Among the casualties of Spain’s burst economic bubble is an electricity industry that has twice as much capacity as necessary, thanks to lavish subsidies in the boom years for renewable energy companies.

Not before time, the government is getting to grips with a particularly acute aspect of the problem – a €24bn deficit in the power sector that represents the difference between the cost of producing electricity and the subsidised prices paid by consumers.

After months of internal wrangling and disputes with the country’s big energy companies, Madrid proposed last week to slap a 6 per cent tax on power-generation revenues, including renewable energy, as well as levies on coal, nuclear waste output, and petrol and diesel used to produce electricity.

According to the government, these taxes will, assuming the bill is passed, raise €2.7bn a year from next year and prevent the deficit from rising even higher. But the beauty of the proposal, for power companies, is that they will in large part be able to pass the taxes on to consumers. Industry experts estimate that average household bills could rise by 7 per cent from next year.

The implications for economic growth are not so rosy. Consumer demand is already suffering because of mass unemployment, higher income taxes, stagnation or even cuts in wages, and a 3 percentage point increase in value added tax that took the standard rate this month to 21 per cent.

Still, Madrid had little choice but to address the distortions in the electricity market. The subsidies doled out to renewable energy producers during the euro’s first decade transformed Spain into one of Europe’s “greenest” nations, but also encouraged too much investment in wind and solar. “The planning and timing of the renewable energy expansion were wrong,” says Pedro Mielgo, a former chief executive of Spain’s electricity network. Wind energy alone accounted last year for 16.4 per cent of electricity generation, but there is so much overcapacity in wind and solar that there is unlikely to be much fresh investment until 2018 or so, says Mr Mielgo.

With the market looking dormant, investors and developers are moving their business elsewhere, creating a risk that Spain will lose its position at the cutting edge of the renewable energy industry.

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