Energy: Slowdown set to test green commitment

Finding the right energy mix for Spain is not for the easily- rattled, particularly in these times of high oil and gas prices. The country’s own hydrocarbons production is insignificant, meaning it depends heavily on oil and gas imports for transport, industry and electricity generation.

Hydro-generation, in a largely parched peninsular, varies wildly from year to year. Coal-fired plants, while still an important source of generation, clash with the socialist government’s commitment to the Kyoto protocol on greenhouse gas emissions.

Despite growing support for more nuclear energy, a moratorium on new reactors remains in place. Spain’s response to the energy conundrum, then, has been to encourage investment in renewable energy sources.

Government incentives have had the desired effect. Lured by generous feed-in prices, companies, individuals and financial sponsors have invested billions of euros in wind energy in the last 10 years, making Spain the leading per-capita producer in the world. In the process, Iberdrola, its largest power group by market capitalisation, has become the world’s biggest generator of electricity from wind turbines.

Acciona, the Spanish construction-to-energy group, is among the world’s biggest wind farm developers, while Gamesa is second only to Vestas in the manufacturing of turbines.

With the breeze now well-harnessed – on one particularly blustery day last year, wind turbines met 27 per cent of total electricity demand – investors have been increasingly looking to the sun as a source of profits.

From about 20MW of installed photovoltaic capacity in 2002, Spain will have an estimated 1,500-1,800MW by the end of this year – compared with early official targets of 400MW by 2010.

This year alone, an estimated €6bn has been spent on installing more than 1,000MW, putting the country among the world’s leading solar power generators. Such frenetic activity owed much to the government’s decision last year to postpone for 12 months changes to the subsidy system.

Listed solar groups are among the best-performing shares in today’s bear market, while solar panel factories, ancillary services providers and research centres have sprouted around the country. Investors have piled in from every corner of the globe, drawn not just by the subsidies, but by the country’s ideal climatic conditions. Some Spanish real estate groups, meanwhile, beat last year’s housing collapse by re-inventing themselves as solar park developers.

One Spanish region, Navarra, draws about 70 per cent of its electricity needs from solar panels, wind turbines and other green technologies, while neighbouring Aragón is home to what will be the largest rooftop solar farm in the world. Built atop General Motors’ Opel plant near Zaragoza, the regional capital, it will consist of 183,000 square metres of solar panels and have 10MW of generation capacity.

Jeremy Rifkind, a US academic who advises the European Union on energy policy, recently praised the project on a visit to Madrid.

“I think Spain has been a bit of a flagship on renewable energy,” he said. “Navarra and Aragón are the sort of places that people visit from other countries to see how it is done.”

But, for many, state-subsidised activity constitutes nothing more than an investment fad, and there are fears of a property–style bubble.

To cool passions in the sector, the government recently reduced the guaranteed feed-in price to generators from €0.45 to €0.32 per KWh for ground-based and large building-mounted generation centres like the GM plant.

Solar farms installed on the outside of apartment blocks and warehouses will receive €0.34 per KWh fed into the local grid. These supports will be reduced by 10 per cent every year for the next three years, during which the government has set an annual 500MW ceiling on the amount of new capacity it will subsidise. After lobbying hard for a more gradual cut in guaranteed prices, industry associations are currently claiming a small victory: a government white paper originally argued for slashing the support to €0.29 per KWh, and capping new capacity at 300MW a year.

While no-one questions the government’s commitment to green energy, Spain’s slowing economy is testing public finances. It also has to contend with a financing the difference between generators’ production costs and government-fixed electricity charges, known in Spain as the “electricity tariff deficit”. Finding lenders to cover this deficit, to reimburse the electricity companies, is proving difficult amid the credit squeeze.

“In negotiations like these, no-one is going to walk away with the match,” says Juan Laso Rodríguez, head of a solar business association. He predicts an “important shake-out” in the photovoltaic industry as investors recalculate their prospects in a business that had been offering a complete return on capital in 10 years

This is an industry in which cost savings are determined mainly by technological advances,” he says.

“Those that attain sufficient scale or efficiency over the next few years will be the survivors.”

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