Government incentives have been a significant driver in the growth of renewables capacity in Europe, but as budgetary constraints force many cash-strapped European economies to rein in spending, subsidies have come under threat, giving investors reason to worry.

The recent hoo-ha surrounding the prospect of retroactive subsidy cuts to Spain’s solar sector follows moves toward incentive reductions elsewhere in Europe.

Germany is hoping to push a 16% cut to solar feed-in tariffs through its parliament, the Czech Republic is considering incentive adjustments while Italy is eyeing an 18% solar subsidy reduction.

A recent report from HSBC Global Research named Spain, Italy, the Czech Republic and Slovakia as the countries most likely to experience a scaling back of support mechanisms, as governments attempt to reduce deficits and the energy cost burden on industry and consumers.

“We believe Spain and Italy are the countries at highest risk, with the possibility of retroactive cuts in solar in Spain as well as future cuts in wind and solar in both countries,” said the report, adding the Czech Republic and Slovakia were likely to see reductions in solar tariff to bring them in line with German levels.

Solar is under greater threat than wind, with the report identifying solar as inherently “less ‘good’ value than wind”.

Industry commentators said generous subsidies, falling technology costs and a commmitment to reducing sovereign debt meant incentive reform “made sense” for governments.

“When we see such drastic cost reductions in the technology itself, which were around 40% in 2009, it makes sense for [incentives] to come down. Otherwise you get returns on investment that are way too high and the government is paying for a lot of speculative investment,” said US-based Cassidy DeLine, a European solar advisory analyst at Emerging Energy Research, noting the point of incentives are to foster an emerging industry and drive down technology costs.

She said feed-in tariff reductions will likely go ahead but will be “a little more flat and a little more predictable”.

Daniel Guttman, renewables director at PricewaterhouseCoopers in London, said European governments have a strong case for incentive reductions and agreed cuts were likely to be less harsh than feared.

“When it comes down to really making cuts, I’m not sure they’re going to be as drastic as some would have it,” said Guttman, highlighting the opposition to Germany’s attempts to cut incentives and Spain’s delay in formally announcing solar tariff changes 

He said the wind industry is likely to fare better than the solar sector as it is a more mature and better understood technology and less dependent on incentives.

On the issue of retroactive cuts, commentators said governments have an obligation to maintain their commitment to investors, but beyond that the outlook is less clear.

Arnaud Bouillé, a UK-based director in consultancy Ernst & Young’s renewable energy group, said current economic challenges are likely to see a downgrade in incentive support and a shift toward more viable technologies.

“What we’ve seen in Spain we’re likely to see in other places just by the simple fact that when the economy is being challenged, there’s less money going around and priorities need to be established,” he said. “It might well be that we’re going to go over the renewables bubble to then think about prioritisation [and] allocation of capital across those technologies.

He said economic constraints would prompt many goverments to “focus on the basics” by directing resources to technologies that are cheaper, better matched to a country’s natural resources and more likely to deliver additional benefits such as job creation.

“When capital is scarce, you have to focus on the basics.”

Charlotte Dudley