland, and Taylor (2001), Pellegrini and Gerlagh (2006) along with many others - but Spain's experience is a clear illustration that the converse relationship (between economic contraction and reduced willingness to spend on environmental policy) also holds.
3. The sharp reduction in government spending in "peripheral" eurozone states is engendering rapid cutbacks in investment. In comparatively research-intensive sectors like energy technology, this means a corresponding reduction in the number of skills-intensive research jobs. As the chart below shows, Spain has seen a dramatic rise in technical employment over the past decade relative to industrialized peers. The rapid reduction in energy technology investment will almost certainly reverse this trend.

In Spain's case, the subsidy cuts were almost certainly inevitable; the national economy is burdened by persistently high unemployment and a gradually collapsing banking sector. However, the end of these subsidies likely means the end of significant positive spillovers to technology and the environment. This is likely suboptimal.

(Image: Wind turbines in Granada, Andalusia from orangebrompton's flickr. Licensed via Creative Commons.)

For further reading please see the special section on ‘Policy Agendas for the Future of Global Energy’ in the May 2012 edition of Global Policy Journal.