Spain has boldly gone where few others have dared to venture by offering generous incentives that made the country the top market for solar energy project deployment in 2008.

It's unlikely to claim that crown this year. The government decided to dramatically shrink its incentive program for 2009. Not only that, it's held up as an example of what not to do in crafting solar incentives. If the United States moves forward with a similar program, you can bet that you'll hear a lot about the Lesson From Spain.

"If you look to Spain with its feed-in tariff, Spain was No. 1 in solar market. It's now going to be the 10th or 15th and difference is policy change," said Tom Werner, CEO of SunPower in San Jose Calif., at a panel in Silicon Valley last week. "There was a gold rush, and now almost all the solar installers are gone."

John Woolard, CEO of BrightSource Energy in Oakland, Calif., voiced the same sentiment during a recent interview.

If you see what just happened in Spain – they re-wrote their feed in tariff and have left quite a few companies stranded," Woolard said.

Feed-in tariffs are guaranteed rates for solar power. They are much higher than the price of conventional power, and utilities must buy solar electricity at those government-set rates via long-term contracts. Such policy has helped to make Germany a top solar energy producing country.

Spain followed suit with its own, very generous feed-in tariff and set a national cap of 400 megawatts that was supposed to last from 2007 through 2010. The amount of solar energy installed reached 344 megawatts by September 2007, prompting the government to scramble to decide whether to raise the cap and adjust the solar electricity rates.

The scrambling actually took a while. The government had considered raising the cap, and then lowering it. It finally settled on a 500-megawatt cap for 2009. That might sound like a good idea until you realized that project developers rushed to complete as many projects as they could before the new rules were set, and they installed a few gigawatts in 2008 alone (see Solar a Bust in Spain).

Aside from dramatically shrinking the size of the market, the government's new decree also lowered the solar electricity rates by between 24 percent 29 percent for 2009, depending on where the panels are located on rooftops or the ground (see Spain Kicks Off New Solar Feed-In Tariffs).

SunPower, which makes solar panels and carries out project engineering and construction, counted on Spain as its primary market in 2008. Not anymore. Spain accounted for 4 percent of its first quarter revenue this year, compared with 52 percent in the same quarter in 2008. 

States and cities in the United States have looked at implementing feed-in tariffs, after seeing what it did to boost business for solar equipment makers and renewable energy production in Europe (see California Considers Expanding Renewable Energy Feed-In Tariffs and Consumers Energy Proposes Feed-In Tariff).  The city of Gainesville in Florida instituted one earlier this year (see Gainesville to Launch Solar Feed-In Tariff).

The Gainesville program modeled after the German version, which analysts say provides more clarity on how solar electricity rates would fall over time as more solar energy systems are put in place. There is no annual cap, and no schizophrenic change in policy to slash the size of the market from one year to another.

Meanwhile, critics contend that feed-in tariffs create artificial markets, and that doesn't help the long-term growth of renewable energy industry. The tariffs also typically lead to higher electricity bills for consumers as utilities pass on the costs of buying solar power.

Federal lawmakers don't seem as enthused about feed-in tariffs many of their state counterparts. Woolard said crafting a good feed-in tariff program would be difficult and could end up hurting the solar industry if done poorly.

"You have to have the confidence that whoever is backing the feed-in tariff wouldn't change the rules on you," Woolard said. "The rules changed in Spain and you have unfinanceable projects. You need a long-term policy to match the long-term horizon for building a power plant."

Join experts and influencers at Greentech Media's Growth Opportunities in the New PV Market: Projects, Finance and Policy in San Francisco on July 13.