Spain is preparing cuts in subsidies for renewable-energy production in an attempt to diminish their threat to public coffers expected to be announced as early as Friday.

Currently, Spanish renewable-energy producers are guaranteed a set amount of income, above market rates, that is determined by whether their projects harness wind or solar energy.

The government would unveil a more complex formula for determining the guaranteed income that producers receive for the electricity they generate from wind energy and solar power projects.

That formula would be based on the government’s estimate of a level of “reasonable profitability” for each project, depending on several factors including its age, cost, and the amount of subsidies it has already received. People in the industry said the changes amount to substantial cuts in subsidies because the government has promised to reduce the cost for running the nation’s electrical system this year.

But they said they can’t calculate the subsidy reduction until the government explains how it will determine “reasonable profitability.” The industry overhaul is also expected to reduce payments for distributing electricity by as much as 20%. The Energy Ministry outlined its plans in two meetings Thursday evening with some of Spain’s largest electric utilities and some large renewable-energy companies. Some details of the plans were reported late

Thursday by Spanish media. The overhaul has been months in the making, driven by the government’s determination to reduce what it calls a “tariff deficit.” That deficit has grown nearly every year of the past decade as subsidies and other costs of running the electrical system have exceeded the sums generated by sales of power to households and businesses.

By May, the total accumulated deficit had grown to about €26 billion ($34 billion), and the government has promised to narrow the gap as it struggles to bring down its overall budget deficit—which came in at 7% of Spain’s gross domestic product last year—and limit the rise in household electricity bills. Solar-energy trade associations have said the subsidy reductions could push struggling solar-energy companies into default and boost loan losses for banks that financed their projects.

The proposed cuts are a far bigger threat to investors in solar energy than in other renewable projects because the solar projects are more heavily indebted. Spain began offering large subsidies and other incentives in the late 2000s to promote the growth of solar-energy projects. In addition, banks lent the solar-energy companies an estimated €30 billion.

As a result, the amount of solar-power capacity installed in Spain far surpassed official government targets, widening the tariff deficit. Since 2010, the government has taken steps to curb the tariff deficit, including a temporary limit on the hours of electricity generation for which most solar-energy producers receive payment above market rates.

Even before the latest measures, these producers said the limits adopted since 2010 could cut their revenue by as much as 40% this year.

Trade associations for solar-energy producers have warned that the latest overhaul could lead to a wave of defaults because companies managing many of the country’s 60,000 or so solar-power installations would have trouble servicing their debt loads.

How many could be at risk of default will depend on how the government determines the new “reasonable profitability” for the different renewable projects, people familiar with the overhaul said. Spanish banks could refinance some of those loans, but they are already facing a rising tide of corporate defaults in other industries.