For much of 2010, Spain's renewable energy providers have been on tenterhooks. Uncertainty has been hovering over the sector since the spring as the government hemmed and hawed about passing a new wave of belt-tightening regulations that would have a big impact on the providers' balance sheets.
Now, the suspense appears to be over. In July, the Industry Ministry and the wind power sector reached an agreement for a 35% reduction in subsidies for wind power generators until January 1, 2013, which was reconfirmed in early December amid reports that the government might have suspended the agreed reduction. And shortly before that in November, the cabinet announced tariff reductions for the solar photovoltaic (PV) sector. But experts say that the months of uncertainty created a regulatory vacuum that deflated investor interest in what was previously one of Spain's most dynamic sectors.
“Not knowing what is going to happen, but knowing something is going to happen, has been the worst part of this,” says a Spanish lawyer who advises clients in the renewable sector. “It's like I know that someone is going to punch me, but I don't know where, so I can't defend myself. If you don't know what's going to happen, you can't make a business plan. And without a business plan, no bank will lend you money.”
The stall tactic is one way that the national government in Madrid sough to deter new renewables installations — after years of offering subsidies to help the young sector get up and running, it created an alarmingly high electricity-tariff deficit, which has now sent officials scrambling to rectify. At around US$26 billion, the deficit has been mushrooming ever since the government set tariffs allowing consumers to pay less for their electricity than what it cost the utilities to generate and distribute it. The utilities – notably Endesa, Iberdrola and Gas Natural – agreed to hold the shortfall on their balance sheets under the condition that the government would reimburse them eventually, in part by issuing bonds.
"The most important and negative aspect of the current scenario is the distrust generated by the many months the government is taking to produce a new legal framework," says Carlos García Suárez, an associate professor at the IE Business School in Madrid and an expert in renewable energy. "There has been rumor after rumor and draft after draft of new decrees."
Until now, the tariff system has been a boon for renewable energy in the country. To spur the sector's development since 2001, the government created above-market prices for wind, solar and other renewables. For instance, Spain's PV solar plants, which directly convert sunlight into electricity, have been charging nearly 10 times the wholesale price. But now, because the cost of producing renewable energy is now much less than before, the government wants to lower the inflated prices.
Before the global financial crisis, the government securitized the tariff deficit in auctions to institutional investors. Since then, however, it has had to guarantee the securities with a state-run fund, involving a global road show seeking investors in Europe and in the U.S. that started mid-September. Such bonds usually sell without a problem – even in early December, amid market worries of a possible European Union bailout for Spain, the treasury sold US$3.3 billion of notes due to increasing yields. Spain sold the securities due in October 2013 at an average yield of 3.717%, compared with 2.527% in the previous sale in October.
Madridhas said it wants to issue between US$2.6 billion and US$4 billion this year to reduce the tariff deficit. Luigi Ferraris, chief executive of Italy's Enel, which owns Endesa and more than half of the deficit, told reporters recently that Enel expects to receive around US$1.3 billion by the end of 2010.
Spain's Green Boom
Five years ago, the country had one of the fastest-growing levels of installed wind and solar power in the world. The White House even cited Spain as an example of how to promote clean energies. But the growth of the industry has been unwieldy. Aiming to cash in on the inflated prices, entrepreneurs flocked to the green energy businesses. When the sector installed more capacity than the government expected, the tariff deficit soared. The five-year PV capacity cap set by the government in 2005 of 371 megawatts (MW) was already exceeded by late 2007.
Bolstered by government incentives, renewable energy in terms of GDP grew 55% between 2005 and 2009. During this time, the country managed to cut 84 million metric tons of CO2 emissions, according to Spain's Association of Renewable Energy Producers, the APPA. In 2008 alone, alternative energies saved Spain the equivalent of spending US$3.7 billion on fossil fuels.
Driving the green push is a European Union directive requiring that 20% of total gross energy consumption among member countries to come from renewable energies by 2020. Spain's objective for 2020 is also 20%, although at around 9% today, it's an ambitious target. Hitting it would not only improve the environment, but also make Spain less energy-dependent on foreign resources. The government says nearly 80% of Spain's power originates from abroad. Only Ireland, Italy and Portugal have higher dependency rates in the EU.
But the long-term quest to develop a mature renewable energy sector has been overshadowed by the country's political and economic turmoil. The increasingly unpopular government passed a difficult austerity budget in September following the worst economic crisis in two decades, while facing a 20% unemployment rate and 10% budget deficit. Government spending is poised for machete-like cuts.
In 2009, renewables accounted for 25% of all electricity produced in Spain and 12% of gross consumption, according to a draft of the government's 2011-2020 Renewable Energy Action Plan. Over the past decade, while the proportion of nuclear power, coal and oil in overall energy consumption has diminished, natural gas-based energy has risen from 9% of the total to around 37%. Renewable energies have increased from 15% to 25% — wind producing 12.4% and PV solar 2%, with the rest from sources such as hydropower thermal solar energy and biomass.
Dominating the renewable sector, wind is worth US$3.8 billion and had been expected to double in capacity by 2015 before the downturn. In 2009, installed power capacity grew 14% to 2,459 MW and by the end of 2009, Spain was the fourth-largest producer of wind power, behind Germany, China and the U.S. It produces 12% of the world's total wind power and has more installed capacity, around 19,000 MW, than France, Italy, Britain, Japan and Canada combined.
Wind power in Spain took a hit in 2010 due to the previous year's new registration process, which wind farms must adhere to before being able to turn on their turbines. According to the AEE, the additional bureaucracy sparked seven months of delays for several wind farms that were ready to go online but had to wait for paperwork to be processed. As a result, new wind power production in the first half of the year was 727 MW.
Nevertheless, experts agree that, even with price cuts, wind power will grow, albeit slightly slower than in previous years. Spanish companies Iberdrola Renovables and Acciona are the top two wind producers, with 10,350 MW and 6,230 MW installed at the end of 2009, respectively.
The Sun Goes Down
In the solar sector, five of the 10 largest PV plants in the world are in Spain. In Zaragoza, General Motors has covered its factory roof with 183,000 square meters of PV panels, which are connected to the local grid. Cutting 6,700 metric tons of CO2 emissions each year, the project is the world's biggest rooftop solar plant. According to Spain's PV industry association, which comprises 487 firms, the largest PV companies in the country include 9Ren España, Acciona Solar, Sharp, Atersa, Prosolia as well as California-based Sunpower.
Talks about new 2011 premium levels between the sector and the Industry Ministry dragged on for months, until mid-November. Decreases include 45% for ground facilities, 25% for medium-sized rooftop panels and 5% for small rooftop panels. The government estimates that the reform will save around US$800 million between 2011 and 2013.
But the new PV regulation is not good, says the IE's García. “It lowers the tariffs, in reasonable terms for small installations, but it put the feed-in tariffs for utility-scale PV at around 150 euros per megawatt/hour (MWh), a level that cannot be reached with today's market prices. So it basically rules out the possibility of building any more utility-scale PV plants in Spain for quite some time.”
Until that announcement was made, however, the PV sector waited on the sidelines, as investment stopped or went elsewhere. New investment in 2009 was US$10.7 billion, 48% lower than in 2008, according to Bloomberg New Energy Finance. A recent United Nations Environmental Program (UNEP) report stated, “The Spanish PV market boomed in the run-up to the expiry of the former feed-in tariff offer in September 2008, but in 2009, with a government cap in place on the amount of new capacity that could be built, investment in utility-scale PV in that country fell spectacularly.”
A number of foreign funds – American, British, German, Japanese – "had or have quite a lot of money invested and are now pulling out,” says the lawyer. “PV technology is becoming cheaper and it's likely that in three to five years, PV plants will be cheaper to run. But this won't happen from one day to the next, which is why having a 45% cut may be excessive. Perhaps gradual cuts, 20% one year, 25% the next, could better allow people to adapt to the changing economic environment.”
Spainisn't the only country grappling with how best to manage its PV sector. Germany added 3.8GW of installed PV solar power in 2009, or more than half the global market. In the summer, it cut subsidies for new solar capacity to halt its rapid expansion and mounting costs. Italy is also mulling a reform to its policy of issuing “green certificates” to utilities using electricity from renewable sources.
“The private sector is very worried about negotiations on tariff cuts that could affect existing contracts, but the reality is that few people in the industry can question a government looking into policy changes when production costs are dropping,” says Eric Usher, head of renewable energy and finance at UNEP.
Spain's government is also investigating whether companies claiming above-market price status are indeed qualified to receive them. A preliminary study by the CNE, Spain's national energy commission, concluded that around 700 MW of installed power was ineligible for the special price. The Industry Ministry offered an amnesty to these installations if they renounced their privileged status by October 7. Any firm that did not apply for the amnesty and is found to have made false claims might have to pay back the government.
The APPA agreed with the government's inspections, but lambasted the Industry Ministry's slowness to regulate. In June, the group accused Industry Minister Miguel Sebastian of blaming the country's energy problems on the PV sector. “If photovoltaic energy disappeared tomorrow, we would still have a tariff deficit,” says Javier García Breva, head of the APPA's PV department.
Spain's government says it wants renewables and natural gas to cover as much as 75% of domestic demand by 2020. By then, natural gas should produce nearly 166,000 gigawatt hours (GWh) and renewables should generate almost 153,000 GWh. Oil-produced energy would more than halve, while coal would rise slightly and nuclear dip slightly. Over the next 10 years, Spain estimates that its renewable energy projects will stop 187 million metric tons of CO2 being released.
One of the newer projects on schedule involves offshore wind – nearly 90% of Spain is surrounded by water and the Strait of Gibraltar is particularly tempestuous. By 2020, Spain aims to install 5,000 MW of offshore wind power. But aquatic wind farms are the only new ways of using existing hardware. More efficient grid technology is the key to taking renewable energy to the next level, says Paul Isbell, director of the energy and climate change program at the Real Elcano Institute, an independent think-tank in Madrid. “Spain has one of the best electricity systems in the world,” he says. “And grid operator Red Eléctrica de España is working toward what could be one of the first examples of a serious smart grid in the advanced world. It could be a catalyst for Europe.”
Smart grids are able to choose which energy sources to use at the best time. They would become even more efficient and provide greater control over supply and demand if engineers can combine a smart grid with interconnections to the European market. But while Spain's wind power players clamor for more electricity connections with France and gas connections with North Africa, the political discussions are moving at snail's pace. There are a few interconnections today, but the next one with France is not expected to be operational until 2014.
“A wider pool of energy sources is the key,” Isbell says, citing Nord Pool in Scandinavia as an example. "They have this region-wide pool of electricity," he says. "This added to smart grid technology can provide much higher capacity levels for renewables to contribute to the mix of energy being used. We need to stick to the renewables push — to cut emissions and get binding international accords that have some credibility because that provides an anchor of stability in the investment markets. That's the most important thing.”