Merryn's Blog

What is the government going to steal from you next?

A recent move by the Spanish government to claw back green energy subsidies is a perfect example of why investors should be very wary of politicians.

When I made my list last week of reasons to be fearful for 2011, I put in at number 14 "greedy governments". With a fiscal crisis well underway around the developed world, it seemed to me that investors in the corporate world would be nuts to consider their assets entirely safe from desperate politicians.

So it is with no particular surprise that we must note the story on the front page of the FT's FM section today. Headlined "Investors may walk after Spain's solar cut", it tells the slightly disturbing story of the government's decision on Christmas Eve to cut subsidies to its solar-photovoltaic energy producers by 30% over the next three years as part of its efforts to trim its shocker of budget deficit.

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On the face of it this isn't that big a deal given that, just like those in the UK, the subsidies were far too generous in the first place. How generous? If you'd connected to the grid by September 2008 you'd have got a feed-in tariff of €450 per megawatt hour of electricity for 25 years. That is ten times the going rate for power from the likes of gas and coal. No wonder Spain now has six times the amount of solar capacity it expected to have by 2010. And no wonder they spent €2.6bn on subsidies for that capacity last year.

But the thing that makes the cuts of interest and a very big deal is that the cuts are retrospective. So they affect existing projects (built and financed on the perfectly reasonable assumption that the agreed subsidies would remain agreed) as well as new ones.

Private equity groups and fund managers have rushed to call the move "illegal" which it could easily be. But more than that, it is a huge breach of confidence: if the government has done this, what might they do next? If you were a happy investor in any regulated Spanish industry from banks to water in 2010, would you still be a happy one in 2011?

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It's all something for investors to mull over as they think about who might get their money in 2011. But it might be something that renewable energy investors in the UK should take very careful note of. As I have pointed out here before, our own feed-in tariffs are much too high. But given that we also have a shocker of a deficit, who's to say they won't end up being cut too?

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