Just under a month ago, on an empty mountain plateau in Andalusia, the last of 600,000 parabolic mirrors were connected, and Andasol, the world's largest solar power station, become operational. It is, as it glints in the Spanish sun, a shining example – literally – of what renewable energy offers.

Big almost beyond belief, it is powerful, clean and looks unlike any power station you could ever imagine. Spread over terrain which covers the equivalent of 210 football pitches, there is nothing to see behind the security fences and drainage ditches but interminable lines of gleaming, eerily silent, parabolic mirrors. They gyrate simultaneously to follow the sun's path through the sky – for all the world like an enormous Star Wars android army awaiting orders from above to destroy the local populace.

The bleak, empty flatlands of the Guadix plateau, 30 miles from Granada, were chosen by the backers of Andasol, a joint venture by four German companies, as the location for their €350m (£293bn) investment because, at 1,100 metres above sea level, Guadix's atmosphere is clearer and less turbulent than lower altitudes. Purely because of that, it captures more solar energy than the entire Saudi Arabian peninsula.

Other plus points include an ample underground spring system, which supplies water for the turbines, as well as 2,000 hours of sunlight per annum. And if a conveniently close high-voltage power line was an indispensable factor, so too was the degree of local government support. For all these reasons, if solar power is going to work anywhere, it's going to work here. But there are clouds on the horizon.

When Rainer Kistner, Andasol's director, talks about business prospects, he can find little cause for celebration. The source of his woes are the so-called feed-in tariffs, the indirect government subsidy which acts as the financial lifeblood for renewable energy projects. They were slashed by half last week in the UK, and, Kistner fears, they face equally dismal prospects in Spain, too.

"In the future, we know that tariffs will go down. Dramatically," Kistner gloomily predicts. "It cannot affect existing power plants" – such as Andasol – "but the government has to give some sort of guarantee to the investors. It can't say it'll pay so many euros per kilowatt hour... for the next 25 years and two years later say 'Sorry, but we'll give you only half of this'."

Spanish and UK solar energy are not alone in facing an imminent crisis. Globally, renewable energy is on the retreat, to the point where last month the Ernst & Young accountancy firm warned that, should the eurozone debt crisis worsen, a climate funding gap of $45bn (£29bn) worldwide could emerge by 2015.

Even if government cuts do not deepen, which is unlikely, the Ernst & Young report claimed that a gap of $22.5bn on investment in renewable energy and subsidies is likely to emerge across 10 leading world economies in less than four years. Among them is the UK where the shortfall is estimated to be $5bn, while in Spain – effectively confirming Kistner's fears – it would be $6bn.

"Continuing economic uncertainty is pushing a low-carbon economy further out of reach," said Juan Costa Climent, Ernst & Young's global climate analyst. And the International Energy Agency's chief economist, Fatih Birol, warned recently in the Spanish newspaper El País that "renewable energies are going through a very difficult period. Countries are cutting subsidies to reduce the [public] deficit. And that is legitimate, but it will have long-term implications."

Andasol's Kistner recognises that renewal energy subsidies have been part of the political discussion on how to reduce Spain's deficit, but he points a finger at the "big electrical companies who would like to lay the blame on renewable energy companies for the increase in price. They've already reduced the tariff for photovoltaic solar energy. The Spanish government right now is nearly bankrupt. And we are living under laws from when the situation was healthy. Our plant should not be affected, but I'm worried about new projects. In a completely liberalised market, there would never be any chance for a new [electricity-producing] technology because the risks are too high."

The real victim of these cuts and the blame games between the electrical companies, as ever, is the environment. While countries such as Canada abandoned the Kyoto Protocol on greenhouse gas emissions last week, Andasol's production alone prevents nearly 500,000 tons of CO2 from being pumped into the atmosphere per annum. And while some media reports say Andasol's output of 150 megawatts is relatively modest, it still provides enough energy for a city of half a million inhabitants.

Part of the explanation for Andasol's high output is that, rather than using the better-known photovoltaic solar energy system, which directly creates electrical current, its linear solar concentrators in the mirrors absorb the heat. The heat is then transferred and thermally stored in some 30,000 tons of salt – heat which can keep the electricity-producing steam turbines turning for up to eight hours after sunset.

"The challenge for most renewable energy sources is that you have to provide electricity whenever the end- consumer needs it," says Kistner. "A photovoltaic solar power needs the sun, but if you want to watch a football game at 10pm or cook a meal you don't care about that. And storing electricity, rather than storing solar heat, like our power station does, is very expensive."

Given the relentless series of government cuts, it is hardly surprising that those companies still keen to invest in renewables are looking further afield. In North Africa, for example, an international venture called Desertec Industrial Initiative has recently announced plans for a Sahara-wide, €400bn solar energy project, starting in the region of Ouarzazzatte in Morocco in 2015.

Desertec's plans could produce 15 per cent of Europe's electricity by 2050, managing director Paul van Son told the news agency Reuters last month. Space – vital for thermal solar plants which could dwarf even somewhere like Andasol – is hardly lacking in the Sahara, either. According to Desertec, it receives as much solar energy in six hours as the entire world uses in a year. "It's interesting, and there are definitely locations that are better than here," Kistner says, "even if the huge political projects take a lot of time. Ultimately, in any case, there is no other choice but renewable energies."