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Purchase price capped and subsidy slashed -- Spanish wind industry's worst nightmare comes true

The Spanish wind lobby's deepest fears are set to become harsh reality. Power purchase prices for wind power in Spain are to be capped at EUR 84.7/MWh no matter how high electricity prices rise on the wholesale market. At the same time, wind's purchase price subsidy is to be slashed by more than half the current rates. The Spanish government's new pricing structure for wind power was announced on November 28. It will apply to purchases of wind generation from all existing wind power plant as well as new developments. Payments for other renewables have been increased.

A shocked wind power industry successfully called for an indefinite extension on the December 31 deadline by which the new regulation is to come into force, warning of a mass exodus of investors from the market. The day after the proposal's release, share prices of the country's two leading wind technology suppliers, Acciona and Gamesa, dropped by more than 5%. Banesto, a major bank, advised customers to sell shares held in Spain's listed wind companies.

Early last month, the author of the government proposal, state energy secretary Ignasi Nieto, told Asociación Empresarial Eólica (AEE), the national wind association, that he would extend the deadline to March 1. AEE's Alberto Ceña is optimistic that Nieto will soften some of the harder hitting blows. "He received some of our main worries with understanding and concern," says Ceña. Nieto made no promises, however.

The new pricing structure pulls the rug out from under a 2004 regulation which guaranteed a stable pricing regime over the entire working life of a wind plant and has since driven the construction of around 4500 MW of wind capacity. The wind lobby has already questioned whether such abrupt departure from the 2004 rules is unconstitutional (Windpower Monthly, December 2006). For the time being AEE prefers lobby pressure to fighting it out in the courts: "That would probably take three or four years to resolve anyway," said one AEE member.

For generators selling wind production on the wholesale electricity market, Nieto has reduced the production incentive to a maximum EUR 17.4/MWh, indexed to inflation after 2008. At that level it is about EUR 3/MWh more than wind's production incentive in the United States. In Spain the incentive drops to EUR 10.5/MWh after the first five years of operation, while in the US it remains at a fixed rate for ten years. The reduced incentive in Spain runs for a further ten years, before dropping to EUR 5.5/MWh for the remainder of the wind plant's operative life.

Nieto is capping the maximum purchase price for wind power, including the production incentive, at EUR 84.7/MWh, indexed linked to inflation from 2008 and applicable to the first five years of operation before the cap is tightened. If power purchase prices on the wholesale market reach EUR 84.7/MWh, the wind incentive will be zero and wind payments will be frozen at that level too. Wholesale market prices ran at an average of EUR 50/MWh in 2006.

If the proposal is passed, AEE predicts a mass shift to Spain's alternative wind subsidy system based on fixed power purchase prices. Wind power generators may choose each year whether they wish to sell their wind power on the market, and get the production incentive, or sell it for a fixed price. Nieto is offering EUR 73.1/MWh as the fixed rate, which declines after five years of operation. The wind lobby had asked for EUR 79/MWh over a wind plant's life. "It is ironic that while Europe is liberalising the electricity market, the government proposal will expel [wind] production from the wholesale market," says AEE.

In the only moderately good news for the wind industry, Nieto fixes a minimum purchase price for wind of EUR 67.7/MWh, no matter how far electricity prices on the wholesale market fall, also linked to inflation from 2008. The minimum rate declines after the first five years. The wind lobby had asked for a minimum purchase rate of EUR 71/MWh for all power generated over a wind plant's life.

Drastic cut

AEE says Nieto's proposal reduces returns on investment to less than 5% for wind plants selling output on the wholesale market, dropping below 3% for older plant. Maximum returns from fixed price contracts are just over 6.41%, says AEE, dropping to below 3% for older plant. The figures are way down on the 8.4% average returns targeted by the 2004 regulation. "Future projects and many existing wind plants simply become non-viable," says the association. It anticipates "the cancellation of most investments already lined up."

Currently, wind makes up 78% of Spain's installed renewables capacity. If the market is blocked, Spain will not only fail to meet its 21 GW wind target for 2010 but also its EU commitment to source 12.1% of its primary energy requirements from renewables. "Investors will move over to fossil fuel generation and CO2 emissions will soar," says AEE, adding that the cost of securing emissions allowances under the EU's cap and trade system will be passed on to electricity consumers. The proposal will also cost Spain its role among global wind sector leaders, together with thousands of local jobs.

Unfair and illogical

Ceña says Nieto's most sympathetic response has been towards AEE's appeal not to cap wholesale wind earnings. "It is unfair and illogical, once wind production is trading with no production incentive, to deny it the going wholesale price," argues Ceña. "Sure, wind has no fossil fuel costs, which push wholesale prices up. But neither do hydro and nuclear, which continue receiving the full wholesale price."

As the proposal stands, wind operators will feel no more than "a slight pinch," according to Nieto. "But wind farms will still go up and we will still reach our targets," he says. Unless the regulation is modified extensively, Spanish project developers will continue building wind plant, says the wind lobby, but mainly outside Spain. Nieto's proposed regulation is now under review by the electricity market regulator, the Comisión Nacional de la Energía.

The association says it will now use the extended deadline to gather support from trades unions and regional governments, both concerned with the impact on regional wind industry investment plans, which have already created 30,000 jobs across Spain. With political pre-campaigning already gathering for the 2008 general election, such support could be AEE's main trump card.

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