Spain proposes to slash wind subsidies

London, 7 December: Spain plans to cut subsidies for wind power generation, while increasing support for other renewables.

Under the proposals, wind generators would see their feed-in tariffs reduced from about €97 ($129) per megawatt hour to between €67 and €87/MWh. However, the government proposes boosting the level of support for other technologies, such as solar.

"Wind power subsidies were exaggeratedly high," said Spanish energy minister, Ignasi Nieto, "especially since the technology has developed in the last year and costs have fallen."

The Spanish government is consulting on the proposals, with analysts divided on what the impact will be on the market.

Ben Warren, from the renewables group at Ernst & Young, said: "The reduction in the level of support of between 15% and 30% will undoubtedly have an adverse impact on the overall attractiveness of the Spanish wind energy sector for investors and developers alike. However, the Spanish market is likely to continue to experience substantial levels of new installations."

He added: "There are certainly benefits of a balanced portfolio of renewable energy supply. The risk is that increases in solar, biomass and combined heat and power contributions as a result of the proposed changes do not outweigh any possible resulting reductions in the levels of new wind capacity installed."

But Catalina Robledo, Barcelona-based European wind energy analyst at consultancy Emerging Energy Research (EER), said that she does not expect the changes to have a negative effect on the rate of new build. "The feed-in tariffs they are being offered are still good, especially compared to what is available in other parts of Europe," she said.

EER estimates that onshore wind installations will increase by about 2,000MW a year, despite the proposed tariff changes. By the end of 2006, 11,500MW will be in the ground, meaning that Spain has a good chance of meeting its target of 20,000MW of capacity by 2010, she said.

But investment bank Citigroup issued a research note saying that the target "could not be achieved" if the government proceeds as planned.

Citigroup also expressed concern over reports that the changes could be applied to capacity installed before January 2008, rather than only to new capacity, as initially expected. Its analysts said that the move could reduce the valuation of a typical portfolio of wind farms – half new and half old – by 15-20%.

Acciona, Iberdrola and EDP are particularly exposed to this risk – with 50% of Acciona's valuation riding on its wind industry activities, Citigroup said.

Warren agreed that any move to apply the changes retroactively could have a negative effect: "Investors would consider any jurisdiction applying retroactive changes to policy to have a high level of regulatory and political risk, and would therefore demand higher returns from their participation."