Spanish wind lobby proposes incentive cut -- Last minute effort at a compromise deal with government on new price structure

With just four weeks to go before a total collapse of the pricing structure for sales of wind power in Spain, the government, beyond making airy promises, remains silent on how it intends to secure the future market. In the vacuum, wind industry lobbyists are fighting hard to influence government thinking. Last month they published detailed proposals for a new price structure, which accepts significant cuts in wind power purchase rates for new plant coming online from January 2008 in return for retaining the safety net of a guaranteed minimum purchase price.

The current structure expires on December 31 for both future and existing wind generation. It was laid down in a 2004 regulation which introduced a production incentive, set at 50% of the average electricity tariff (AET), to supplement the market price of wind power. Since then, however, wholesale electricity prices have soared, driven up by rising gas prices and a shortage of hydro power, with wind prices and wind's AET-based incentive dragged up with them. In 2005, Spain's electricity suppliers, legally prevented from passing cost increases onto customers, built up a deficit of EUR 3.8 billion, with wind contributing EUR 320 million, or 8.4% of that.

With the same pattern continuing into 2006, the Spanish government took action five months ago to put a stop to the "excess profits" that wind power investors were being accused of making. Just before the summer break it passed an emergency electricity sector law unlinking wind's incentive rate from the AET from the start of 2007. At the same time, a guaranteed minimum rate for renewables -- fixed at 80% of the AET -- was axed, removing a safety net in place since 1997 (Windpower Monthly, September 2006). So far the government has made no public statement on what the level of the production incentive might be after December 31.

Racing against the clock, wind industry group Asociación Empresarial Eólica (AEE) and the broader-based renewables group Asociación de Productores de Energías Renovables (APPA) joined forces to present their own proposal for what should happen next. The groups have been instrumental in shaping previous laws and believe their influence will be felt, especially with the replacement of state energy secretary Antonio Segura with the more wind friendly Ignasi Nieto.

AEE's Alberta Ceña says the proposal put forward is a compromise solution which reduces incentive payments when wholesale prices rise, but rejects outright any change to the price structure for all existing and new wind plant connected to the network before 2008. "These are long term investments over twenty years and require long term guarantees. We can only presume the government will respect legal obligations to uphold investment security," says AEE's Ramón Fiestas. More belligerently, one APPA member confides: "It's anti-constitutional to attract mass investment with a long term official promise and then break it." The 2004 law was due to be reviewed in 2006, but any changes were only to be introduced from 2008.

The details

To carry the market through the next year, AEE and APPA say wind's incentive must once again be linked to power price forecasts, as promised in the 2004 law. After 2008, they propose a sliding scale incentive, still indexed to price forecasts, which incrementally falls as sales prices for wind power rise, with the reductions kicking in when market price hits EUR 42.3/MWh. (The average market price for 2006 is running at EUR 50/MWh.) Once market prices go above EUR 92/MWh, AEE and APPA accept that wind's incentive falls to zero. In return, APPA and AEE are insisting on a guaranteed minimum price of EUR 71/MWh, linked to inflation, should market prices drop through the floor.

Retaining wind's full incentive up to a market price of EUR 42.3/MWh will keep wind power purchase prices below EUR 84/MWh, say AEE and APPA. Beyond that, as wholesale prices rise so do payments for wind. But assuming an average annual market price of EUR 55/MWh, the wind lobby says its proposed incentive cap will save consumers EUR 30 million in 2008 and EUR 58 million in 2010, compared with continuing the current price structure. That is a 25% saving says AEE's María García.

Meanwhile, under the 2004 law, wind generators in Spain do not have to sell their output on the wholesale market, but can choose to receive a fixed payment instead, set at EUR 72/MWh for 2006. The lower earnings offered by the fixed tariff option have made it of little interest in past years. Nonetheless, APPA and AEE want it retained and increased to EUR 79/MWh from 2008. The raise is to cover the rising cost of installing wind plant, says APPA's Javier del Pico.

The overall aim of the AEE/APPA proposal is to secure wind power investors an internal rate of return of 8.8%, a 0.3% rise on the target which the 2004 law had in mind. The increase is to keep pace with rising interest rates.

More savings

AEE and APPA point out that wind power's effect on wholesale electricity prices is to push them down, a market impact also registered in Germany and Denmark. As increasing volumes of wind flood onto the system, the clean power replaces fossil fuel generation, with the most expensive generation being the first in the merit order to be pushed off the network. "Increasing amounts of wind produce increasing savings," says Del Pico. Combined, the capped wind incentive and the rising volume of wind on the market will reduce the annual electricity sector deficit by EUR 880-1480 million, say AEE and APPA. "After deducting subsidy costs, that translates to a net saving for the system of EUR 170-745 million."

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