Sun worshippers have always flocked to Spain to soak up powerful rays of light. That same desire has more recently beckoned those in the solar industry to come in droves. Coupled with support from the Spanish government, the country's solar industry is on track to more than double this year.
But is getting so much sun a good thing? In late September, the country reached 344 of the 400 megawatts it had set as its goal for solar-electric power. Spain had originally expected to meet the goal by 2010. The accelerated pace is a cause for concern because the government had scheduled its current high level of incentives to end once Spain reaches its goal. With industry watchers now expecting Spain to exceed this cap as early as this month, the Spanish government is on the move to shift its strategy.
Spain's Ministry of Industry, Tourism and Trade has proposed tripling the cap on solar-electric installations from 400 megawatts to 1.2 gigawatts. A decrease in the country's feed-in tariff, which pays homeowners and businesses a higher rate for renewable energy fed back into the electrical grid, also is on the table.
Even though the Spanish government has yet to make a decision, industry watchers are bracing themselves for change. The final decree could have a big impact on the country's solar market, which some analysts say is growing at unsustainable rates.
In 2006, 100 new megawatts of solar power were installed in Spain. Credit Suisse expects that number will grow to 300 megawatts this year and 500 megawatts in 2008.
With growth driven by its solar goal and generous feed-in tariff, Spain ranked No. 4 in the world for its total solar capacity in 2006, according to a report by the European Photovoltaic Industry Association and Greenpeace. Germany was No. 1, followed by Japan and the United States.
Increasing Spain's cap to 1.2 gigawatts would give the solar industry room to breath, said Johan Trip, chief growth officer for SolarPlaza, a web marketplace for solar. "They can now continue to develop projects," he said.
But not everyone shares Trip's optimism. "The impact would be very negative. It would paralyze the sector for the time period from 2008 till 2010," said Luis Alberto Solà, a general director for Schott Ibérica.
Solà doesn't think the new cap is large enough. He is concerned that Spain will reach the proposed new cap in less than a year.
"According to this expectation, no bank will finance any project due to the high risk of being out of the game," he said.
Also fueling concern is the proposed drop in the feed-in tariff. The industry now has a year's grace period before the tariff, which pays 42 euro cents per kilowatt hour, drops. The government proposal also includes an additional annual 5 percent tariff reduction (à la Germany) starting in two to three years.
For the year to come, Jenny Chase, a senior analyst for New Energy Finance, expects developers and investors will race to finish up projects so they can get in at the current tariff levels. If they succeed, the projects will be guaranteed the current rate for 25 years. The result could be even steeper growth -- putting installations in several hundreds of megawatts -- in the next year, she said.
But after that, companies will have to hook into the grid with a lower tariff, which Trip and Chase said could very likely be 31 euro cents.
Such a decrease no doubt dims the bright future of Spain's solar industry.
According to Chase's calculations, owners under the current tariff see an average 26-percent return on their investment, before taxes and a few other costs. But if the lower price were adopted, that rate would drop to about 12 percent. "It's a big cut," she said. "But it won't make them uneconomical."
She also sees an upside. From her perspective, the Spanish solar industry is growing too fast. The proposed legislation could help the industry transition to a model of sustainable growth.
Still, solar companies such as Conergy will no doubt be lobbying for the most conservative of cuts to the country's tariffs.
Thorsten Vespermann, head of corporate communications for solar titan Conergy, reminds people the proposal is just a draft. And Vespermann is confident the country will work to ensure the industry leaves the bargaining table feeling supported.
"We clearly see that the political leaders want to let the market grow to be the most attractive region for solar companies to invest into new production capacities," he said.
Still, Vespermann said Conergy "can live with" the suggested 5-percent-per-year cut in the tariff. The industry is on track to reduce total solar system costs by 7 to 8 percent annually anyway, he said.
Another reason a steady drop won't hurt too bad is that all the sun Spain gets equates to more hours of energy, say when compared to Germany, helping to make up the system costs.
Regardless of the final outcome, solar companies know a change is coming. Trip and Chase said such moves are a necessary to push the industry into a more mature state. And weaning it off government support will push solar power into grid parity, the point when it is competitive with conventional electricity.