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Cablegate: Spain Bets On Windpower

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

UNCLAS SECTION 01 OF 05 MADRID 004613

SIPDIS

SENSITIVE

DEPARTMENT FOR OES/EGC, EB/ESC/IEC, AND EUR/WE; NRC FOR
INTERNATIONAL PROGRAMS: ROSALES-BUSH; DOE FOR INTERNATIONAL
PROGRAMS

E.O. 12958: N/A
TAGS: ENRG SP
SUBJECT: SPAIN BETS ON WINDPOWER

REF: MADRID 4241

-------
SUMMARY
-------

1. (SBU) Spain's "new" Socialist Party (PSOE) Government,
unlike its center-right predecessor, appears be taking quite
seriously the commitment, enshrined in domestic law and EU
Directive, to derive 12 percent of energy consumption from
renewable energy sources by 2010. Renewable energy sources
currently only provide 6.8 percent of Spanish energy
consumption. Spain believes windpower represents its most
promising renewable energy source and hopes wind will carry
it toward compliance with the 12/2010 target. A quick glance
at the numbers, and an analysis of the economics of renewable
energy in Spain, suggests that windpower is indeed Spain's
best option. But Madrid's pointman on renewable energy
believes the 12/2010 target could only be met if the growth
of energy demand was also suppressed vis-a-vis higher energy
prices. He noted, however, that his proposals to increase
energy prices had been blocked by Second Vice President and
Minister of Economy and Finance Pedro Solbes, for fear that
higher prices would increase inflation and put Spain's
macro-economic fundamentals off kilter. Whichever way the
energy price debate goes, renewable energy sources do not
offer Spain a way out of its worrisome dependency on foreign
energy supply or a magic solution to allow Madrid to
implement its Kyoto Protocol commitments without significant
economic dislocation. END SUMMARY.

2. (U) Higher oil prices and the GOS' decision to take its
Kyoto Protocol commitments seriously have led to greater
public focus on both nuclear and renewable energy sources.
Reftel addressed prospects for a nuclear energy revival in
Spain. This cable focuses on the renewable side of the
energy mix equation.

-------------------------
12 PERCENT BY 2010 TARGET
-------------------------

3. (SBU) In December 1999, the then-ruling center-right
Popular Party (PP) Government promulgated the Renewable
Energies Promotion Plan (REPP). The REPP called for Spain to
increase the share of energy consumption met by renewable
energy sources to the level of 12 percent by 2010. It also
called for renewable sources to provide 29.4 percent of
electricity generation by 2010. These targets were
consistent with the EU's "White Book" on renewable energy, as
well as EU Directive 2001/77/CE. However, by most accounts,
the PP made no serious effort to meet these targets,
preferring to let markets determine Spain's energy mix.
Spain's "new" PSOE Government, which was elected in March
2004, announced that it would make serious efforts to meet
the 12/2010 target. The new government, under the leadership
of Prime Minister Zapatero, underscored that expanded
renewable energy production, combined with greater emphasis
on energy efficiency and a reduced energy demand growth rate,
were integral parts of Spain's strategy to meet its Kyoto
Protocol commitments (another initiative that the PP paid lip
service to, but no made no serious effort to implement).
Indeed, the government calculates that achieving the 12/2010
target would reduce annual Spanish CO2 emissions by over 40
million metric tons in 2011.

4. (U) To get a better handle on the PSOE's plans and level
of commitment to renewable energy sources, ESTHOFF met
recently with the Francisco Javier Garcia Breva, Director
General (A/S equivalent) of the Industry Ministry's Institute
for the Diversification and Savings of Energy (IDAE).
Garcia, Spain's pointman on renewable energy, began with a
general overview of renewables in Spain. His general sales
pitch is that a greater focus on renewable energy sources
would: (1) reduce dependency on foreign energy sources; (2)
help Spain comply with its Kyoto Protocol greenhouse gas
emissions limits; and, (3) help boost the Spanish economy (as
Spanish industry is a world leader in wind and solar
technologies). Garcia said it was his job to both increase
the supply of renewable energy and reduce overall energy
demand (or at least reduce the growth rate of energy demand).

-----------------------------------
CURRENT ENERGY CONSUMPTION SNAPSHOT
-----------------------------------

5. (U) According to Garcia, Spain's degree of external
energy dependency (80 percent) is approximately double the EU
average. According to 2003 IDAE figures, 50.3 percent of
overall Spanish energy demand is met by petroleum, 15.8
percent by natural gas, 15.2 percent by coal, 11.9 percent by
nuclear, and 6.8 percent by renewable sources. Of this 6.8
percent renewable share, 2.9 percent comes from biomass, 2.5
percent from hydroelectric, 0.8 percent from wind, and 0.2
percent from biogas. All other renewable sources, including
photovoltaic and thermal solar, represent less than 0.3
percent of Spanish energy consumption.

6. (U) Expressed as percentages of electricity consumption
vice overall energy consumption, coal provides 28 percent of
Spanish electricity consumption, followed by nuclear (24
percent), renewables (24 percent), natural gas (16 percent)
and petroleum (eight percent). Of the 24 percent of
electricity consumption supplied by renewable sources, 18.5
percent comes from hydroelectric, followed by wind (5.1
percent) and biomass (0.6 percent).

--------------------------
REPP TARGETS NEED REVISION
--------------------------

7. (U) Under the current REPP targets, Spain should generate
35,733 megawatts (MW) of electricity from renewable sources
by 2010. The target breakdowns are as follows: 16,571 MW
from hydro, 13,000 MW from wind, 2,230 from minihydro, 3,098
from biomass, 262 from urban solid waste, 200 from
thermoelectric solar, 144 from photovoltaic solar and 78 from
biogas.

8. (U) Garcia underscored that both the renewed emphasis on
actually trying to meet the 12/2010 target, as well as energy
consumption growth rates that had exceeded those predicted in
the REPP (the original REPP targets were based on a 2 percent
average annual energy consumption growth rate between
1999-2010, while the actual average annual growth rate
between 1999-2003 has been 3.5 percent) had forced the GOS to
reassess the original REPP targets. Since energy demand had
grown faster than anticipated in the REPP, Spain would need
even more renewable production to meet the 12/2010 goal.
Garcia estimates that renewable energy production in Spain
would have to increase 22 percent a year between 2005-10 in
order to meet the 12/2010 goal. He also stressed that the
business/technology environment in Spain had evolved since
the targets were mandated in 1999 and they thus needed to be
updated. Finally, he noted that electricity generation was
the only segment of the renewables sector that could
realistically help Spain meet the 12/2010 target.

----------------------
PSOE BETS ON WINDPOWER
----------------------

9. (U) IDAE's proposals to adjust to these new realities,
which are pending the approval of Commerce, Tourism, and
Industry Minister Montilla, represent a clear GOS bet on
windpower to meet the REPP targets. Under the current
proposed/revised REPP targets, the 2010 windpower goal would
increase from 13,000 MW to 20,000 MW. Besides wind, the
proposed changes would increase the solar and biofuels
targets, while reducing the biomass target. What is under
discussion is not the 12/2010 target itself. That would stay
the same. What would change is that windpower would emerge
as the renewable technology of choice to meet the existing
12/2010 target. Indeed, some in the windpower industry are
calling for the GOS to expand the 2010 windpower target to as
high as 28,000 MW (which would represent 18.5 percent of
electricity demand). They note that over 30,000 MW of
economically feasible windpower resources have already been
identified. This is not wishful thinking, as Garcia noted
that the GOS had already authorized permits for close to
24,000 MW of wind parks. The final revised REPP targets are
expected to be issued by the Commerce, Tourism and Industry
Ministry by March 2005.

10. (U) Garcia said windpower clearly offers the single
best chance of meeting the revised REPP targets and more
broadly, along with solar, represents the future of renewable
energy in Spain. Why wind? Garcia offered the following
arguments: (1) the technology is ripe and mostly homegrown;
(2) the economics work (i.e., it is profitable); (3) the
regulatory framework is already in place; (4) the amount of
unexploited wind resources offers long-term opportunities;
and, (5) wind is the "greenest" of the renewable sources.
Garcia said windpower in Spain "was not a chimera, but a
reality; a brilliant reality." The GOS would play its part
by continuing to renew annual agreements that guarantee that
above market rates are paid for electricity entering the grid
from renewable sources. But the key driving force, Garcia
noted, was that production costs were dropping dramatically,
making windpower an ever more lucrative business opportunity.

--------------------------------------
WINDPOWER IN SPAIN: FACTS AND FIGURES
--------------------------------------

11. (U) As of 2003, Spain had 6,075 MW of installed
windpower. This represents 16 percent of total global
installed capacity. It is also eight times the amount of
installed windpower existing in Spain in 1998 (when Spain had
only six percent of global installed capacity). The 6.075 MW
also represents 47 percent of the current 2010 REPP target of
13,000 MW. In 2003, Spain was second in Europe after Germany
and third in the world (behind Germany and the U.S.) in terms
of installed windpower. Spain is set to pass the U.S. and
move into second place in installed windpower during the
course of 2004 (8,000 MW of installed windpower by the end of
2004 versus 15,000 MW for Germany). Half of the wind
turbines installed globally in 2003 were installed in either
Spain or Germany. During 2003 alone, installed windpower
capacity in Spain increased by 28 percent (the global growth
rate was 27 percent and the EU growth rate was 23 percent).
The 2004 installed windpower growth rate for Spain has been
estimated at 29 percent. What all these numbers suggest is
that windpower represents Spain's only realistic hope of
meeting the 12/2010 targets.

12. (U) As for the regional breakdown of Spain's windpower
resources, it is clear that the dominate region is Galicia
(1,614 MW installed), followed by Castilla-La Mancha (986
MW), Aragon (985 MW), Castilla y Leon (925 MW), and Navarra
(722 MW). These five regions house 85 percent of total
installed windpower capacity in Spain. Garcia said the
development of windpower in other regions with great
potential (i.e., Cataluna, Asturias and Cantabria) had been
stymied by environmental opposition (mostly defenders of
migratory bird species that perish when they fly into wind
turbines and those who believe windmills represent a type of
visual pollution).

-----------------------------------------
SPANISH INDUSTRY WELL-PLACED IN WINDPOWER
-----------------------------------------

13. (U) The Spanish firm GAMESA is the world's third largest
producer of wind turbines, with 17.5 percent of the global
market in 2003. Spanish firms produced 78 percent of the
wind turbines installed in Spain in 2003. Foreign firms,
including GE (which is the world's second largest producer of
wind turbines with 18 percent of the world market), installed
the remaining 22 percent. IDEA estimates that 350 Spanish
firms are now involved in the windpower sector, representing
over 81,000 jobs (20,000 direct, 61,000 indirect). This is
expected to grow to 200,000 jobs by 2010. IBERDROLA, Spain's
second largest electricity supplier, claims to be the world's
largest generator of renewable energy, with 3,100 MW
installed by the end of 2004 and plans to have 5,500 MW
installed by 2008. Garcia told ESTHOFF that China plans to
make major windpower investments and that Spanish business
(e.g., GAMESA) has an excellent chance of capturing a large
part of this potentially lucrative wind turbine market.

------------------------------
REMAINING WINDPOWER CHALLENGES
------------------------------

14. (U) When asked about major impediments to windpower's
continued growth in Spain, Garcia cited three items all
related to ensuring a seamless connection of wind parks to
the Spanish electricity grid: (1) the need for better wind
turbine technology to ensure electricity supply security in
times of low winds; (2) the need for more effective
connection of wind parks to the electricity grid; and, (3)
the imperative to connect the Spanish electricity grid with
the rest of Europe (e.g., France) to better stabilize the
domestic electricity grid. All three measures, Garcia
stressed, would help ensure that greater reliance on
windpower does not lead to a higher rate of electricity grid
collapse (thus increasing the economic attractiveness of
windparks).

-----------------------
SOLAR A LONGER-TERM BET
-----------------------

15. (U) Garcia clearly believes that after windpower, solar
energy has the best long-term growth potential in Spain.
Spain, with 9.3 percent of the global market, is the EU's
second largest producer of photovoltaic cells (after Germany)
and the world's fourth largest producer (after Japan, the
U.S., and Germany). Most of Spain's production is exported
to Germany (which has 10 times more installed panels than
Spain). To stimulate the domestic panel market, the Zapatero
Government plans to alter Spain's building codes to require
the installation of thermal solar energy panels in all new or
renovated buildings. The idea is for these panels to become
the main source of sanitary hot water for all new or
renovated buildings. But Garcia stressed that the bet on
solar was long-term and that neither type of solar would
really help meet the 12/2010 target.

-------------------------
DEMAND REDUCTION ALSO KEY
-------------------------

16. (U) Garcia underscored that the demand side of the
equation was also key. He said Spain needs to promote
greater energy use efficiency while simultaneously reducing
the growth rate of energy demand. Expanded renewable energy
production is far less significant if energy demand growth
exceeds domestic energy supply growth. To foster greater
efficiency, the PSOE Government plans greater efforts to
implement the 2003-12 Energy Efficiency Strategy passed by
the former PP government in November 2003. The building code
changes referenced above are the first significant new
efficiency-related measure adopted by the PSOE government.
Garcia said others would soon follow.

17. (SBU) But the best way to reduce demand, according to
Garcia, would be to increase energy prices (presumably via
higher taxes). At Garcia's urging, Industry Minister
Montilla vetted such a proposal with his Cabinet colleagues.
But the proposal was shot down by Second Vice President and
Minister of Economy and Finance Pedro Solbes, for fear that
higher energy prices would increase inflation and put Spain's
macro-economic fundamentals off kilter. Montilla is now
playing the loyal cabinet soldier, stating in repeated public
remarks that he does not plan to increase energy prices
beyond current inflation rates. Indeed rates are expected to
rise by only 2 percent in 2005, well below the anticipated
2004 Spanish inflation rate of 2.8 percent.

-------
COMMENT
-------

18. (SBU) While hydroelectric represents by far the biggest
source of renewable electricity generation in Spain, most
economically feasible hydro resources have already been
exploited and most analysts doubt hydro could make a
significant new contribution toward meeting the 12/2010
target. The bet on wind appears intelligent. Windpower is
the fastest growing renewable energy source in Spain and the
one with the greatest immediate potential for expansion. The
business community clearly sees a bright future in windpower.
But it is also clear that the wind boom is not the result of
GOS sponsorship. The real reason, not surprisingly, is that
there is money to be made in this business. In this regard
and notwithstanding PSOE denials, there is not that much
difference between the PSOE and PP renewable energy policy.
The PSOE's bet on windpower is best viewed as a recognition
of the market potential of windpower in Spain.

19. (SBU) The economic viability of solar energy in Spain,
on the other hand, is less well established and it remains
doubtful that solar could emerge as a significant player in
the short to medium term. The building code changes should
boost domestic demand for photovoltaic panels and are a
necessary, but probably not sufficient boost for this sector.
Spanish companies are well established in both the wind and
solar markets, being world leaders in the production of both
wind generators and photovoltaic panels. Thus there are
possibilities for interesting synergies.

20. (SBU) However it is important to remember that the
renewed focus on renewable energy will not significantly
alter Spain's serious dependency on foreign energy sources.
The best solution for that larger question would probably be
nuclear, but that remains a political taboo for now (see
reftel). Prospects for significant change on the demand side
are also uncertain. Higher energy prices seem out of the
question (at least in the short-run) for both political and
economic reasons, as attempting to curb demand via higher
prices and/or other mechanisms would likely have a negative
impact on economic growth. Promoting better energy
efficiency via tax incentives is probably the easiest way for
Spain to slow the growth rate of energy demand, but this
again would likely be a drop in the bucket and not a solution
in itself. What is clear is that there are no easy answers
to the problem of how Spain can reduce its foreign energy
dependency, stimulate renewable energy production, and meet
Kyoto Protocol commitments while simultaneously trying to
grow its economy.
MANZANARES

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