Cablegate: Spain: Energy Sector Developments

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 MADRID 002118

SIPDIS

E.O. 12958: N/A
TAGS: ENRG BTIO EPET SP
SUBJECT: SPAIN: ENERGY SECTOR DEVELOPMENTS

1. This cable summarizes selected developments in the
Spain's energy sector. In this issue:

-- New Ministry of Industry, Tourism and Commerce responsible
for energy policy (para 2)
-- Possible merger of gas, electricity and water companies
(para 3)
-- Low gas supply reserve may lead to brownouts this winter
(para 4)
-- Iberian single market for electricity delayed (para 5)
-- "Coal is important to Spain" says new Industry Minister
(para 6)

2. NEW MINISTRY OF INDUSTRY, TOURISM AND COMMERCE
RESPONSIBLE FOR ENERGY POLICY
Energy policy is now primarily the responsibility of Spain's
newly formed Ministry of Industry, Tourism and Commerce
(Ministry of Industry), headed by Minister Jose Montilla
Aguilera, a Catalan who has a reputation for being serious
and disciplined. In a recent interview Montilla stated that
the principle aim of energy policy is "to guarantee supply
and quality." He said that the coal mining industry is
important to Spain and affirmed that no new Spanish nuclear
power plants should be expected, in line with PSOE election
pledges. Montilla also said that the new GOS will be serious
about its commitment to the environment and will fulfill its
Kyoto commitments "in a way that is manageable and without
putting at risk the competitiveness of sectors affected by"
these commitments.

3. POSSIBLE MERGER OF GAS, ELECTRICITY AND WATER COMPANIES
Recent reports indicate that Spain's dominant natural gas
supplier Gas Natural is again attempting to merge with other
energy companies following an unsuccessful attempt last year
to merge with electricity company Iberdrola. Its preferred
plan reportedly is a triple merger between the country's
leading electricity supplier, Endesa, with 40 percent of the
electricity market and the water utility Aguas de Barcelona
(Agbar). According to 2003 figures, a merger of the three
companies would result in an entity with revenues of 16.2
billion euros (USD19.83 billion at EUR1.0=USD0.816), offering
water, gas and electricity services. Pro forma earnings for
last year would have been about 2 billion euros (2.45 billion
dollars). Industry Minister Montilla said in a recent
interview that while he has not seen a formal proposal, "our
intention is not to interfere." While Gas Natural officially
denies any moves to create such a merger, reports indicate
that around 30 employees of the three companies have been
working on a deal for the last two months, and that an
announcement is being delayed until after the EU elections.
COMMENT: This merger would create an extremely large energy
company that may be based in the region of Catalonia (which
includes Barcelona). Some experts believe that last year's
merger was not permitted in part because its power base would
have shifted to Barcelona, rather than remaining in Madrid.
Montilla's comments suggest his Ministry would not oppose the
merger. However, the merger would still require approval of
the competition and energy regulators. End Comment.

4. LOW GAS SUPPLY RESERVE MAY LEAD TO BROWNOUTS THIS WINTER
Spain could face an energy crisis this winter unless gas
suppliers increase reserves, according to Pedro Mielgo,
chairman of Spain's national electricity grid operator, Red
Electrica de Espana (REE). Per Mielgo, gas suppliers are
maintaining minimal reserves while at the same time, Spain's
gas-fired power plants are becoming Spain's main source of
electricity. Reportedly, natural gas suppliers are
maintaining their reserves at less than half their full
capacity, due to the high cost of gas and other fuels.
According to the gas sector association Sedigas, demand for
natural gas rose 16.4 percent in the first quarter from a
year earlier to 86,660 gigawatt hours. Reserves, however,
have not increased proportionally. Mielgo noted that REE is
working closely with Spain's principal gas distributor Enagas
and Industry Minister Montilla to avoid an energy crisis this
winter. The National Energy Commission (CNE) warned gas
suppliers that they will face sanctions if they fail to keep
reserves above minimum levels. According to the 1998
Hydrocarbons Law, suppliers must have minimum reserves
equivalent to 35 days of consumption. However, Enagas claims
that only five out of 12 gas suppliers are currently due to
have reserves at the end of the year.

5. IBERIAN SINGLE MARKET FOR ELECTRICITY DELAYED
Once scheduled to begin in April, the tying together of the
production and supply of electricity between Spain and
Portugal will likely suffer further delay, reportedly due to
delays in approvals by the National Energy Commission and the
Council of State resulting from the recent change of
government. Nevertheless, many electricity companies believe
that the delays will have a limited initial impact, at least
until connections supporting 1,100 more megawatts are laid.
Currently, Spain and Portugal have interconnectivity of
between 600 and 1,100 megawatts at peak times. With EU
financing, this reportedly will double by 2005.

6. "COAL IS IMPORTANT TO SPAIN" SAYS NEW INDUSTRY MINISTER
In a recent interview, Montilla argued for the need to
maintain the Spanish coal industry by saying that Spain must
have "a diversified sector and coal has its place." Montilla
added "We have little water, few nuclear plants and little
renewable energy. And it would make no sense to import coal
and rid ourselves of national production because even though
it's lost ground it is still important and it's vital for
certain regions." COMMENT: Spain's coal costs far more than
current world market prices. But political factors make
total shutdown difficult, with coal production centered in
northern regions of the country which already suffer from
high unemployment. The GOS has been under investigation by
the EC for several years regarding government support of the
coal industry of as much as 600 million euros (735 million
dollars) in contradiction of EU rules. End Comment.
ARGYROS

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