The new Iberian energy market will offer Spanish utilities a chance to expand into Portugal, while the differences in generation mix between the two countries will offer interesting opportunities for power management.
The year 2003 was described as ‘tense’ for Spain’s energy sector. A year after the gas and electricity markets were fully deregulated, energy companies contiued their strategic repositioning for the coming years. The shareholding of REE, Spain’s grid controlling body, changed hands, while electricity utilities invested in Enagás. Naturcorp’s choice of HidroCantábrico as a partner surprised observers who had seen Iberdrola as the likely winning candidate. But the most visible struggle was the hostile takeover bid launched by Gas Natural for Iberdrola – an attempt ultimately vetoed by the National Energy Commission.
The turbulence in the market reflects not only the results of the previous year’s deregulation, but also preparation for two major changes in 2004: creation of a single electricity market for Spain and Portugal, known as MIBEL (Iberian Electricity Market); and the definition of a National Allocation Plan (NAP) for carbon dioxide (CO2) emissions, required from all European Union member states as a major plank of the EU’s Emissions Trading Scheme.
Behind the manouvering, Spain’s strategic aims for its energy industry have not changed. In September 2002 the government approved a national energy plan for the decade to 2012 that would see major changes in its generation mix. The strategy aims to meet an energy demand growing around 2.4 per cent faster than the EU average – a demand growth of 3.5 per cent, based on annual GDP growth forecasts of three per cent – and at the same time meeting Spain’s environmental goals. At present, oil and gas provide around half of Spain’s firm capacity. That proportion is set to decrease, while natural gas will become the second most consumed source of energy.
Spain has committed to increase its renewable energy to provide 12 per cent of generation by 2012 and that means renewable energies will become Spain’s third most important energy source. The 2002-2012 national energy plan sees a minimum investment of g26 500 million in gas and electricity generation and distribution over the ten year period.
The agreement to set up a single electricity market in the Iberian peninsula was signed in a January ceremony by Portuguese Prime Minister Jose Manuel Durao Barroso and then-Spanish Prime Minister Jose Maria Aznar. With over 28 million domestic and commercial customers, MIBEL will be the fourth largest electricity market in Europe, behind Germany, France and the UK, and will be larger than NordPool, the only other cross-border market.
The market was first mooted two years ago but the project was held up while both sides wrangled over the terms of the liberalization. The new market is due to begin operation on 20 April but it will be limited in the short-term by a lack of high voltage power lines linking Spain and Portugal and by the fact that some details of market operation have still to be worked out. The market should become fully operational by 2006 when the cross-border transmission capacity between the two nations is expected to have been doubled. The two countries are also working to establish a single gas market ‘in the medium term’.
The six major players within the market – Endesa, Iberdrola, EdP-Hidrocantábrico, Union Fenosa, Italy’s Enel Viesgo, and Gaz Natural – have all expressed their support for the market. The open market is likely to have the greatest effect in Portugal, where the former state monopoly EDP currently has a virtual monopoly on the sale and distribution of electricity, despite strategic investment by the major Spanish players. Only large industrial customers can choose their providers, and prices are 10-20 per cent higher than those in Spain.
The effect of the MIBEL market and other factors on Spanish electricity prices has been examined by UK-based ILEX Consulting in a report published at the end of December 2003 and updated this year. The ILEX report projects wholesale prices in Spain to 2025, considering parameters that will influence the electricity price such as demand growth, environmental factors, level and mix of capacity on the system, fuel prices, cost of new entry, regulation issues and market power.
ILEX notes that the single market has still many hurdles to overcome and the next four years are likely to lead to important revisions in the way both markets are structured. The government and the regulators are looking for ways to make the market more competitive. Players in both markets have also been addressing issues to ensure that the conditions for doing business will be identical in both countries. An ILEX spokesperson said the company saw very little variation in price for Spanish customers as a result of the market opening. “There are already a lot of trades across the border and market power of the main companies is strong. For Spanish companies the Portuguese customers will be an add-on to their existing business.” However, she noted that since Portugal was heavily hydro-based, while Spain’s portfolio is more mixed, “There will be an effect in extreme dry or wet years.”
The short term impact is that prices will increase in 2004 and stay high until 2006. They will begin to stabilise again after around 2012, at the end of the government’s current plan, and ILEX anticipates that new capacity will be built then. “My personal guess is that things probably won’t change much until 2010-2012,” the ILEX spokesperson said. “At the moment generators are covered by the CTC mechanism by which they can get payments to cover some stranded costs. This is depressing the Spanish pool price and that makes new entry very difficult.” The stranded cost compensation will be paid to existing generators during a transitional period, until 2010. “Then we will see new entries and also prices will start to go up.”
In the long term Spain will rely heavily on gas. Some plants are in planning and will begin to be implemented in 2005-2006, although most of the new capacity will come on stream after 2012. “There is enough gas for new entries at the moment and we are not forecasting major changes”, the spokesperson said. Spain has a pipeline bringing gas from west Africa, where there are extensive reserves, and is expanding its liquid natural gas (LNG) terminals.
The Strategic Plan set several objectives to contribute to achieving the target of covering 12 per cent of energy demand with renewable energies in 2010, a target that derives from the EU’s White Paper on renewable energies. In Spain, renewable energy is not only seen as an environmental objective from a strategic point of view, but also seen as necessary as Spain depends at present on foreign resources for 74 per cent of its energy needs, compared to an average of 52 per cent for the rest of the EU.
Renewables will go from supplying 5.6 per cent of Spain’s electricity needs at the moment – mainly from large hydro stations – to 12 per cent in 2012. The Spanish government anticipates investments of G12 billion to increase the installed capacity by 14 800 MW. Spain’s so-called special regime offers a guaranteed tariff for renewables. Most of the new investment will be in wind farms, where Spain has already established itself as a major player. Its 2003 installation of 1377 MW was the second highest in the EU, behind Germany. However, there are also plans for small hydro, biomass and cogeneration, and a solar energy programme.
The effect of CO2 trading on the Spanish market is still being examined
The opening of the Iberian energy market will be positive for Spain’s wind industry, as Portugal’s flexible hydro capacity, added to Spain’s existing hydro storage, should help balance the intermittent generation from wind. Viability studies are also being carried out on the installation of offshore wind farms. The company Energía Hidroeléctrica de Navarra (EHN) plans to construct a 2500 ha wind farm off the coast of the province of Cadiz, in the Strait of Gibraltar.
At this stage it is hard to assess the likely effect of the EU’s emissions trading scheme on the Spanish market. Last year opinion was said to be deeply divided on whether the cost of limiting CO2 emissions could be borne without putting job creation and, indeed, the companies in the industry at risk. It seems certain that the scheme will hasten the phaseout of Spain’s large coal and diesel generating capacity, but the country is still feeling the effects of large-scale reduction in its coal industry over the last decade and some support payments are still being made as the industry reconfigures.
Discussion and completion of the Spanish NAP that will, among other strategic settings, set the amount of CO2 emissions for each plant has been delayed. Until the effect of carbon trading on the Spanish market is fully debated amongst industry figures and the NAP set out, its effect on the market will remain unquantified.