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Cablegate: Scenesetter - Codel Dorgan Visit to Seville, Spain

VZCZCXYZ0001
RR RUEHWEB

DE RUEHMD #1292/01 3441138
ZNR UUUUU ZZH (CCY AD0903E2 MSI4817-695)
R 091138Z DEC 08
FM AMEMBASSY MADRID
TO SECSTATE WASHDC 5744

UNCLAS MADRID 001292

SENSITIVE
SIPDIS
C O R R E C T E D C O P Y (CAPTION)

STATE/H FOR ANDREW MACDERMOTT, PATRICIA DIGGS

E.O. 12958: N/A
TAGS: AMGT ASEC BEXP OREP AFIN SP
SUBJECT: SCENESETTER - CODEL DORGAN VISIT TO SEVILLE, SPAIN
DECEMBER 18-19

REF: STATE 128942

1. (SBU) Summary: Embassy Madrid warmly welcomes your
visit. You will be visiting Spain during a severe economic
downturn, its first in 15 years. Spain has become a leader
in the development of renewable energy - particularly wind
power - as the result of implementing feed-in tariff
subsidies. Several Spanish companies, including Abengoa,
whose solar tower plant you will visit, are among the world's
largest renewable energy companies. Cooperation on renewable
energy is an increasingly important part of our bilateral
relationship. As expected, Spanish renewable enregy
companies reacted favorably to the extension of U.S.
renewable energy tax credits as part of the Emergency
Economic Stabilization Act of 2008. End Summary.

---------------------------------
Tough Times for Economy, Zapatero
---------------------------------

2. (SBU) President Zapatero's Socialist party (PSOE)
narrowly defeated the conservative Popular Party (PP) in
general elections last March. The PSOE gained seats in
Congress but fell just short of an absolute majority, forcing
it to barter with small regional parties and the United Left
party to pass legislation. Foreign affairs did not play a
major role in the campaign, but the PSOE reminded voters that
it removed Spain's troops from an unpopular war in Iraq.

3. (U) Since Zapatero was re-elected, the GOS has faced a
deepening economic slump. After 15 years of rapid economic
growth, the end last year of a long construction boom has led
to surging unemployment, now almost 13 percent. Inflation
reached a high of more than 5 percent earlier this year, but
has recently dropped to 2.4 percent due to the drop in oil
prices and the economic downturn, spurring concerns over
possible deflation next year. The economy is almost
certainly already in recession, having contracted 0.2 percent
in the third quarter of 2008; 2009 is expected to be an even
more difficult year. Months of worse-than-predicted economic
news have led to widespread criticism of Zapatero and his
economic policymakers for their upbeat predictions during the
campaign and for having downplayed the economic difficulties
long after many others were saying Spain was in a crisis.

4. (U) Spain's banks have so far weathered the
international financial crisis of the last few months better
than their counterparts elsewhere in Europe. Conservative
regulation by the Central Bank meant that they had high
provisions against losses, and almost none had invested in
U.S. mortgage-based securities. However, Spain's domestic
property crash has left banks with bad construction and real
estate loans, rising unemployment has contributed to
increased delinquencies, and the country's very high current
account deficit makes it dependent on crossborder lending
that is now scarce. Spain has announced bank support
measures like those elsewhere in Europe, including asset
purchases, guarantees for new debt, and possible capital
infusions. The GOS announced on November 27 plans for 11
billion euros in additional spending including 8 billion for
municipal government infrastructure projects.

5. (U) The medium-term economic picture remains reasonably
favorable. Spain has the world's eighth largest economy and
is the second largest international tourism destination and
eighth largest auto manufacturer. By one way of measuring,
its per capita GDP is expected to pass Italy's in 2010. In
the bilateral economic relationship, investment is more
important than trade. U.S. investment has played an
important role in the Spanish economy for decades, and U.S.
firms employ over 200,000 Spaniards. Spanish investment in
the U.S. has surged in the last few years, particularly in
renewable energy, banking and toll road construction. In
2007, Spain was the fourth largest foreign investor in the
U.S.

----------------------------------
Bilateral Cooperation and Security
----------------------------------

6. (SBU) U.S.-Spain relations were seriously damaged by
President Zapatero's decision immediately after his election
in 2004 to abruptly withdraw Spanish forces from Iraq.
However, over the last several years, both countries have
made a concerted and successful effort to rebuild the
relationship based on strong mutual interests in
counter-terrorism, fighting narcotics trafficking and
organized crime, and rapidly expanding economic ties.
Following the March 11, 2004 train bombings in Madrid, Spain
remains a target of Islamic extremists. Al-Qaeda leaders
often call for the recapture of the medieval "Al Andalus,"

and the uncovering in January of a cell allegedly sympathetic
to Al-Qaeda and operating out of Barcelona has shown the
public that this threat is not an idle one.

7. (SBU) Spain is no stranger to terrorism, having fought
the domestic Basque terrorist group ETA for almost 40 years.
ETA has been weakened by a series of arrests stemming in part
from improved cooperation from France. Last month, French
police arrested ETA's presumed leader and military chief in
Cauterets, France; earlier this year, Spanish police
arrested the organization's political leader. However, ETA
retains the capacity for violence and has carried out several
small-scale bombings and killed four people this year.

8. (SBU) Narcotics trafficking is another area of common
concern and excellent cooperation. Spanish authorities
acknowledge that Andean cocaine is a serious problem here,
and Colombian trafficking organizations are active in Spain.
Money laundering is another serious issue. We are increasing
bilateral cooperation and encouraging Spain to continue
engaging more aggressively with law enforcement authorities
in key Latin American countries. Second only to the U.S. in
terms of investment in Latin America, Spain is actively
engaged in the region, both politically and economically.

9. (SBU) Spanish military cooperation matters. The bases of
Rota and Moron are strategic hubs, midway between the U.S.
and Afghanistan and Iraq. U.S. planes and ships account for
around 5,000 flights and 250 port calls a year in Spain.
Spain has nearly 800 personnel in Afghanistan and runs a
provincial reconstruction team in Badghis province. Spain
has nearly 1,100 troops with UNIFIL in Lebanon and about 700
in Kosovo.

------------------------
Oil, Gas and Electricity
------------------------

10. (U) Although Spain is not dependent on Russian gas like
many European countries, it does rely on imports for almost
all of its oil and gas, so energy security is a significant
concern. Spain imports oil from a variety of suppliers,
including Russia, Mexico and the Middle East. Last year, no
one supplier provided more than Russia's 22 percent of
Spain's oil. About 70 percent of Spain's gas is imported as
liquefied natural gas. However, nearly all of the imported
pipeline gas and almost a third of Spain's total gas imports
come from Algeria, leaving the country uncomfortably
dependent upon one source. Other main suppliers include
Nigeria, Persian Gulf countries, Egypt, and Trinidad &
Tobago.

11. (U) In recent weeks, Russian oil company Lukoil (partly
owned by the U.S. firm ConocoPhillips) has sought to acquire
up to 29.9 percent of Repsol, Spain's largest oil and gas
company. GOS officials, including President Zapatero,
publicly opposed reported interest by the Russian
government-owned Gazprom, but Zapatero has supported Lukoil's
interest, saying the GOS "will not interfere" and referring
to the negotiation as "an issue between two private
companies." Spain's conservative opposition Popular Party
has been vocal in its opposition to the sale, which would
make Lukoil the former national oil company's single largest
shareholder. Media reports indicate that Repsol and Lukoil
have agreed to the GOS' requirement that Repsol continue to
be directed by Spaniards, with Lukoil controlling 4 of
Repsol's 16 board seats with up to 29.9 percent of the
company's equity.

12. (U) The rapid economic growth of the last several years
has led to a steady increase in electricity consumption. The
main electricity sources are gas, nuclear, coal, wind power,
and hydroelectricity, in that order. The use of gas has
grown rapidly in recent years and now accounts for around 40
percent of generation. Nuclear production is around 20
percent of generation and has remained roughly constant in
recent years; President Zapatero and the ruling PSOE party
oppose new nuclear power plants and have committed to closing
Spain's existing plants as their useful lives end.
Coal-powered generation has fallen dramatically (down 39
percent in the first 9 months of 2008) for price reasons
including the added cost of CO2 emissions permits. It has
accounted for a little over 15 percent of generation this
year. Wind generation is growing steadily and now accounts
for over 10 percent of the total. There are no new
large-scale hydro projects, and hydroelectric generation
varies from year to year with changes in annual rainfall
levels. In this relatively dry year, it has accounted for
around 8 percent of generation. Solar and other forms of
generation are still relatively minor sources of current
generation, although investment in solar has boomed in the

last couple of years.

---------------------------------------
Renewable Energy Increasingly Important
---------------------------------------

13. (U) Renewable energy is an increasingly important part
of the Spanish economy and of our bilateral relationship.
Abundant wind and sun, and generous feed-in tariffs, have
helped make Spain a world leader in wind and solar power.
Iberdrola is the world's largest producer of wind power, and
Acciona is the third largest. Gamesa, partially owned by
Iberdrola, is one of the world's largest manufacturers of
wind turbines and also operates wind farms. Spain is also
the world's third largest generator of solar power and has
undergone a boom in both photovoltaic and concentrated solar
projects; the GOS is particularly optimistic about the
potential for cost reductions in concentrated solar projects
like Abengoa's Solar Tower that you will visit.

14. (U) Spain's feed-in tariff system provides very high,
guaranteed, inflation-adjusted tariffs for the life of the
project for the first few hundred megawatts (MW) of projects
that use a particular technology. Future projects receive
lower guaranteed tariffs. For example, photovoltaic projects
connected to the grid by September 29, 2008 qualified for
tariffs of over 40 cents of a euro per KWh. The first 367 MW
of ground-based PV projects connected before the end of 2009
will receive a still-generous 32 cents. The steady decline
in wind generation costs is an example of how the system has
worked. The guaranteed tariff for new wind power projects is
around 7 cents/KWh, not much above the cost of other means of
generation. The high tariffs are designed to be factored
into overall consumer electricity bills; the volumes are
small enough that the increase would be only around 8 percent
so far. U.S. companies are benefiting from Spain's system
both by investing in (e.g., AES) and by supplying (e.g., GE
and other U.S.-based firms) renewables projects in Spain.

15. (U) A factor complicating Spain's feed-in tariff system
is that for the last several years, the GOS has not passed on
the full cost of electricity to consumers and is building up
a debt to generators for the remainder. Although rates have
increased more than inflation this year, bills are still
around 20 percent below actual cost. This is a matter of
contention between the generators and the GOS, but it has not
affected renewables policy discussions.

16. (U) Spanish renewables companies see the U.S. as an
increasingly important market. Spanish companies own wind
farms in at least 17 U.S. states and continue to expand.
Iberdrola's multi-billion dollar acquisition of Energy East,
which closed in September, reportedly was delayed over the
company's insistence that New York regulators allow it to
keep Energy East's wind assets. Iberdrola plans to invest as
much as $11 billion in U.S. renewables in the next few years.
Gamesa and Acciona own four wind turbine manufacturing
plants in Iowa and Pennsylvania. Gamesa has wind energy
projects operating or under construction in 18 states.
Acciona owns the world's third largest solar plant, the 64-MW
Nevada Solar One concentrated solar (parabolic trough)
facility. Abengoa Solar, which will be hosting you for a
tour of its Solar Tower plant in Sanlucar la Mayor, is
building a 280-MW concentrated solar (parabolic trough) plant
in Arizona, which will be the world's largest of its kind.
The plant, expected to begin operating in 2011, will supply
electricity to Arizona Public Service.

17. (U) Abengoa Solar has received five contracts from DOE
and NREL over the last year to develop parabolic trough and
power tower technology. Abengoa has also been awarded DOE
grants for second-generation ethanol projects. As of the end
of 2007, Abengoa Bioenergy is the fifth largest producer of
Bioethanol in the United States with 110 million gallons of
installed capacity. The company currently has biofuels
operations in 7 U.S. states.

--------------------
Bilateral Engagement
--------------------

18. (U) In February of 2008, Embassy Madrid and the Spanish
government organized a visit to Washington and Colorado for a
renewable energy delegation of Spanish government and
business leaders including Santiago Seage, CEO of Abengoa
Solar. The group participated in meetings with federal,
Senate, and state officials, business representatives, and
the National Renewable Energy Laboratory. The delegation,
led by Ambassador Aguirre, met with Senators Craig, Domenici,
Grassley, Martinez, Salazar and Thune, and several staff
members.

19. (U) Two issues that may come up in your meeting with
Abengoa are U.S. investment and production tax credits for
renewables and U.S. biofuels subsidies. Throughout 2008,
Spanish companies have repeatedly raised with Congressional
delegations and USG officials the importance of renewing tax
credits. In fact, Abengoa's planned 280 MW concentrated
solar plant in Arizona was contigent upon the extension of
federal tax credits. Companies were pleased with the 8-year
extension of credits for solar energy included in the
financial sector rescue legislation, though we have not heard
reactions to the one-year extension of wind credits. Press
reports have indicated that the same legislation eliminated
the "splash and dash" incentive that had sparked U.S. exports
to Europe of imported biofuels but extended the biofuels
subsidy that also encourages U.S. exports. GOS officials
have expressed interest in confirmation of the measures and
their impacts.

--------------
Climate Change
--------------

20. (SBU) Climate change is one of the signature issues of
the Zapatero Administration and one reason the GOS is so
supportive of renewables. The Socialist government has
firmly embraced the Kyoto Protocol, under which Spain
committed to reduce greenhouse gas (GHG) emissions to 15
percent above 1990 levels by 2012. Despite generally popular
initiatives to promote renewables and energy efficiency and
to implement EU commitments, emissions are currently 50
percent above 1990 levels, in part because of years of rapid
economic growth. Spain is the EU country most out of
compliance with Kyoto and will not meet its 2012 commitment.
That said, Zapatero remains committed to fighting climate
change and, despite the economic slowdown, may be willing to
commit to costly actions if necessary.

-----------------
Personal Security
-----------------

21. (U) In general, Spain is safe. However, large cities
attract a large number of criminals and pickpockets and
frequent incidents of crime of opportunity against the unwary
do occur. It is best to carry only essential items including
a photocopy of your passport's photo page. Visitors can
protect themselves against crime by being street-smart, alert
and aware of their surroundings. Travelers are encouraged to
review the most recent Worldwide Caution issued by the
Department of State. As the Department of State continues to
develop information on any potential security threats to
Americans overseas, it shares credible threat information
through its Consular Information Program documents, available
on the Internet at http://travel/state.gov. Additional
information regarding safety and security in Spain is
available on the U.S. Department of State's website
(www.embusa.es).
AGUIRRE

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