Spain & Solar Subsidy Cuts Meet the Grinch (YGE, LDK, JASO, FSLR)

The government of Spain has officially cut its subsidies to the solar power industries by 30% in a move that is expected to save the government about $970 million. The decision has caused an angry reaction among investors in the country’s solar projects, who argue that the cut could cause loan defaults that would exacerbate the problems facing many European banks.

But investors should have seen this coming. Last year the Spanish government pulled back on its subsidies and placed a cap on the amount of solar power that would be subsidized. Companies like Yingli Green Energy Holding Co. (NYSE: YGE), LDK Solar Co. (NYSE: LDK), and JA Solar Holdings Co. (NASDAQ: JASO) saw revenues and profits fall as a result of the government’s decision.

As Spain continues to try to get out of its financial predicament, it only makes sense that the government would try to cut subsidies on solar power projects. The country’s subsidies caused a boom in solar construction that now gives the country some 3,200 megawatts of solar capacity, more than six times the amount the government had planned on by the end of 2010, according to The Wall Street Journal.

What has investors really nervous is Spain’s intention to apply the cuts to existing plants built before 2008 as well as planned new ones. In 2008, electricity generated by solar PV plants was subsidized by the government’s feed-in tariff to the tune of $589 per megawatt-hour. And that subsidy had been approved for 25 years. No wonder investors and solar PV makers made a beeline for Spain.

Most solar PV makers, including First Solar Corp. (NASDAQ: FSLR), as well as the Chinese makers already noted, had scaled back on their plans for Spain. SunPower Corp. (NASDAQ: SPWRA) signed a deal last summer to build a 9.1 megawatt solar PV plant in Spain.

The potential hit to investors could be devastating according to a London money manager cited by the Financial Times.  The manager notes that much of the capital for constructing the plants came from pension funds and that it “would be extremely detrimental for global pension fund money” if Spain goes through with its planned subsidy cuts.

It’s very likely that the Spanish government will negotiate some accommodation with investors, if for no other reason than to avoid an endless string of lawsuits. Solar PV makers have already changed their focus to the US and China, so they stand to be hurt less by the subsidy loss.

Paul Ausick