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Twin pillars of wind market in Spain disappear -- Emergency decree axes guaranteed minimum price and production incentive

The legal basis of the production incentives driving Spain's wind market is now time bombed to disappear in the new year. In the run up to the summer recess, the entire renewables generation sector awoke to the publication of a new energy law -- Royal Decree Law 7/2006 (RDL 7/2006) -- put together behind its back and passed by government emergency decree. The law will remove the pillars of the 2004 regulation (RD 436) supporting the market.

Specifically, the production incentive payment per kilowatt hour for renewables generation over the entire life of the plant will no longer be indexed to the average electricity market tariff (AET), a government controlled and periodically adjusted reference rate intended to reflect the average national electricity price. Furthermore, the guaranteed minimum payment for renewables -- fixed at 80% of the AET -- is to be removed. The 80% minimum price formed the basic articles of the 1997 electricity sector law underpinning the entire renewables market.

The new law sets a January 2007 deadline for establishing a replacement regulation and incentives. Instead of the AET index, the law empowers the government to dictate incentives and methods, without offering any indications of the criteria. The immediate affect, according to the combined force of the Spanish renewables and wind associations, is that "projects that should have closed in the past few weeks have been paralysed and others annulled."

Without a guaranteed minimum price and without the electricity sector index, confidence in the renewables sector is "shattered" says José María Gonzalez of Asociación de Productores de Energías Renvobles (APPA). "At a stroke it has become impossible to calculate internal rates of return on project investment for existing and new renewables plant alike." Earnings are thrown back a decade "to depend entirely on government good will" rather than the law.

assuranceS

Just before Spain's August shutdown, however, the furore sparked verbal assurances from government that the new rules will effectively amount to a revision of the 2004 law, albeit without AET indexation, not a scrapping of the entire market. "The [industry] ministry is more concerned with capping excess earnings than with altering the whole structure," says Alberto Ceña of national wind association Asociación Empresarial Eólica (AEE).

AEE and APPA argue that 1997's 80% minimum price guarantee must be the basis of all national renewables regulation. The subsequent 2004 regulation introduced the long term investment stability the industry so badly needed. It provided a life long production incentive for wind power, set at 50% of the AET for the first five years and gradually diminishing over the rest of the plant life-cycle. Over 95% of Spain's wind generation is now traded on the wholesale power market, receiving the spot market price, plus the production incentive. The remainder sells its output under the standard offer purchase contracts of the past, with today's price set at 80-90% of the AET. These are still an option, but with rising fuel prices pushing up the wholesale rate, the spot market is a far more attractive choice.

Price emergency

Indeed, the rising wholesale price of electricity lies behind the government's emergency action. Wind station owners have been earning more than the government budgeted for. Over 2005, low hydro resources and volatile fuel prices saw pool prices soar to over EUR 50 MWh, instead of the average EUR 32 MWh government had predicted. Average wind earnings reached EUR 86.61/MWh, around 30% above the government's target price. With electricity retailers banned by anti-inflation rules from passing such price increases onto consumers, renewables -- mainly wind -- accounted for around EUR 600 million of the electricity sector's EUR 3.6 billion budget deficit.

In its own words, RDL 7/2006 aims to "correct" such "distortions" to market prices from renewables. In fact, the correction has already started -- new wind capacity coming online until the end of the year is tied to the AET price prior to July and will not share in the current 1.83% increase.

Staying cool

During Spain's August shutdown, individual developers are playing it cool. The resignation of state energy secretary Antonio Fernandez Segura has even given them grounds for rejoicing. Segura has been behind many of the attacks on wind over the past year or so. Reportedly, he had already produced a draft of a new regulation from January 1, aimed at keeping earnings at a historically low level by removing subsidies for wind power traded on the market if and when wholesale prices topped a specified limit. Subsequent assurances to AEE from the ministry are that no such document will go forward.

Concern is also tempered by the cautiously optimistic belief that any policy which seriously damages the renewables market would be political suicide. "There's too much at stake to radically alter the rules," is the off the record comment from an insider at utility Iberdrola, Spain's top wind operator. Not only is wind power now a major national industry, Spain is struggling to meet its CO2 emission commitments under the Kyoto Protocol. But he cautions that while major wind corporations can ride the storm, "smaller developers might have difficulty convincing banks."

From Danish power group Energi E2, a major wind developer in Spain, César Rodriguez also points out that the government is committed to 20 GW of wind power by 2010 and is only a little over half way there. "There is no mention of any tampering with that," he says of the target.

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