Solar Ambitions

In Spain’s forthcoming snap elections, the energy transition is high on the agenda, and solar power at the forefront. Prime Minister Pedro Sanchez has often expressed ambitions to make Spain the lead producer of solar electricity on the continent, positioning renewables as a cornerstone of the country’s “transformation in this decade.” By exploiting Spain’s great potential in solar power generation, the Spanish center-left coalition intends to upgrade the Spanish economy and reorient it towards higher value-added activities, in order to create well-paid jobs and appeal to manufacturing firms through low energy prices. 

At first glance, the results look good. Under the tenure of the well-respected Minister for Ecological Transition Teresa Ribera, Spain has drawn out ambitious public investments and new regulatory measures to hasten the approval of solar plants and provide certainty to investors regarding contracts and energy prices. The country’s photovoltaic (PV) installed capacity is currently estimated to reach 49GW by 2025, hugely surpassing initial ambitions to reach 39GW by 2030. The government has upwardly revised its target for renewable energy share in electricity production from 73 percent to 81 percent.¹ The limited production incentives required to achieve these aims testify to the fact that solar energy has reached grid parity: the point where a renewable energy source can produce at or below the price of energy from the electricity grid. 

But these achievements should not distract from the chinks in the armor. The possibility of a new solar crash, echoing that of 2010, haunts Spain’s solar sector. With a mediocre capacity for high voltage transport and storage, falling energy prices, blockages in the permit process, and limited connection to France, the country’s solar infrastructure faces an uphill battle. The possible victory of the right in forthcoming elections could ignite a new string of bankruptcies and further undermine the renewable transition. The policies have also faced significant resistance across rural areas heavily impacted by renewable energy plants—protests which the right has tried to exploit. Finally, like other European countries, Spain relies heavily on cheap, high quality Chinese solar panels, raising issues of technological dependence, security of supply, and exposure to geopolitical shocks.

For countries embarking on their own green development initiatives, the trajectory of Spain’s solar energy policy offers insights on the possibilities and limitations of a market-oriented productivist industrial policy focused on regulation and leveraging private investment. While important steps have been taken, addressing bottlenecks in production and storage may require a more vertically integrated approach—and more proactive state intervention. 

Entrepreneurial state?

Since 2019, the Spanish government’s green energy initiatives² have shared a transformational ambition far surpassing any we have witnessed in recent decades. By 2030, Spain is expected to reduce 23 percent of its greenhouse gas emissions and reach 81 percent reliance on renewable electricity production. To pursue these objectives, the government plans to double wind energy generation, quadruple solar energy generation, and evolve into a continental leader in green hydrogen—with plans for the construction of a hydrogen pipeline between Spain and France. The goals demand an astounding €241 billion in total investment, with €91 billion for renewables alone over the present decade. They are expected to bring positive macroeconomic effects, generating 1.8 percent in additional GDP growth annually by 2030 and nearly 300,000 jobs.

These plans reflect a break with the continent’s austerity consensus of the 2010s. Then, indebted EU members like Spain, Italy, and Greece were forced to slash state spending and public investments, leading solar energy capacity to plateau. Climate policy was entrusted to financial experts via arrangements like the European Emissions Trading Scheme, with very little role for public institutions. With the dawning of the “New Washington Consensus,” policymakers have been eager to stress a departure from the neoliberal suspicion of the state. Motivated by growing geostrategic competition with China, Western governments have embraced a more proactive industrial policy and sought to rebuild a domestic manufacturing base while accelerating the post-carbon energy transition. We face a global shift from neoliberalism to neostatism, in which government intervention has gained a renewed prominence in policymakers’ toolkit. 

The greater degree of government interventionism is apparent in many recent policies introduced in Europe and in the US. The Biden administration IRA (Inflation Reduction Act) provides over $200 billion in energy-related tax incentives to accelerate the green energy transition. Similarly, the CHIPS and Science act uses both grants and tax credits in order to strengthen domestic capacity in the semiconductor sector. These policies break with Gary Becker’s infamous contention that “the best industrial policy is none at all.” 

Within this reemergence of the state, varying approaches abound. As Spanish economist David Lizoain highlights, there is an evident difference between “the American reliance on tax incentives and the European emphasis on regulation.” This latter approach is characteristic of Spain, which is counting on the private sector to provide 80 percent of the investments outlined in the transition plans.

Phantom crash

The current surge in Spanish solar energy in Spain is not unprecedented. Between the late 2000s and early 2010s, Spain experienced a solar boom that saw the country reach 4.5 GW of solar PV installed capacity in 2012, from just 125MW in 2006. This impressive growth was made possible by generous premium feed-in tariffs, which encouraged investors to flock into the solar energy sector. In 2008, Spain became the second country in the world for solar power generation (after Germany) as well as a leader in concentrated solar power.

This boom, however, was unsustainable. With solar plant construction far exceeding initial forecasts, the government was saddled with over €100 billion in investor obligations. Under financial pressure from the 2008 crash and the ensuing sovereign bond crisis, in 2011 the Zapatero government cut premium tariffs, leading to a 30 percent reduction in revenues for 90 percent of solar PV plants, while limiting installations to 500MW every year. 

The measure meant bankruptcy for 30,000 investors who found themselves with far lower revenues than they had anticipated. The People’s Party government led by Mariano Rajoy also introduced a highly unpopular “sun tax” to pay for connection to the energy grid, further increasing the costs of using solar panels for individual consumption and generating widespread disappointment among investors. The policy was only repealed in 2019 by the new Socialist government led by Sánchez, in a sign of renewed support for the solar energy industry.

Today’s industry conditions have drastically changed. With grid parity, solar energy production makes commercial sense, and the government no longer needs to provide the subsidies which led to the previous bubble. National incentives for utility-scale plants have all but disappeared, except for small self-consumption solar PV plants and solar thermal and heat pump technologies. Furthermore, feed-in-tariffs (FITs) by which the government guaranteed a fixed price have nearly been phased out, substituted by Power Purchase Agreements (PPAs), long-term contracts between energy producers and consumers which guarantee a fixed price. These more predictable price agreements now cover around two-thirds of all solar PV projects. 

Regulatory changes have made enormous strides, but they cannot resolve infrastructural gaps. The partially privatized grid operator Red Electrica de España (REE) is struggling to provide grid access given the backlog of applications. This backlog has been fed by huge speculation in permit auctions, with some actors gathering grid connections without the intention of actually building plants. 

The solar energy sector is also faced with a deeper perversity: its very rapid success may augur its undoing. The momentous growth of renewable energy installations risks triggering a solar energy glut, namely a situation in which price reductions resulting from the abundance of solar energy significantly lower profit margins for producers and in turn decrease future investment. This is already the case during sunny days in late spring and summer in some countries, when the price of electricity can even go negative. 

The consequence of a solar energy glut and its depressive impact on wholesale prices, also described as “price cannibalization,” is that the industry’s rate of growth could see a protracted decline, jeopardizing Spain’s green transition targets. As energy researchers Juan Ignacio Peña , Rosa Rodríguez, Silvia Mayoral claim in a recent journal article “If currently proposed policies aiming at solar and wind reach 74 percent in electricity generation by 2030, the market remuneration of all technologies will likely be well below their current estimated levelized costs.” This situation casts a doubt on the possibility of relying on the private sector to support long-term growth. 

The risk of price cannibalization is exacerbated by limited grid storage capacity. Unlike oil or nuclear energy, solar energy accumulates intermittently when the sun shines, threatening to overcharge the grid. Despite advances in utility-scale lithium batteries, adequate storage remains a major obstacle for the Spanish solar transition, particularly as the share of solar energy grows.

A victory for the right will likely exacerbate these structural constraints. The leader of the conservative People’s Party has promised to extend the use of nuclear power stations slated to be retired from operation and introduce a tax on renewable energy, threatening solar companies already operating in the sector. The far-right Vox party, likely to be a junior partner in the new government, has expressed more explicit skepticism of the green transition. The party has capitalized on discontent from rural families who have been displaced and distressed by the construction of solar energy plants and wind farms.³ As ecological activist Hector Tejero highlights “the government has not done enough to reward rural areas…whose solar plants serve large cities, with few employment, infrastructural, or economic benefits.”

Perhaps the most significant challenge to the Spanish solar transition comes from its dependence on Chinese panels. Solar panel manufacturing depends on a complex supply chain involving the refining of silicon and the production of polycrystal or monocrystal silicon ingots; their cutting into wafers (similarly to microchips), the transformation of wafers into solar cells, the assembling of solar cells into solar panels, and the production of other key components such as cables and inverters to transform the direct current produced by solar panels into an alternating current. 

Solar panels require no rare earth inputs. They are 95 percent constituted by the Earth’s second most common mineral: silicon. But for production, this silicon needs to be painstakingly refined with a purity of at least 99.99 percent through the energy intensive Siemens process. While until the early 2000s this industry was still dominated by European and Japanese companies, today China provides around 80 percent of solar panels and is dominant across 90 percent of the supply chain. This was made possible because Chinese firms received large subsidies from the Chinese government, and they also purchased manufacturing equipment from European firms. Now Chinese firms have achieved impressive efficiency in the production of solar panels, much of which is now automated, thanks to the use of coal for energy-intensive processes such as the refining of polysilicon. 

Spanish renewable energy expert Pedro Fresco notes: “In the past, Spain had many companies involved in the different components of solar panel production. It has since lost much of this, and getting it back will be difficult.” According to some estimates, the country still holds around 60 percent of the value chain, including some capacity in the refining of polysilicon (though the result is of a lower grade). However, Chinese solar panels remain almost impossible to beat: their price is around 20 percent lower than European panels and the average quality is higher. 

Rebuilding solar manufacturing

Ribera has often stressed the importance of adopting a holistic approach and fostering a sustainable “energy ecosystem.” Her outlook positions the government as a logistical force responsible for ensuring that all the necessary pieces operate properly, smoothing the regulatory pipelines and eliminating clogs in the permit process. But this regulatory approach is unlikely to adequately meet the challenges ahead for the Spanish energy transition. Mitigating the counterproductive market incentives generated by falling prices, generating sufficient storage capacity, balancing the distributional benefits, and developing the hardware necessary for energy generation will require far more public sector intervention.

Some of these interventions can be taken at the national level: the Spanish government will need to make significant investments into energy storage, which presently remains commercially unattractive. To avoid mass company bankruptcy, it will also need to offer a minimum electricity price guarantee. Other issues require continental coordination: as Simone Tagliapietra and Reinhilde Veugelers have argued, coordinated continental action will be required to develop adequate industrial hardware. Besides national champions, EU authorities should adopt vertical industrial policy actions to create continental champions, with different European countries specializing in different components of the value chain, and investments to provide a better interconnection across national electricity grids. 

While the growth of Spain’s solar industry has overwhelmed expectations, the current trajectory is fragile. Grid parity is only the beginning; there will soon be calls for the state to address bottlenecks in energy storage, deal with the risk of solar energy gluts, ensure better high-voltage transmission, and work towards the long-term goal of “reshoring” the solar panel industry. Regulating private investments is not enough. At some point, due to price cannibalization, market incentives will not be sufficient to ensure the growth in solar electricity generation required to meet net zero target. The Spanish government will likely be forced to consider either the introduction of new subsidies or the creation of a publicly-owned renewable energy company. If Spain is to fully exploit the power of the sun to transform its devalued economy, its next government must take a proactive role—not just as regulator, but as architect of the renewable energy sector.