Spain's central region of Castile-La Mancha is gearing up to expand its already substantial wind power sector, to achieve an installed capacity of 6GW by 2015 from just under 4GW today. But there remain several obstacles that could derail these plans, according to industry observers.
Charged with governing one of Spain's most sparsely populated regions, Castile-La Mancha's regional authorities plan to launch a tender for 800-1,000MW within the next three months. The auction is expected to attract bids from many of the firms that already dominate the area's wind sector, including Energias Eolicas Europeas, owned by renewables major Iberdrola, turbine giant Gamesa, Union Fenosa Renovables and Alstom Wind (formerly Ecotecnia).
"There will be an auction very shortly, which will attract all the usual suspects," says Fernando Domingo Triado, president of Aprecam, the Castile-La Mancha wind developers association. According to Domingo, Iberdrola is also moving to build a 1.3GW wind farm in the province of Cuenca, which will contribute to the 6GW regional target.
Domingo says the roughly 2GW of additional capacity earmarked for Castile-La Mancha will cost around EUR3 billion to install - although this sum is lower than the EUR5.5 billion the regional sector has attracted over the past five years.
Castile-La Mancha currently has 3.76GW of installed capacity, making it the second-largest wind energy generation region in Spain after Castile-Leon, which boasts installed capacity of 4.8GW. The northern region of Galicia is in third place with 3.29GW.
Castile-La Mancha is also home to seven turbine, blade and tower factories, the largest of which are operated by Gamesa and GE Wind. Energias Eolicas Europeas, Gamesa and Pecamsa operate the largest wind farms in the region, which are located in four of the region's five provinces: Cuenca, Albacete, Guadalajara and Toledo. Industry observers expect Guadalajara, Albacete and Cuenca to attract most of the next round of investment.
In an effort to create much-needed wealth and jobs for the region, authorities have made considerable efforts in recent years to attract wind developers. Its new expansion target is currently the most ambitious in Spain - the world's fourth-largest producer of wind-generated electricity. Moreover, the regional administration recently touted several initiatives to make Castile-La Mancha a more compelling investment destination, promising to expand its rail and other transport infrastructure as well as improve the grid. It has also deployed a campaign to promote the area to foreign wind investors and institutions. A renewable-energy research institute has been established at the local university, charged with developing new turbine and wind farm models and fine-tuning plans for their future connection to the national electricity grid.
Meanwhile, after the summer, Spain's national government hopes to launch its long-awaited wind power regulatory framework for the post-2012 period. There is an expectation in the sector that the new framework will be based around lower but still competitive feed-in tariffs. Much future investment in wind energy in Spain will hinge on this new tariff regime.
Domingo expects the tariff to be slightly lower than the current EUR0.070-0.077/kWh feed-in subsidy, which fluctuates depending on whether a developer is paid under the fixed or market tariff. "The tariff will be lower, but we don't expect it to be much lower as this would make many projects unprofitable," says Domingo.
Spain's policymakers are keen to facilitate movement toward a national installed wind power capacity of 35GW by 2020, up from the current 21.5GW. As all players in the market agree, choking the industry's finances won't help it meet that objective. "This is the dichotomy," says Domingo. "They need to make sure this goal is achieved and you can't add another 14GW without an attractive tariff mechanism."
Uncertainty over the new national regulatory framework means it is not yet possible to predict accurately how much new wind capacity will be installed in Castile-La Mancha over the next five years, says Heikki Willstedt, director of energy policy at national wind body Asociacion Empresarial Eolica.
The current national regulatory framework expires in late 2012 and nobody knows what, when and under what terms new wind energy capacity will be installed after that," Willstedt points out. He adds that his organisation hopes to meet the government to negotiate the incoming framework as soon as possible.
Some observers have speculated the tariff could come down by as much as 30%. However, Luis Antonio Martinez, general manager at Agecam, the Castile-La Mancha regional energy agency, believes that wind would still be competitive even under such a reduced tariff. "Spain's wind industry is mature and our companies, technology and market know-how means projects will still be profitable," he insists.
As in the rest of Spain, Castile-La Mancha's interconnection capacity will have to be expanded significantly to ensure grid access for new wind farms built as a result of the region's forthcoming auction. Improving wind developers' access to the grid is something that transmission company Red Electrica de Espana has pledged to prioritise over the next four years. As part of this effort, the firm is already working on a new 200-kilometre high-voltage line that will cross Castile-La Mancha, the first phase of which will be ready late this year, with project completion scheduled for 2015.
Even after the line is completed, further strengthening of transmission and interconnection capacity will be required to plug future developments into the main grid, says Domingo. "We need more power lines and substations and - depending on how many are actually installed - we may see more or less of the (6GW) goal achieved," he points out.
Domingo suggests that wind developers are likely to end up shouldering the brunt of the investment necessary to enlarge the transmission network, but the government is likely to contribute.
A new visual impact levy on existing and future wind farms in the Castile-La Mancha region is another factor in the mix, and has the industry up in arms. Under the levy - which was recently approved by regional legislators and is expected to come into force this year - wind farms with more than three turbines will pay EUR489 a quarter, those with 8-15 machines EUR871 and plants with more than 15 turbines EUR1,233-EUR1,275.
Developers have complained that the tax will unfairly penalise the industry, causing tensions between wind energy and the regional government, which has shown no intention of backing down.
Underscoring this tension, Castile-La Mancha president Jose Maria Barreda branded developers' complaints against the tax "a joke", arguing that it "certainly won't hurt their profitability" and "if anybody is benefiting from the recession it is power companies".
Offering an opposing view, Willstedt insists that the levy will have a negative economic impact and could undermine the success of the upcoming Castile-La Mancha auction. "This is simply going to make the region less attractive for companies," he says. "We believe that even if the regions get a lot of money in the short term with these taxes, in the long run it will result in less wealth creation, as there will be fewer incentives to invest and create jobs."
Castile-La Mancha is not the first region to establish a wind farm visual impact levy. With Spain enmeshed in a deep recession that has prompted global financial markets to test its credit worthiness, the cash-strapped north-eastern region of Galicia slapped a similar duty on its wind sector in 2009. Other regions could follow suit, observers warn. Indeed, Spain's anaemic macroeconomic health and choked financing markets may pose a significant hindrance to its domestic wind sector over the coming months, if not years.
Castile-La Mancha's new visual impact levy also risks undermining its competitive advantage over rival region Castile-Leon. Castile-Leon is already planning 1.3GW of new installed capacity by 2012, which would lift its total regional capacity to 5.8GW, propelling the two regions into a neck-and-neck race. Unlike Castile-La Mancha, Castile-Leon does not hold income-generating auctions. However, Castile-Leon's project authorisation process is generally slower than the auction approach taken by its regional rival.
Martinez says project approval and administration can be six to 12 months quicker in Castile-La Mancha than in other parts of Spain. "We have wind speeds of six metres per second which is in line with other regions. While this makes projects profitable, our real advantage is a faster and more efficient administration," argues Martinez. "We treat investors quickly and more directly and there is no bureaucracy or intermediaries. In an industry where it can take three to four years to start up a project, saving six to 12 months of time is a big benefit."
Marketing boasts aside, observers expect the three regional wind energy leaders - Castile-La Mancha, Castile-Leon and Galicia - to compete fiercely with each other in coming years, and that this competition will likely result in the three developing their wind sectors at similar speeds - provided, that is, that economic and political weaknesses at a national level do not undermine the power of Spain's regions to expand their wind energy sectors.