Spain had one of the world’s most ambitious — and generous — plans to boost the amount of electricity it generates from the sun. That dream, for the solar industry at least, has turned sour.

Just days before Christmas, the government slashed the level of subsidies that all new and existing photovoltaic (PV) solar projects will receive. But even the powerful utility companies, who opposed the solar industry, are now warning that the fallout could be long-lasting and reach far beyond the energy sector.

The row has pitted the renewable lobby against Spain’s three biggest utilities — Iberdrola, Endesa and Gas Natural — which have been urging the government to take action to stem the wave of subsidised renewable projects being built, particularly solar ones.

Carlos Salle, Iberdrola’s director for regulation, told the Guardian that divisions between the renewable lobby and the rest of the energy industry are even deeper in Spain than elsewhere as a result. “We have more controversy here in Spain with renewables against non-renewables … this is an aspect of our system — it provokes problems.”

Another Madrid-based businessman, from one of Spain’s leading companies, was franker, likening relations, only half-jokingly, as a “war.” The Asociación de la Industria Fotovoltaica (Asif), Spain’s solar industry body, accuses politicians of telling lies, exaggerating the costs of generating electricity using solar PV to justify the cut in subsidies.

It is more than just bragging rights between rival generators at stake.

The solar PV industry alone received subsidies last year of €2.6bn (£2.28bn), a sum neither the country — nor the utilities — can afford. The utilities have paid out €20bn to subsidize solar and wind projects, and are still waiting for the government to pay them back.

Credit rating agencies threatened to downgrade the companies if something was not done to address the “tariff deficit.” Salle recalled: “The situation was horrible a year ago — €20bn for three companies was an amount comparable to an entire budget for some countries.”

The utilities also complain that their coal and gas plants, which the government wanted them to build a decade ago after several blackouts, are losing money because they are now only needed for half the time. But the Spanish regulator forces the firms to keep them on standby for times when the wind stops blowing or at night when solar does not generate.

Asif argues that solar projects, which last summer provided a maximum of 4 percent of the country’s electricity, have been sacrificed to keep profits from dirty coal and gas plants high. The solar industry had enjoyed phenomenal growth due to a subsidy regime which, even Asif admits, was too generous. Companies were able to cut costs too quickly — 70 percent since the original subsidies were introduced in 2004. Investors poured in and about two-thirds of the current capacity was installed in 2008 alone, before a planned tariff cut came into force the following year.

This has left Spain with 10 times the amount of solar PV capacity the government had planned for by 2010 — and a much bigger bill than it had envisioned.

Javier Anta, Asif’s president, said that the industry will challenge the cut in the courts, but admitted that this would take years, by which time many solar project owners could have gone to the wall. He added that some investors will not back new projects because they fear the tariff could be cut again retrospectively.

“There are some people who say this is not a one-off. They do not trust the government,” he said.

This is one point on which both the renewable lobby and the power industry agree: By taking the unprecedented step of retrospectively cutting subsidies promised to projects which have already been built, the government risks scaring off investors of all kinds.

Salle says that “even if we recognise that the situation is better than a month or a year ago, the problem is [a lack of] confidence. The uncertainty and [risk] premium does not apply only to that sector [solar PV] but to the whole industry and the rest of the country in some cases.

“Everyone appreciates the relevance of having regulation which does not make any retroactive decisions because you will have to attract new people [to invest]. The new people will say, ‘Hey, in the history of this country and this sector these people who have been new in the past and have invested, the government has changed the rules.'”

Reflecting Change

Abengoa, a Spanish engineering firm celebrating its 70th year, is pushing ahead with solar-thermal projects. Unlike the schemes involving reflectors heating a salt water mixture running through pipes, Abengoa has developed towers of pipes that look like mini skyscrapers. It employs 23,000 workers in its solar unit, which had a turnover of more than €3bn (£2.6bn).

The firm has conducted sustainability audits of its business for several years and says projects that can’t meet sustainability criteria are modified or abandoned. Controversially, it has championed the refining of biofuels, something anti-poverty campaigners have cited as denying food sources to poor people in the developing world.

Carlos Bousoño, director of corporate social responsibility, said the debate had moved on after technology allowed for seeds and fruit to be separated from plants before processing. He said only the stalk and waste material was used in second generation biofuels fermentation, allowing corn, soya or other foodstuff to be saved for making food.