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Spain

Market in Spain under political attack -- Wind lobby staves off first assault on escalating power purchase prices

End of year panic in Spain's wind sector subsided rapidly after the government publicly reassured investors that wind power's privileged position in the wholesale electricity market is to remain. The furore started after state energy secretary Antonio Fernandez Segura informed the press that wind accounted for EUR 450 billion of a EUR 3.6 billion trading deficit on the market in 2005. The claim was strongly refuted by the wind industry, which argued that far from contributing to the deficit wind power had held prices down.

In the two weeks between Segura's attack and subsequent climb down on December 15 -- following pressure applied from colleagues in the industry ministry -- rumours abounded that restrictions on payments for wind power in Spain were imminent. Share prices fell for listed wind companies Gamesa and Acciona.

They recovered quickly, however, after the wind lobby's clear victory in the first of what are likely to be several skirmishes this year over wind power support. This year sees a scheduled review of incentive payments. Any changes will apply to wind plant installed after January 1, 2008. Segura is in charge of compiling sector data and opinions for the review.

About 90% of generation from Spain's 9500 MW of wind power is sold on the wholesale market. But rather than competing on price with other generation, all production must be paid an average of the daily trading price, topped up by an incentive payment. With the average price soaring from EUR 38/MWh in 2004 to EUR 54/MWh in 2005, wind payments also soared, reaching an average EUR 83.5/MWh during last year.

The market deficit arises as a result of the government's anti-inflation policy. Electricity producers may not pass on their rising costs to customers in higher electricity bills. Generation costs have risen for a variety of reasons. The country has suffered from its worst drought in 50 years, pushing up the price of usually abundant and cheap hydropower. The global hike in oil and gas prices is also hitting home as is the low availability of nuclear power and the carbon penalties hitting fossil generation after the start last year of the EU's Emissions Trading System.

Excessive profits

Suggestions that wind power generators are raking in excessive profits due to the link between wind power support and market prices are hotly disputed by the Spanish wind power association, the Asociación Eólica Empresarial (AEE). "Wind investments are over 20 years and earnings adjustment should be calculated over the long term, not in response to a temporary increase in pool prices," says AEE's Fernando Ferrando. From wind turbine supplier Ecotècnia, Ivón Martínez also argues that earnings were poor in 2004. Wholesale market prices may even come down this year. Investment banks ABN-Amro, UBS, ING and Lehman-Brothers have forecast a drop in the average price to around EUR 40/MWh.

AEE disputes Segura's claim that wind has contributed EUR 440 million to the electricity trading deficit. The association suspects he bowed to utility attempts to make wind an easy scapegoat because of its record earnings in 2005. Segura's figure, believes Ferrando, is the difference between what wind producers would have received under Spain's fixed wind tariff and what they did receive from choosing to trade on the market. Spanish wind generators may choose each year if they wish to receive a fixed payment, which brought in EUR 65.5/MWh in 2005, or sell power on the wholesale market and receive an incentive payment.

"Far from increasing the deficit, wind power trading on the market actually reduces it by EUR 1.6 billion," says Ferrando. The wind contribution saves purchases of expensive alternative generation, thus depressing, not inflating, the average price, argues AEE. Without wind, the deficit would have been EUR 5.2 billion, not EUR 3.6 billion, he says. Any suggestion that wind should be pushed out of the market and back onto a fixed tariff would increase the wholesale market deficit, not reduce it, according to AEE.

The effect of Europe's Emissions Trading System is playing its part. AEE estimates wind power saved EUR 240 million in avoided carbon penalties in 2005 and will save EUR 2.3 billion in the five years to 2010. It is "the main contributor to reducing Spain's CO2 emissions," claims Ferrando.

He also points out that cutting wind payments would strike at the industry just as the cost of wind generation has gone up, a result of increases in the price of raw materials and a global shortage of wind turbines. AEE also points out that the installed cost of wind power has gone from EUR 920/kW in 2004 to EUR 1115/kW in 2005 -- and that the windiest sites in Spain closest to transmission lines have already been developed. It will cost more to generate wind power in future, warns AEE.

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