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Cablegate: Spain: Ongoing Problems with the Energy Supply

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

291444Z Jun 05

UNCLAS SECTION 01 OF 02 MADRID 002484

SIPDIS

DEPARTMENT PASS TO EUR/WE
EB/IEC

E.O. 12958: N/A
TAGS: ENRG ECON SP
SUBJECT: SPAIN: ONGOING PROBLEMS WITH THE ENERGY SUPPLY

REF: A. 05 MADRID 01676

B. 05 MADRID 00649
C. 05 MADRID 00393
D. 04 MADRID 04613
E. 04 MADRID 04241

1. SUMMARY: Spain's national energy grid, Red Electrica de
Espana (REE), was forced to temporarily cut power to hundreds
of businesses in various parts of Spain in June due to record
demand and inadequate supply. The businesses affected have
contracts with the electricity supplier that allow for
interruption of service in return for lower prices. REE
officials cite reduced output due to repairs, drought and low
winds as the primary cause for the shortfall. The Spanish
energy grid is currently operating near maximum capacity, due
to a 43 percent increase in energy consumption over the last
seven years, and this problem is likely to continue into the
near future. As a result, the Spanish government will likely
have to strike a better balance between the need for
increased energy prices and the resulting inflationary
economic impact of such an increase. END SUMMARY.

2. Red Electrica de Espana (REE) interrupted the power supply
to hundreds of Spanish businesses in north central Spain on
June 21 and 22 for three hours in order to avoid an overload
of the energy grid. During the peak hours on those days,
energy demand reached record levels of 37,400 MW and 38,600
MW, respectively. REE also had to cut power to a number of
companies in Catalunya on June 27 and 28, despite the fact
that total demand was significantly lower, at just over
36,000 MW. The companies that had their supply interrupted
had contracts with REE that afforded them lower prices
(between 15 and 25 percent lower) in return for agreeing to
have their power supply interrupted subject to certain
conditions. In all, about two hundred businesses in Spain
have this type of contract.

3. REE cited a number of factors that contributed to the
decision to interrupt the power supply to various businesses.
The main reason was a combination of record demand and
reduced supply. Electricity consumption in Spain has
increased 43 percent between 1997 and 2004, and is already up
7.3 percent for 2005. In addition to increased demand, REE
officials cited current problems with the power supply.
Dozens of Spain's energy facilities, including two of Spain's
nine nuclear power plants (currently closed for repair and
renovations), are experiencing output problems, resulting in
a 7,300 MW reduction in available power supply. Renewable
energy sources, such as wind and hydroelectric, have also
experienced a reduction in output due to environmental
factors. Low winds have resulted in a reduced yield of
3,000-3,500 MW from wind power facilities, almost one-third
their potential production. Hydroelectric facilities, which
currently have water reserves of 54.9 percent of capacity due
to an ongoing drought, are supplying power at less than half
of their potential (7,864 MW out of 16,000 MW). Finally, REE
cited a temporary problem with the energy grid connection
with France, where a decrease in output resulted in a
reduction of 1,000 MW in the Spanish grid.

4. Spanish power companies have attributed some of the fault
for this situation to sectoral issues, primarily the
government-regulated fees that they are allowed to charge.
According to these companies, the regulated electricity fee
fell 32 percent between 1996 and 2005, harming electricity
suppliers ability to increase output to meet growing demand.
Company sources state that Spain's electrical suppliers
invested EUR 15.5 billion (18.6 billion USD) in the
distribution network between 2001-2005 and are calling for
increased rates to help finance further network
modernization. In addition to lower revenues, REE sources
cited higher production costs due to recent increases in the
price of petroleum and natural gas as an aggravating factor.

//COMMENTS//

5. The first hints of this ongoing problem appeared last
year, when problems with the natural gas supply forced
Spain's electrical companies to cut power to numerous
businesses. Spanish Ministry officials attributed the
problem to the lack of output from two of Spain's nuclear
reactors, which were shut down for repairs and renovations.
However, recent studies show that Spain's margin between the
potential output of the power grid and the maximum
electricity demand has almost disappeared. Industry sources
state that Spain should have potential output of 10 percent
more than the maximum demand to be within acceptable safety
margins. REE sources have publicly stated that this problem
is temporary, and will be alleviated by repairs to power
facilities and an resumption of normal grid connections with
France. However, the most recent interruptions in service
come at a time when the energy demand was significantly lower
than the record set the previous week.

6. As stated in reftels, rising demand is likely to put
pressure on the Zapatero government to take further action.
One obvious option is to raise energy prices in the hopes
that increased fees will curb electricity demand growth and
the resulting extra revenue will allow electrical companies
to upgrade the power grid. However, such a proposal is
likely to encounter strong resistance from Vice President and
Minister of the Economy Solbes, who would find the resulting
inflationary impact on the economy undesirable. Another
option is to pursue the development of other energy sources
(i.e. increase supply). Nuclear, which is potentially
sufficient for Spain's energy needs, is politically untenable
due to strong public opinion against its use (reftel E).
Coal, abundant in Spain and relatively inexpensive, results
in high levels of pollution and would run counter to current
EU policy (reftels A and C). The GOS is encouraging the use
of renewable energies, such as solar and wind, but the
technology is not sufficient at this time to meet market
demand (reftel D). Natural gas, relatively clean and
affordable, appears to be the GOS' choice for future
production as demonstrated by its commitment to the
construction of an underground gas pipeline between Spain and
Algeria (reftel B). However, Spain is experiencing some
difficulty in competing for natural gas resources in the
global market due to government-imposed price restrictions.
Therefore, it is increasingly likely that Spain will have to
raise electricity prices to depress the demand growth while
simultaneously strengthening various production capabilities.
AGUIRRE

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