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Solar Energy in state of flux as Europe cuts subsidies, but US introduces them

The renewable energy industry has always been one stooped in controversy; a sector led as much by political factors as it is from the economic effects of demand and supply

The renewable energy industry has always been one stooped in controversy; a sector led as much by political factors as it is from the economic effects of demand and supply. The ever increasing global taste for low carbon energy sources and fears surrounding damage to the environment caused by the consumption of fossil fuels, has led governments in the developed nations of the world to make proactive efforts on behalf of the renewable energy industry, notably in solar power and photovoltaic (PV) energy.

Never was this more so than in Europe, where a historically left-leaning, liberal bias, meant governments were very keen to subsidies the sector, based on political and ideological beliefs, in hopes of underpinning a fundamental shift into renewable energy sources. At the same time, a more conservative and oil-based economy in the US, meant that comparatively less effort was made in the country to push towards renewable energy sources and solar power.


These two shifts have now began to show in the photovoltaic industry, with Spain and Germany both recently announcing a reduction in subsidies to the sector, while at the same time in the US, several loan guarantees have recently been put in place to benefit fledgling solar energy companies, not just via efforts to boost renewable energy sources but also thanks to funds set up to provide economic stimulus. But do these things really represent a philosophical change in attitudes from Europe and the US towards the solar energy industry, or rather are they born of necessity, where political beliefs inevitably had to give way to basic economics in times of financial turmoil and uncertainty?


Even in Europe for example, where renewable energy has been actively promoted, solar power (thermal and photovoltaic combined) still only accounts for less than 1% of energy produced. The main problem facing the solar industry however has not been lack of sunlight, but the comparatively high costs of solar power and photovoltaic energy conversion, even compared with other renewable energy sources, which are in themselves more expensive than oil and coal based power. In Europe, this has led to the subsidising of solar power through the use of feed-in tariffs, which guarantee that producers receive fixed wholesale prices for their output, typically for 20 year periods.

As highlighted however, the need for European countries to reduce budget deficits and undertake fiscal austerity measures has now brought about the need for this to come under review. This has most notably been the case with Spain, one of the European ‘peripheral’ countries that have been most susceptible to concerns surrounding sovereign debt in recent months.


Although not yet enacted, expectations are that the law may come to pass in the next few weeks, and if so, the industry is likely to see a massive impact in the Iberian peninsula. This is particularly the case as the photovoltaic sector is usually highly leveraged, around 85% of financing coming from bank loans. Naturally it would hit the profitability of the company’s hard, reducing their value significantly along with equity prices. Naturally this would impact investors in the sector, particularly renewable energy and ‘clean power’ funds, which have seen a lot of interest in recent years. On top of this, their would undoubtedly be a knock-on effect for those financial institutions which have provided financing for the companies, with the likelihood that some may default on their debt, or at least have to restructure the debt and delay repayments.





Where as in Europe the need to reduce fiscal deficits is paramount, in the US, President Obama has been able to increase government spending in the renewable energy sector not only to stimulate the economy, but also has previously been the case in Europe, to back the sector on ideological beliefs in Environmental conservation and carbon reduction.

Earlier this month, President Obama began the move, announcing that nearly $2 billion in loan guarantees will be given to two solar energy companies, in a move which he hopes will kick start the industry in the US. He said the money will come from government stimulus funds designed to boost the economy during the recession, and expects the move to create 5,000 new jobs. Although President Obama did acknowledge the move is simply a first step, his future plans were clear, saying “we're going to keep competing aggressively to make sure the jobs and industries of the future are taking root right here in America”.


One of the key areas which is seen as easy to cut, has been the solar energy sector, which has traditionally benefited from subsidies, one could argue to the detriment of becoming cost effective and efficient. In the US, attempts to stimulate the economy by increased government spending have combined with the environmentally friendly political agenda of the Democratic party and President Obama, in increasing subsidies to the solar energy sector; hoping to both stimulate jobs and promote carbon free energy sources. One could argue that in both cases, the moves have been born of necessity from the economic recession in recent times.

Although undoubtedly both moves also have a political agenda, hopes of stimulating or stabilizing their respective economies has to be the key aim for both governments. To see the effectiveness of these moves, we will just have to watch this space.

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October 21 2016

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