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The government is planning to impose a cap on profitability across all renewable technologies

Spain will announce what the government expects to be its “definitive” energy reform before the end of July in a move likely to slash profitability across the country’s renewable energy sector.

Having been a world leader in backing alternative power sources such as solar and wind energy, Spain has been forced to reconsider the generous incentives it offers its heavily indebted renewables industry.

After several delays to its attempt to cut subsidies to the sector, the Spanish government is now planning to impose a cap on profitability across all renewable technologies, said officials familiar with the draft reform.

The cap would be set at a fixed level above Spain’s government borrowing costs and represent an official judgment of acceptable profitability over the entire term of an investment.

However, this is unlikely to provide a return large enough to avoid the most indebted solar and wind energy projects falling into the hands of their lending banks.

In recent weeks Spain’s secretary of state for energy, Alberto Nadal, met a group of Spanish and international banks, including Santander and Deutsche Bank, to warn them that the pending reform was likely to trigger defaults.

The government is battling to reduce a €28bn so-called “tariff deficit”, which has resulted from the state compensating the renewables sector for electricity prices not being high enough to meet its production costs.

Yet the likelihood of retroactive changes to subsidies known as “feed-in tariffs” has angered investors, who have argued that any such moves would be against international energy treaties.

Earlier this month a group of international investors with large investments in the sector, including Antin Infrastructure Partners and InfraRed Capital Partners, openly called on the Spanish government to negotiate any further changes to subsidies.

The final reform package is now expected to address not only the tariff deficit, but also energy transportation, payments for disruptions to capacity, restrictions of carbon and distribution to the Canary Islands.

One official familiar with the draft reform said the subsidy cuts were likely to take the form of recalibrated incentives, adding that a further tax increase on feed-in tariffs for the sector was unlikely.

“Investors know that during these years they have obtained profitability much higher than could have been reasonably expected,” the official said.

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