It sounds like a Spanish James Bond movie but for most of us, tomorrow often comes too soon. Unfortunately, in today’s power industry time is a commodity there is seldom enough of. It certainly makes analysing and preparing for the future a difficult task – especially in an evolving market.
Of all the countries in Europe, Spain is probably one of the most difficult to analyse. And no doubt, with all the changes taking place, generators must feel as if they are being rushed towards an uncertain future. In a Spanish newspaper, Rafael Miranda chief executive officer of Endesa Group said: “A rash replacement in Spain of coal with combined cycles, to reduce power plants emissions according to Kyoto, could create serious problems in Spain concerning both kWh price stability and risks of power shortage.”
This is a valid point since it was only in 2002 that the country experienced a power shortage which led to a series of price spikes. As a result, a large construction programme (some 26 000 MW) of combined cycle power plants is underway to address the short-term capacity problems. For example, in March, Endesa announced plans to invest $4.55 billion to boost installed generating capacity in Spain by a quarter between 2004 and 2008. The company said that it would construct 5847 MW of new capacity over the four-year period.
The fundamentals of growing electricity demand and average power prices will no doubt drive investment in Spain for the foreseeable future. What does remain unknown, however, is the impact of the common Iberian Electricity market (Mibel) and the National Allocation Plan (NAP) for CO2 emissions on the type of plant over the medium to long term.
The introduction of Mibel (the cross-border electricity trading market for Spain and Portugal) was originally planned to start on April 20, 2004 but is now scheduled for July 2004. According to reports, legislation was not approved in time and the Portuguese energy market will also not be fully open until July.
A key issue, with regard to the impact of Mibel, is the current fuel mix in both countries. In Spain, coal accounts for about 42 per of electricity generation. Combined with oil and gas, installed thermal capacity represented about 52 per cent of generation in 2002; hydro 25 per cent; nuclear 15 per cent and other renewables (mainly wind) about 8 per cent.
In Portugal, hydropower accounted for about 31.4 per cent of electricity generation in 2001. During the 1990s, installed capacity for both hydropower and thermal (coal, oil and gas) grew 36 per cent and 47 per cent, respectively. While installed capacity of oil reduced during the period, the use of natural gas increased. Although gas did not become a major fuel source for power generation until 1998, its share had already grown to more than 10 per cent of total installed capacity by 2000.
NordPool is the only other cross-border electricity exchange we can draw experience from. Here we have seen some of the lowest prices in Europe, with power prices being influenced by cheap hydropower predominantly from Sweden. This led to a situation where coal plant in Finland laid idle. Mibel will, however, be operating under different weather and therefore different peak demand scenarios. Also, the dominance of hydro in the market will not be as great as in the NordPool market.
Although not a cross-border system, the UK electricity trading system could also provide an indicator as to how the market might pan-out. The UK also saw a fall in electricity wholesale prices which again put pressure on old coal fired plant.
If the introduction of Mibel has a similar impact we might see power prices being dictated by Portugal and pressure being put on the Spanish generators. EDP, the Portuguese national generator, also has the advantage of having few competitors in its home market. Another point which has to be considered, however, is the fact that Portugal has fairly high power prices and its market is relatively small compared to Spain. Therefore most of the power, at least in the short-term, will come from Spanish generators.
The impact of NAPs on generator strategy and future investment is unknown, except to say that coal and oil will come under further pressure. Spain introduced a ten-year energy policy in 2002 aimed at increasing the share of renewables and gas. But now the country has a new government which is developing an energy policy with the EU emissions trading scheme in mind.
It’s a confused picture and no wonder there is hot debate. With a number of changes all taking place at the same time, the only conclusion I can draw is that the plot thickens: much like a good Bond movie.