Guarded welcome to new support system -- Legislative proposals shape future Spanish market

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New legislation proposed by the Spanish government aimed at reducing uncertainty on future wind power prices has been initially welcomed by the country's wind sector, though with some reservations. State energy secretary Jose Folgado has chosen to retain, but significantly amend, Spain's two wind power subsidy models: a single fixed price payment and a premium payment that tops up market price. Wind power plant operators can select which model they want to be paid under -- and switch between them once a year.

While the bill containing the proposed amendments still has to run through the national electricity regulator, Comisión Nacional de Energía, for comment, Folgado expects the law come into force in February, over a year past deadline. Both support models include financial incentives that encourage wind generators to choose turbine technology that can provide the grid with reactive power and ride through grid faults.

With high prices for electricity in recent years, the premium option, coupled to a market payment based on the average wholesale electricity price, has been the most popular. Folgado is now proposing to do away with the average wholesale price payment and instead invite renewables operators to schedule and trade production in the daily electricity pool under the same conditions as conventional generation.

Under this model, the pool price achieved by operators will be supplemented by a premium payment. Annually adjusted, the premium will equal 40% of the entire electricity sector's average kilowatt-hour billings -- referred to as the average electricity tariff (AET) -- estimated for the year ahead.

Changes are also proposed for the fixed price model. Until now the level of the fixed payment has been set annually within a boundary of 80-90% of the AET. Payments have tended towards the top of the boundary -- and have been at 90% since January, 1999. But with reviews every four years, investors have feared the rate could be reduced to the 80% level at a stroke of the minister's pen.

In recognition of the lack of investor confidence, Folgado is proposing that payment under the fixed price model be 90% of the average tariff for the first five years of plant operation, falling to 85% for the following ten years and dropping to 80% for the remainder of the plant's working life. He retains the obligation on utilities to buy all wind power offered for sale under the fixed price option.

The proposal to peg wind payments to the AET at fixed percentages "seems to provide the long term economic certainty and stability that we have been demanding in order to encourage investment," says Ramón Fiestas of wind lobby group Plataforma Eólica Empresarial, representing 85% of Spain's wind sector. "However, we are still waiting to see the document and study all the figures involved."

Market risk

The market option has met with a cooler response. "We would need to schedule production accurately 24 hours ahead, but wind forecasting techniques are still in their infancy and it's difficult to see how this could be viable," says a source at Iberdrola, Spain's biggest wind operator. "Furthermore, we still don't know the proposed margin of scheduling-error wind operators will be allowed before penalties are applied [for not meeting schedules]."

The overall costs of entering the electricity pool remain to be assessed, adds Fiestas. "We don't know if we are being asked to support grid faults over a period of seconds or milliseconds: there's a huge difference. We need to study the full document before we can come to any clear conclusions."

Although cautious, Fiestas welcomes a voluntary option that enables wind to prove its worth on the real market: "If the market option proves more profitable, rest assured that Spanish developers will go for it." Fiestas also sees a possible future for wind operators aggregating production management. If one operator falls below production schedule and another exceeds it, each will be penalised if scheduling is managed separately. "But by aggregating scheduling, the imbalances will smooth out," says Fiestas.

In weighing up the premium option against the fixed price option, the Iberdrola source comments: "The market option might be more favourable further down the road, as wind's targeted earnings fall to 85% and then to 80%," he says. "But even with improved forecasting, operators would have to play the pool market like the stock exchange, buying and selling power to offset losses from scheduling imbalances," says Javier Sanz of the Centro Nacional de Energías Renovables. "There could be a niche for brokers here," he adds.

The initial response from the Asociación de Productores de Energías Renovables praises the stability offered by the fixed tariff proposal. But APPA is peeved that Spain's existing premium option based on an AET reference payment will disappear. Nearly all Spain's wind production has been paid under this system for the past five years. The association asks why a system that has made Spain the world's second largest wind producer should be changed when a little "fine-tuning to the existing model" would have done the trick.

There is still some time for debate, though given the year long delay in drawing up the new model, Folgado is unlikely to welcome major modifications.

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