Despite the world’s dependency on fossil fuels, the renewable energy sector remains to be a favorite of venture capitalists and government investments.
Investments to the tune of hundreds of billions of dollars kept pouring into emerging energy companies over the past years, making renewable energy the largest sector of venture capital investments.
Solar energy is one of the more popular renewable energy sources. According to a new report by the International Energy Agency, solar energy alone is expected to supply almost a quarter of the world’s electricity needs by 2050.
«The combination of solar photovoltaics and concentrating solar power offers considerable prospects for enhancing energy security while reducing energy-related [carbon dioxide] emissions by almost 6 billion [metric tons] per year by 2050,» said Nobuo Tanaka, executive director of the agency.
However, cost structures of solar technology are still not economical enough when compared with current alternatives. Thus, many governments tailored specific subsidy programs to encourage the development of solar technology and raise consumer demand.
The solar subsidies became a big help in increasing solar energy’s popularity, as the rush across the globe became more like a stampede. The demand for solar panels was so high at one point that Chinese freight companies actually auctioned off cheap panels for high prices before ever landing ashore.
However, the peak in demand also led to a surplus in supply. Most buyers are now returning uninstalled units, which is depressing revenues for many promising producers in other global markets. An advantage resulting from this may be the recent weakening of the euro, as depicted by Forex indicators, which will make exports to foreign buyers cheaper.
Nevertheless the clamor for solar power still remains and is further fueled by government subsidies, such as the case of Spain.
Within two years, Spain’s solar industry grew by 900 percent, assuming the third largest capacity position in the world after the United States and Germany. Spanish subsidies have been inordinately high, and the business community overreacted due to the obvious potential for quick profits, forcing the government to make subsidy cuts.
An investigation also revealed that 4,200 of solar subsidy registrations were fraudulent. Wind turbine operators were registered as solar generators because solar subsidies were higher than that of wind.
Spain has also been beset with financial issues, with subsidy levels for all renewables approaching 6.3 billion euros ($7.74 billion). When economists demanded austerity measures to be put in place, solar subsidies became instant targets in every cost cutter’s gun sights.
Still, industry experts counseled Spanish authorities not to overreact in their retrenchment plans, but to learn from their experience over the past five years. Subsidies may be a necessity, but Spain pays more in subsidies for renewables than the total cost of energy production in the country, leaving the industry with bills 17 percent higher than the European Union average, according to Financial Times.
Spain will eventually benefit from solar farms on its sun-drenched plains. More detailed planning with published plans for graduated subsidies will give producers and international suppliers a better map for future strategies.
The solar stampede brought by a peak in demand, coupled with government subsidies, promote the formation of “asset bubbles” and their negative consequences that inevitably lead to bad business practices and investor losses.
The industry must work with governments to prevent such bubbles from occurring, develop reasonable subsidy programs and maintain investor confidence throughout the process.
Jennifer Gorton is the content manager of ForexIndicators.net, which provides discussions and information related to forex trading indicators and technical analysis.
