Government change of heart brings relief in Spain -- For smaller reduction in purchase price subsidy and cap on profits removed

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In a second about turn on Spain's wind power pricing structure, the government looks set to scrap its proposals to more than halve the current purchase price subsidies and place an arbitrary cap on profits. The news comes just days before the revised pricing system, laid out in a draft regulation in November, was to come into force on March 31. Nothing is official yet, said the Spanish wind industry group, Asociación Empresarial Eólica (AEE), late last month, but state energy secretary Ignasio Nieto is reportedly drafting a new regulation for publication in early April. It will contain wind power purchase subsidies "approaching those we demanded," says AEE's Ramón Fiestas.

Nieto's climb down comes after months of pressure from the wind lobby and damning condemnation of the government's intentions by the Comisión Nacional de la Energía (CNE), the electricity regulator. CNE slammed the hardest hitting aspects of the government's proposed reforms as a "disproportionate" response to the rapidly rising profits of wind plant owners in Spain. Rising wholesale electricity prices have had the spin-off effect of pushing up prices paid for wind power, though the cost of running wind stations does not go up hand-in-hand with the cost of buying fossil fuel.

"The regulator's report was undoubtedly the catalyst to the change in Nieto's position," says Fiestas, although it was not until a late March meeting with the energy secretary that AEE felt secure of a turn around. "Finally, we began to see eye-to-eye and we are confident this will be reflected in the final government's document," says Fiestas.

In November the government had announced that wind's purchase price subsidy would drop from EUR 35/MWh to EUR 17.4/MWh for the first five years of operation, dropping to EUR 10.5/MWh for the following ten years and to EUR 5.5/MWh after that. At the same time, the total price for wind power was to be capped at EUR 84.7/MWh, even if wholesale electricity prices rose above that level. The new rules were to apply to existing wind plant from 2010 and to all future wind power generation as soon as the regulation was passed. AEE won an extension to March 31.

Breathing space

For the wind industry, greatest relief comes from Nieto's decision to maintain existing price subsidies until January 2012 for all wind plant online by January 2008, a two year extension on the previously planned transition. By doing so he partially stays in compliance with the 2004 law that forms the foundation of the Spanish wind market. While the law allowed for a review of prices in 2006, rates for existing wind plant were to remain unchanged; for future developments, price revisions were not to take force before 2008. The wind lobby has been threatening to take the government to court for breach of its own law.

Last month, CNE said amending the rules and rates was not illegal and the increased profits for wind plant owners in 2005-2006 justified some change. But it viewed Nieto's proposed rates as too severe, the transition period to the new rates too short, and their retroactive application to plant already online as plain unfair.

Under the 2004 law, wind power is paid the going price for electricity on the wholesale market, plus a price subsidy set at 50% of the Average Electricity Tariff, an annually adjusted forecast of average electricity sector billings. Soaring fossil fuel prices over 2005 and 2006 hiked the wholesale price to over EUR 55 MWh, way above the EUR 36 targeted in the 2004 regulation, pushing average prices paid for wind power to EUR 87.5 MWh in 2005 and EUR 87.6 MWh in 2006, according to CNE, considerably higher than the EUR 72/MWh forecast in the 2004 law. The prices are after deducting "imbalance" penalties for deviations from scheduled generation.

Reduced incentive

In light of the higher wholesale price, an adjustment to wind's production incentive is called for, says CNE. Wind's purchase price subsidies cost the system EUR 922 million last year, contributing to an electricity sector deficit running at EUR 3 billion. The regulator's recommendation is for the subsidy to remain unchanged until 2012 for existing wind plant and those coming online this year. That will be accepted by Nieto, says AEE.

"It's a step in the right direction but we will withhold our official opinion until we receive the new draft reforms," says Fiestas, who declines to reveal further details of Nieto's new proposal. But he comments that the high wholesale prices in the past two years are a "freak trend" and no basis for forecasting future prices.

Looser tongues say the purchase price subsidy is to be cut by EUR 5/MWh to EUR 30/MWh, linked to inflation. That rate will apply for 20 years and be applicable from 2008 for all new plant coming on line and from 2012 for existing plant and those built this year.

AEE says Nieto is ready to remove the limitation on wind power profits introduced in November when the maximum payment for wind was capped at EUR 84.7/MWh, no matter how high wholesale prices go. The industry dubbed it the "negative incentive." But Nieto is not prepared to pay the full production incentive if it contributes to driving up payments for wind above the cap, to be raised to EUR 87/MWh, says AEE. This means the rumoured EUR 30 MWh price subsidy will diminish incrementally if and when the wholesale price reaches EUR 57/MWh. The incentive will reach zero at a wholesale price of EUR 87/MWh, a cap linked to inflation.

AEE welcomes the decision to allow wind to benefit from rising wholesale prices. It has long argued that singling out wind as the only technology not to receive the going market price for electricity was a sure sign of Nieto's search for a scapegoat for the rising deficit in Spain's electricity account. Like wind, neither nuclear nor hydro suffer rising fuel costs, points out AEE, yet nobody suggests capping their profits. The deficit exists because hikes in the cost of producing electricity may not be passed on to consumers in Spain under current law.

Safety nets

A minimum wind power purchase price reportedly remains in place and has been raised by Nieto from the EUR 67/MWh first proposed to EUR 73/MWh, which is EUR 2 above the figures suggested by AEE. Wind plant operators can also still choose to accept a fixed price payment for their production instead of selling the output on the wholesale market and receiving the price subsidy. According to AEE, that fixed rate will be raised from the EUR 73.1/ MWh proposed in November to somewhere between EUR 75-78/MWh. AEE had asked for EUR 79/MWh. The 2006 rate was EUR 72/kWh.

All now depends on whether Nieto keeps his word to AEE. "As his promise stands, the Spanish wind sector is saved from total doom, though the EUR 5 drop in the incentive is worrying. With increasing installed capacity and capital costs, we needed it to go up, not down," says one industry member. Fiestas limits the official statement to: "We will continue pushing to negotiate improved conditions in the new draft."

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