Market Status: Spain - Glorious past does not guarantee future success

SPAIN: Spain's once bullish wind market is now overshadowed by regulatory uncertainty.

The government has failed to meet its own 2010 deadline for proposing a new pay mechanism for wind capacity connected after the current regulation expires at the end of 2012. After that, the only element remotely resembling a market driver for projects is the National Renewable Energy Action Plan, drafted in compliance with the EU renewable energy directive, under which Spain commits to 38GW of installed wind capacity by 2020.

Just over 1.5GW of new capacity was installed in 2010, bringing cumulative capacity to 20.7GW (see chart, above), according to national wind body Asociacion Empresarial Eolica (AEE). This is slightly above the 20.2GW government target for 2010 set in 2005. Beyond the figures, wind has firmed up its position as the electricity system's third biggest producer, behind only gas and nuclear. In 2010, wind covered 16.6% of national electricity consumption, according to figures from national grid operator Red Electrica de Espana.

Spain's total and new capacity over the past ten years

New capacity to 2012 is capped by a central register introduced in 2009. This leaves 1.5GW of wind projects to build annually this year and next - way below the industry's full potential. As a result, factories have been shut down and jobs lost. There have been an estimated 10,000 wind sector layoffs since 2009.

Meanwhile, most of Spain's 17 regions, which equate wind power with local economic development, are crying out for new capacity. Last year, calls for proposals licensed or broadly approved a total of 7GW across Aragon, Canaries, Cantabria, Catalonia, Extremadura and Galicia. However, any new capacity after 2012 depends on a new central government call for applications to the register.

Going down

Without either that or a signal on the new pay mechanism, there are no guarantees to convince the bankers and investors who are withholding finance, says AEE. The national wind industry is emigrating, with most capacity from the country's top developer and manufacturer respectively, Iberdrola and Gamesa, going abroad. In the widely consulted renewables market attractiveness index by Ernst & Young, Spain's wind market has dropped from the top three positions held for most of the last decade to eighth. To turn the tide, AEE insists it is necessary to begin negotiations with the government on the new rules for future capacity.

Gamesa installed nearly half of all new turbines in 2010

The architect of recent wind planning is industry minister Miguel Sebastian - a renowned critic of renewables' role in inflating the Spanish electricity system's cumulative deficit, now at EUR25 billion. So far, he has refused to give any indication on the new post-2010 pay scheme. Following retroactive cuts even to existing online wind capacity, the signals are not promising.

In December, Sebastian pushed through a new decree governing the sector to end-2012. It introduces a wind production capacity factor cap that AEE strongly opposes. Capacity factor is the actual output of a wind plant or turbine over a period of time expressed as a percentage of its constant output at nominal capacity over the same period. The decree introduces a cap of 29.57% for all plants. Beyond that figure, a plant stops receiving the production incentive.

The cap "penalises improvements to turbine efficiency", argues AEE. Individual developers complain that retroactive application undermines investor security. But Antonio Hernandez, director general of energy policy at the industry ministry, says the cap will only apply if the average national wind capacity factor in any given year rises above 28.54%, which he claims will allow the sector to make "reasonable profits" while safeguarding consumers.

Despite the disputed capacity factor cap, AEE describes the decree as "a step forward", saying it ends previous fears of sweeping retroactive cuts. The only other cut introduced, which matches an agreement with AEE in July, is a 35% reduction in the EUR38/MWh inflation-linked production incentive paid to wind generation in addition to the price it receives on the wholesale electricity market. The cut is temporary, ending on January 1, 2013, and applicable only to capacity that came online after December 31, 2007, representing roughly 20% of the current 21GW total.

More importantly, the cut is mainly hypothetical as the so-called reference incentive only comes into play if the wholesale market price rises above EUR45/MWh. If it remains below that figure - which has been the case throughout 2010 and is expected stay that way in 2011 - then wind power receives a guaranteed minimum price of EUR74.1/MWh.

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