Subsidy cut sees trading surge -- Power sales switch

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Spain's wind power producers are finally switching to new power sales options in a sudden but tardy reaction to the country's revised renewables regulation, passed in March 2004 (Windpower Monthly, May 2004). Around 20% of the country's wind plant output, equivalent to between 1500-2000 MW, will be traded on the wholesale electricity pool market by March, rather than sold using the old style system of subsidised fixed purchase prices, says wind association Plataforma Eólica Empresarial (PEE). Moreover, most of the remaining 6000-7500 MW is expected to be sold using the new fixed tariff alternative.


The country's wind power operators had been sceptical about the potential for better earnings under the new alternatives, both of which were originally planned to rely on a degree of wind forecasting. Just two companies had signed up to trade on the pool by last May and few others joined them in switching for the remainder of 2004. Most had appeared content to rely on the third transition option allowed under the revised regulations, which enables companies to stay with the old regulation until 2007. Under this rule, electricity distributors must pay for all wind production, regardless of demand, at a rate equivalent to the hourly pool price plus an annually adjusted fixed subsidy. While PEE argued companies could gain better returns with the new options, they were reluctant to take the risk. In December, however, the government significantly cut the subsidy used in the transition option, reducing it by 14.28% to just EUR 59.6/MWh for this year. Only the very bottom end of the alternative fixed tariff option, applicable to a minority of plant, pays less.

scheduling costs

Trading on the power pool pays most, suggests PEE, estimating average earnings of EUR 70.1/MWh over 2005. Under this option, a production incentive, set at 50% of the average electricity tariff, is paid on top of the hourly pool price for electricity. In addition, earnings are accrued for wind plant offering complimentary grid services, long since provided by most operators. In trading on the pool, wind must schedule its production alongside conventional power. Extra costs incurred for deviations from the schedule will be the same for excess delivery and shortfalls. This was the prime reason most companies held off. However, with the fixed priced tariff subsidy now cut, the economics are starting to make sense to many. PEE estimates market earnings of 6% more than the best paying alternative -- namely the top end of the fixed tariff option. "With the pool-price variable, there is always some risk. But it would take very freak pool condition for the market earnings to drop below those of other alternatives," says PEE's Alberto Ceña.

Many now agree. Already, developing giant Energía Hidroeléctrica de Navarra (EHN) has switched to pool trading for its entire 900 MW capacity in Spain. Corporación Eólica plans to do the same with 450 MW. Moreover, power pool brokers say they have had a sudden rush of interest. Wind 2 Market, a broker set up by wind corporation Gamesa, says it is negotiating contracts to trade production from 1000 MW, while PEE's lobbying rival, the Asociación de Productores de Energías Renovables (APPA), is also now in the process of setting up a brokerage. Although having previously expressed serious doubts the viability of the market option, it now says it is in negotiations for entry into the pool of 2500 MW of renewables capacity, most of which is expected to be wind.

Nevertheless, still wary of the complexities of market trading and the risks involved, most operators are opting for the alternative guaranteed feed-in tariff, offering earnings at EUR 58-66/MWh over 2005. "In many cases banks see the fixed tariff as the safest bet and are making this option a condition for finance, at least for this year," says Ceña. In addition to the subsidy reduction in the old system, a main reason for the sudden mass attraction to this option follows a government ruling in December to postpone its requirement to schedule hourly production 32 hours ahead of delivery under the fixed tariff option. The requirement had been due to kick in on January 1, 2005 but has now been put back a year.

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