Retrospective cuts end freeze in Spain amid disgruntlement

SPAIN: The Spanish wind association, Asociacion Empresarial Eolica (AEE), has finally negotiated cuts to wind power production incentives, following a six-month debacle with the central industry ministry. The agreement has been met with disgruntled relief by the wind sector, while the ministry hopes to seal cross-party approval and agreement with other renewables technologies by the end of July.

Build dismay: production incentives were meant to be secure for a wind farm's useful life
Build dismay: production incentives were meant to be secure for a wind farm's useful life

The cuts apply to 25% of Spain's online fleet, for projects put online between 2008 and 2012, and only when the wholesale electricity price nearly doubles current rates. As such, they are widely considered to have a negligible economic impact (see below).

The agreement comes as a relief to the sector, which had feared more drastic cuts, and stock-market-listed renewables firms experienced share hikes of as much as 8% following the announcement.

The disgruntlement, however, is that the cuts will apply retrospectively to capacity already online, which is widely viewed as a dangerous signal to prospective investors and financiers for future projects planned to boost capacity to meet Spain's 38GW wind objective to 2020, up from today's 19.4GW.

Furthermore, the ministry has yet to present its long-overdue pay scheme proposal for new wind capacity connected after 2012, putting on hold new financing agreements for projects long since lined up to meet the 2020 target.

"Even if the impact of the cuts is low," says one AEE member, "it is strange that AEE gives its blessing to retroactive changes to a production incentive, which, since 2004, has attracted investments precisely on the basis that rates were supposedly secure across a wind plant's entire useful life."

The big utility players, including Spain's Iberdrola, the world's top wind operator, and AEE's biggest members are happy. But he adds: "Profits from thousands of megawatts of online wind capacity have dodged earlier ministry threats of a much larger retroactive cut."

"With gas in mind, the utilities are not too concerned about installing much more wind capacity in Spain after 2012," he says. High wind penetration, now exceeding 14%, coupled with falling electricity demand, is pushing production offline from the same utilities' combined-cycle gas plants - huge investments by utilities in these are as yet to be paid off.

Iberdrola's wind pipeline is now mainly abroad, while its gas-fired capacity at home is suffering curtailment.

AEE's statement on the compliance was short. "Following our collaboration and efforts in meeting the ministry's cost-cutting demands, we have accepted a temporary reduction in the incentive in return for the long-term market stability we were looking for," the press office told Windpower Monthly.

Even if the wholesale electricity price recovers next year, insiders do not expect the agreed cut to the production incentive to save the electricity system more than EUR100 million a year to 2012 - a drop in the ocean against the electricity sector's deficit of EUR20 billion.

Even if the ministry saves its planned EUR1-2 billion with cuts to other renewables, says Peter Sweatman of renewables and climate change investment consultancy, Climate Strategy, this makes no sense as the savings will not outweigh the added borrowing costs for Spanish firms caused by reduced confidence. "It will now take a very brave international investment director to take a new Spanish renewables investment before his investment committees ...

This Pandora's box should not be opened," he concludes.

Spain's new agreement A negligible profit impact

The AEE-ministry agreement sets a 35% cut in the so-called reference production incentive, which, depending on conditions, is paid for wind power in addition to the price achieved on the hourly wholesale electricity, or pool, market.

But the conditions are the key to the low impact of the cuts. The reference incentive is set at EUR31/MWh, and does not always come into play.

Under the 2007 regulation, wind power connected from 2008 is covered by a minimum price of EUR75.1/MWh. Thus, if the pool price drops below EUR45/MWh, the minimum price is paid instead of the pool price plus the EUR31/MWh incentive. Until the pool price reaches EUR45/MWh, it is irrelevant whether the incentive is cut by 35%, 99% or any other figure.

For most of the past year, the pool price has slumped - from record highs in excess of EUR90/MWh - to hover nearer the EUR40 mark. With Spain's high hydro reserves and low electricity demand keeping electricity prices down, the EUR45 mark is widely seen as unlikely to be hit until the dry months of 2011.

Furthermore, the 35% cut applies only to capacity put online between 2008 and 2012 - around 25% of Spain's 19.4GW total.

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