Spain has made the controversial decision to cease renewables subsidies for new solar, wind, co-generation and waste incineration plants in the face of an ever-growing government budget deficit of €24 billion. The power-system borrowings have been backed by the state but it appears that revenue generated by state-controlled energy prices has not been covering the high costs associated with delivering power, including the payment of renewables subsidies that have been put in place.

“What is today an energy problem could become a financial problem,” commented Industry Minister José Manuel Soria.

With the country’s generating capacity currently at around twice its peak requirements, the country has been slow to react to the explosion in solar- and combined-cycle gas-fired plant-related investments over the years. The subsidies suspension will apply only to newly commissioned solar, wind, co-generation and waste incineration plants and will not affect already-operating plants or projects that have already been approved for subsidies by the government.

“This is shutting the stable door after the horse has bolted,” said Peter Sweatman, CEO of consultant company Climate Strategy. “The risk is that Spanish firms that are recognized global leaders in renewable energy feel their position undermined by lack of domestic support.”

The country’s government is mired in controversy as it attempts to assure investors of its ability to cut the budget deficit to 4.4% of GDP in 2012, down from 8% last year. However, with 23% of its workforce unemployed, this move to cut subsidies is bound to be an unpopular one as the country’s cleantech sector is said to sustain 110,000 Spanish jobs, according to the Renewable Energy Producers Association.

“It’s clear they have to make major cuts,” said Francisco Salvador, a strategist at FGA/MG Valores in Madrid. “The government has already ruled out a significant increase in prices, so the cuts will fall in many places and the spotlight is on renewables, but not just on renewables.”

“It’s a real positive for the developers, the owners of assets, because it removes the risk of retroactive cuts,” said Sean McLoughlin, a renewable energy analyst at HSBC Plc. “The government could certainly have done that again when you think of how much it’s costing them but have decided not to. This suggests that the government is listening to the industry.”