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ESSA

Spain’s tax on sunlight – the candle makers’ tax?


Phillip O'Riordan

By

October 16th, 2013


How a solar power industry is born and buried: Phillip O’Riordan looks at the case of government intervention in Spain.


In the mid-2000’s Spain embarked on a solar power revolution: 2008 alone saw solar-energy capacity increase by 400%, accounting for half of the world’s new solar-power installations[i]. Yet five years on, many of Spain’s solar-energy companies are on the verge of bankruptcy as revenues and demand plummet. What happened to cause such a rapid fall from grace in the industry once dubbed ‘renewable-energy’s Cinderella’[ii]?

Background

In 2007, Spain had just 690MW of installed solar power capacity. By the end of 2008, this had grown fivefold. Due to pro-renewable government initiatives and a 50% drop in solar module prices over the past five years, Spain’s solar capacity is now close to 6,500MW[iii]. Even U.S. President Barack Obama pointed to Spain as an example to the world of renewable energy’s potential[iv].

However, after coming into office in 2011 Spain’s current government has clamped down on solar energy providers: profits have been severely capped and tax rates have increased sharply. The government is now targeting households too, which will soon be charged a tariff to source and consume their own solar power – or be fined up to €30 million[v]. As a result of such measures, providers’ revenues are now down 40% from 2008, and the industry faces the prospect of mass bankruptcies and layoffs[vi].

There are two possible explanations for the government’s rationale. Many critics argue that the regulations are simply the result of rent seeking by state-owned utilities that consider it ‘unfair’ when any other company can do things faster, smarter, or cheaper than they can”[vii]. However others see a step back by a government previously too generous to the solar energy industry[viii].

Power Grabbing

Liberal economist critics, such as investment advisor and columnist Mike Shedlock, have been quick to cite parallels between Spain’s solar power tax and 19th century economist Frédéric Bastiat’s parable of the Candle Makers’ Petition[ix]. In Bastiat’s narrative, French candle makers demand the monarchy outlaw the sun, forcing people to close “all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds – in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses”. The petitioners argue the sun has an unjust advantage over “fair industries”, which cannot compete with the sun’s price of lighting, and demand that the monarchy ‘even’ the playing field[x].

Like Bastiat’s candle makers, Spain’s state-sponsored utilities have been hit hard by solar power’s success. These companies own and maintain the country’s energy infrastructure, and with fewer homes consuming electricity from the grid, revenues are plummeting while fixed costs remain high. However the introduction of a consumption tariff has shifted the balance of power away from (previously) cheap, affordable household solar panels back to the relatively expensive energy grid. Spain’s Industry Minister, Jose Manuel Soria, has admitted that the tariff is designed to do just this, claiming, “I support ‘autoconsumo’ [household power-generation]… but the power system has infrastructure, grids that the rest of us Spaniards who are in the system have to pay for.”[xi]. It is easy to see then why Mike Shedlock and others view the consumption tariff as an attempt to line the pockets of the uncompetitive state-sponsored utilities. As basic microeconomic literature illustrates, tariffs in a free market do indeed benefit a few producers while reducing overall societal welfare.

Evening the Playing Field

There is, however, another side to Spain’s solar energy story. Many, such as Forbes’ William Pentland, point out that one of the key drivers of Spain’s solar revolution was the very government now trying to regulate it[xii]. During the height of the expansion, between 2007 and 2012, Spain’s solar energy capacity grew 1,300%. During that same period, government subsidies to solar-energy companies grew 1,800%. In 2012 alone, Spain’s renewable energy subsidies totaled €8 billion, about 1% of GDP. Unfortunately such incentives have landed the already cash-strapped government with a €34 billion deficit. The problem is that the structure of these subsidies makes them nearly impossible to unwind, and the government could be providing renewable energy subsidies of €7-8 billion per year even after cuts. Thus, unable to cease subsidizing the industry, the government has resorted to taxes and tariffs to cut its losses[xiii]. Considering the government’s history of pro-renewable subsidies and the resulting deficits, its recent measures are most likely not the result of rent seeking by state-owned utilities, but rather an attempt to compensate for a well-intentioned but ultimately unaffordable program.

Implications

Whether or not Spain’s solar energy regulation is an attempt to unwind overly generous government subsidies, few doubt the implications will be significant. For nearly a decade Spain’s solar energy companies, fuelled by the guarantee of generous subsidies, undertook massive, otherwise unprofitable projects. Now that the rug of government profligacy has been pulled out from beneath them, such ventures have become unviable practically overnight, and Spain’s five largest solar utilities alone expect collective losses of €1 billion a year as a result[xiv].

Solar energy companies aren’t the only victims. Spain’s banks have loaned €30 billion to solar energy companies, and are already in talks with the government about forestalling some of their debtors’ inevitable bankruptcies. Consumers have been hit hard too. Whereas it previously took 12 years for a household to break-even on the cost of installing solar, with the tariff it will take 35[xv]. Many are already ripping out their solar cells, having found that paying the tariff is more expensive than sourcing their energy from the traditional providers[xvi].

All in all, after years of generous subsidies and triple digit growth, the clock has finally struck midnight for renewable energy’s Cinderella. As well intentioned as Spain’s solar-energy incentives may have been, €34 billion deficits simply cannot be ignored, as painful as the alternative may be.

References

[i] Gonzales, A., Johnson, K. (2009). Spain’s Solar Power Collapse Dims Subsidy Model. The Wall Street Journal. Available at: http://online.wsj.com/article/SB125193815050081615.html

[ii] Webster, R. (2013). Solar power: how renewable energy’s Cinderella got a fancy new dress and went to the ball. The Carbon Brief. Available at: http://www.carbonbrief.org/blog/2013/09/solar-power-how-renewable-energys-cinderella-went-to-the-ball/

[iii] Renewable energy in Spain: the cost del sol. The Economist (2013). Available at: http://www.economist.com/news/business/21582018-sustainable-energy-meets-unsustainable-costs-cost-del-sol

[iv] Gonzales and Johnson op. cit.

[v] Rucinski, T. Rodrigues, J. E. (2013). Spaniards rebel against solar panel levy. Reuters. Available at: http://www.reuters.com/article/2013/08/14/spain-energy-idUSL6N0GE1WR20130814

[vi] The Economist op. cit.

[vii] Shedlock, M. (2013). Spain levies consumption tax on sunlight. Mish’s Global Economic Trend Analysis. Available at: http://globaleconomicanalysis.blogspot.com.au/2013/07/spain-levies-consumption-tax-on-sunlight.html

[viii] Pentland op. cit.

[ix] Shedlock, M. (2013). Spain levies consumption tax on sunlight. Mish’s Global Economic Trend Analysis. Available at: http://globaleconomicanalysis.blogspot.com.au/2013/07/spain-levies-consumption-tax-on-sunlight.html

[x] Shedlock op. cit.

[xi] Rucinski and Rodriguez op. cit.

[xii] Pentland op. cit.

[xiii] The Economist op. cit.

[xiv] Ibid.

[xv] España privatiza el sol. Prohibido generar energia para autoconsumo. El Pais (2013). Available at: http://elpais.cr/frontend/noticia_detalle/6/83700

[xvi] Rucinski and Rodrigues op. cit.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Dean

    Great first piece for ESSA, Phillip!

    • Owen Wakely

      I agree with Dean. Very good article Phillip: some solid lessons in unintended consequences. Cheers Owen

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