Reduced profits and grid limits cap growth -- Spanish market past its peak

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Spain installed 1587 MW of new wind capacity in 2006, up just 4% on the market's performance in 2005 when 1524 MW went online and a long way off 2004's record 2361 MW (graph). The national wind association, Asociación Empresarial Eólica (AEE), fears the market slow down will continue. At best, AEE anticipates a levelling off at around 1550 MW a year, leaving Spain 2000 MW short of the government's 20 GW target for 2010. Total operating wind capacity for end-2006 was only just over half that target, at 11,615 MW.

The reasons for the slow down are twofold: a shortage of transmission capacity slowing connection of new wind stations and the recent market uncertainty after the government's announced intention to slash payments for wind production by more than half (Windpower Monthly, January 2007). The government says an internal rate of return on investments in wind projects of 7% -- a drop of 10% on today's rates -- is adequate for keeping the market afloat.

According to AEE, however, such a relatively low return will spur a mass exodus of Spain's wind industry, which will head for richer pickings in foreign markets. Already, most of Spain's top seven developers, behind nearly 80% of the country's operating wind power capacity, have extensive development plans across the boom markets of China, America, other growth markets in Europe, and in Latin America. The country's two largest wind turbine manufacturers have also prepared for a Spanish slow down: Gamesa has opened factories in China and the US and Acciona is making turbines in China.

The tighter pricing structure for wind power in Spain was announced in November. It had been due to go into force from January 1, applicable to both existing wind plant and future developments, but the wind industry won a stay of execution. Since then, national electricity regulator Comisión Nacional de Energía (CNE) has waded in on wind's behalf, saying that any cut in incentive payments cannot be applied to wind plant already online, arguing that these were developed and financed on the basis of the higher rates. Surprisingly, state energy secretary Ignasi Nieto is firmly disagreeing with CNE, saying the reduced pay rates will come into force shortly. CNE, however, advocates a breathing space and says the date of implementation should be January 1, 2008.

The government's re-think on the wind market comes only three years after introduction of the current structure in 2004. Wind operators had been expecting to trade their power at wholesale market rates for the entire life of their plant and receive a production incentive fixed at 50% of average electricity sector billings. But rising fossil fuel prices and hydro power shortages have driven up wholesale market prices, resulting not only in unexpected profits for wind operators but also a massive national deficit for the electricity sector. By law it cannot pass on the rising costs to consumers. Payments to wind power make up more than 8% of that deficit (Windpower Monthly, December 2006).


Under the government's new proposal, the rate paid for wind power, including the reduced production incentive, must not exceed EUR 84.7/MWh, even if wholesale prices rise above that level. According to Nieto, wind power purchase rates reached EUR 93/MWh over 2006, providing owners with "no risk returns of 15%" on their investments, up from EUR 67/MWh in 2001, when returns were 7% and "developers were still fighting to build wind farms." The new proposal also adds a safety net: a minimum payment for wind is set at EUR 67.7/MWh.

AEE says the proposed rates are not profitable for wind generation trading on the wholesale market. Wind generators, it adds, will choose to abandon all efforts to join the mainstream power industry and revert to operating outside the market, accepting an alternative premium payment fixed by government under the 2004 law, which is still on offer. "That would be a big step back for a sector leading the way in Europe as an electricity main player with high levels of penetration and extensive grid integration measures," says AEE's Alberto Ceña. The boss of Spain's dominant wind plant owner, Ignacio Galán, says he is prepared to fight the government's about turn on its 2004 wind law in the courts.

Last year, wind generation in Spain met 9% of electricity demand. In a demonstration of just how much fossil fuel can be saved, on December 8 wind power was the biggest single contributor to the Spanish power mix, with over 8100 MW of wind generation meeting 32% of spot demand.

Development of more wind plant in Spain, however, is being hampered by "local grid saturation," says Ceña. Galicia, Spain's top wind region (map), has little available grid capacity left and a new regional government elected in 2005 "still has no clear plans for future lines," says Iñigo Muniozgurren of regional wind association Ega. Worse, the elections kept back the annual 200 MW quota of new development permits for two years running. "There's still no signal of how much will be issued this year," says Muniozgurren.

Way to the east, landlocked but windy Aragón finally reached 1500 MW in 2006 -- the volume targeted for 2002 in its regional grid improvement plan. In Catalonia, 3000 MW of projects lined up with initial approval since 2002 are still negotiating connections. Extremadura, a virgin wind power region in the southwest, still needs to process the project proposals received in response to its request last year, as well as carry out lengthy reinforcements of its shaky power lines.

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On the bright side, the regions of Castile-La Mancha, Castile and León and Valencia each installed around 300 MW of new capacity in 2006 (map) and the huge southern region of Andalucía aims to start building 700 MW this year, thanks to systematic grid planning.

Valencia's take-off comes after the government made financing of new power lines a requirement of development concessions, five of which have been granted to project developers for a combined 2300 MW after a public tender process. The winning developers have now put most of the needed wires and substations in place.

Similar grid planning in Andalucia "will finally bring capacity up and building to 3000 MW by the end of 2008," promises Mariano Barroso of regional wind association Aprean, a big increase on the 600 MW installed today in what was once Spain's leading wind region. Completion of new lines "is progressing fast and ground moving work is already underway on projects in La Janda and Huéneja," says Barroso.

Confidence in the four strong regions is underlined by new manufacturing facilities in each. Vestas of Denmark and Spanish newcomer MTorres both opened facilities in Castile and León last year and Vestas is to build a blade factory in Castile-La Mancha. Acciona Wind Power's new turbine facility in Valencia is working at full speed to feed 1.5 MW machines to the group's 800 MW development concession. The company also completed its hub and bearing facility in Castile-La Mancha last year. Andalucía's first wind turbine manufacturing plant, belonging to newcomer Eozen (Windpower Monthly, July 2006), is almost complete. Eozen says production of its 1.5 MW direct drive machine under licence from Germany's Vensys will start this month.


Spain's all dominant turbine supplier, home-grown Gamesa Eólica, lost some of its hold on the market last year, with its slice of the pie dropping to just below 50% (chart), though it still retains 61% of cumulative capacity. Gamesa's increased focus on China and the US has allowed both Vestas and Acciona a larger Spanish market share.

Spain's Navantia, making turbines under licence for Siemens' wind power business, also stepped up production for a backlog of projects in Galicia, still its only region of influence. Reports are that Siemens is vying between Andalucía and Canada for its next facility. The company declines to comment.

Spain's independent turbine maker, Ecotècnia, is still holding on to its 8% of the market, but GE Energy was nowhere to be seen last year. Its slice of the market to date is smaller than Ecotècnia's share.

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