Bruised but victorious wind lobby in Spain -- Lower but acceptable new purchase prices with a dose of uncertainty added

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The Spanish wind power market is secure once again. In late May, the government finally passed reforms governing the future purchase price for electricity from wind plant. To the relief of the wind industry, the document is far removed from the first draft of November 2006, which cut purchase price subsidies by more than half with immediate effect. For all wind plant online by the end of this year, incentives will remain at the original rate until the end of 2012. "But for new developments and for existing plant after 2012, the economics are going to be tighter," says Ramón Fiestas of national wind association Asociación Empresarial Eólica (AEE).

"Still, we've boxed all twelve rounds and finished with something approaching our demands, even if we've taken some serious blows." The November draft had sparked warnings of a mass exodus of the Spanish industry to foreign markets. That will now not happen, believes Fiestas, claiming a wind sector victory despite the bruises.

Under the new regulation, the wind power production incentive drops to EUR 29.29/MWh from January 1, 2008, for all new wind plant. The old rate of EUR 38/MWh is applicable until 2013 for existing plant and those commissioned this year. The new rate, while a big reduction, is a big improvement on the EUR 17.4/MWh offered in November's draft. The new rate will be reviewed in 2009 for new plant commissioned from the beginning of 2010.

Although the incentive is slightly less than the EUR 30/MWh promised in a March gentleman's agreement between AEE and state energy secretary Ignasi Nieto, that is not the wind lobby's major concern. What worries it more is the government's refusal to set it in stone. In March, Nieto had promised to link the subsidy to the annual inflation rate minus 0.25%. Now the percentage to be subtracted from the inflation rate is provisional and can be changed at any time. Potentially, that gives the government carte blanche to subtract any figure it likes.


"It injects a certain amount of uncertainty for an industry requiring long term visibility for investments over a 20-year period," says Fiestas. "Unlike the November draft, the new regulation offers conditions for continued development, though investors and banks will now keep a keener eye on the signals relevant to political commitment than they had to under the 2004 rules."

Under the old regulation, the EUR 38/MWh incentive had been promised for the entire working life of all wind plant online before January 1, 2008. Soaring fossil fuel prices over 2005 and 2006, however, hiked the wholesale market price of electricity -- on which wind power purchase prices are based -- to over EUR 55/MWh, way above the EUR 36/MWh predicted by policy makers in 2004. As a result, the average price being paid for wind power (sales price and incentive) rose to EUR 87.6/MWh, way above the EUR 72/kWh targeted. Government alarm over excess payments spurred the reforms now in force, ending the so-called lifetime guarantee -- even though the wholesale market price over 2007 has slumped to a five year low at EUR 33/MWh.

It all depends

With over 8.5 GW of development to go before Spain hits its 21 GW wind target for 2010, the pace of market growth will be heavily influenced by the evolution of wholesale electricity prices. "The upward price trend will probably continue, especially as the market is set to internalise CO2 costs in coming months, predictably at EUR 20/tonne," according to Fiestas. If the market price is high, wind sites with lower wind resources will be developed. If not, only the remaining sites with higher resources will go ahead.

To some degree, wind operators are protected from lower wholesale electricity prices. The new regulation marks a guaranteed minimum total price for wind power, regardless of how low the wholesale market price falls. That price is set at EUR 71.12/MWh, below the EUR 73/MWh Nieto promised in March but still way above the EUR 67.7/MWh set in the November draft.

Safety net

In the worse case scenario of touching the floor price on the wholesale market, operators still have the option of avoiding the benefits and downsides of market risk by switching to a fixed guaranteed power purchase rate. Operators can switch back and forth between playing the market or going for low-risk, standard offer contracts from year to year. Currently, the benefits of playing the market mean that few accept the fixed rate: EUR 73.22/MWh, index-linked to inflation.

"That offers a safety net for investors and banks," says Fiestas. The safety net has a weak spot, however, in that the government can choose to tamper with the index, so even fixed purchase prices depend on political goodwill. "Fingers crossed," says Fiestas.

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