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Cablegate: Spain Five Years After Electricity Market

VZCZCXRO5381
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #2266/01 3530801
ZNR UUUUU ZZH
P 190801Z DEC 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 3975
INFO RHMCSUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 3978
RUEHBO/AMEMBASSY BOGOTA 5310
RUEHBR/AMEMBASSY BRASILIA 0603
RUEHBU/AMEMBASSY BUENOS AIRES 0373
RUEHCV/AMEMBASSY CARACAS 1268
RUEHGT/AMEMBASSY GUATEMALA 1443
RUEHPE/AMEMBASSY LIMA 1901
RUEHME/AMEMBASSY MEXICO 0661
RUEHMN/AMEMBASSY MONTEVIDEO 1009
RUEHQT/AMEMBASSY QUITO 1397
RUEHRB/AMEMBASSY RABAT 6069
RUEHSG/AMEMBASSY SANTIAGO 0507

UNCLAS SECTION 01 OF 02 MADRID 002266

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON SP ENRG PREL EPET SENV
SUBJECT: SPAIN FIVE YEARS AFTER ELECTRICITY MARKET
DEREGULATION


1. (SBU) Summary. Five years after all consumers were given
the right to choose their own electricity providers, two
companies control 80 percent of the Spanish electricity
generation and distribution market. This market dominance by
Endesa and Iberdrola has remained consistent over the past
five years, although deregulation has allowed some 350 small
players to vie for the remaining 20 percent market share.
Demand for electricity continues to increase at a rate higher
than the EU average, but transmission grid expansions have
failed to keep pace, resulting in high-profile blackouts.
Coupled with price hikes, these weaknesses are cause for
concern during this election year. Meanwhile, Spain is
working to increase its connectivity to Portugal and Morocco,
but links to France remain stagnant. End Summary.

-----------------------------------------
True Competition? Dominance by Just a Few
-----------------------------------------

2. (SBU) After almost five years since all consumers were
given the right to choose their electricity provider, true
competition has not flourished in Spain. The market
continues to be dominated by two companies, Iberdrola and
Endesa, each with approximately a 40 percent share of
generation and distribution activities. According to Spain's
National Energy Commission, the other principal market
players include Union Fenosa (14.6 percent), Hidrocantabrico
(4.1), Viesgo (2.3), and approximately 350 other small
generators and distributors. Endesa, based in Madrid,
dominates the southern and eastern areas of Spain, while
Bilbao-based Iberdrola controls markets in northern and
western Spain.

3. (SBU) Endesa, one of the largest electric utilities in the
world, was created in 1944 as a Spanish state-owned
enterprise and was privatized in 1998. The Italian firm Enel
and Spain's Acciona won their takeover bid for Endesa Spain
in 2007 after a long drawn out battle which led many to
question the GOS' involvement in the process. The GOS
continues to insist that Endesa maintain a semblance of
Spanish identity by mandating that it be kept as an
independent company, brand, and decision-making center in
Spain. The European Commission overruled these and other GOS
restrictions on December 5 and it is unclear whether Spain
will appeal this decision.

4. (U) Electricity generation is divided among natural gas,
coal, nuclear, hydro, wind, and other sources. Natural gas
and wind generation have risen in recent years, while coal
and nuclear have remained relatively stable and hydro has
fluctuated according to rainfall levels. Wind now accounts
for almost 10 percent of generation. Although much
investment is flowing into solar, most of these projects have
not yet come on line, and total solar generation remains low
(though second only to Germany within the EU).

--------------------------------------------- ----
Increased Consumption, Blackouts, and Price Hikes
--------------------------------------------- ----

5. (U) Electricity consumption has grown steadily over the
past decade. According to Spain's National Energy Commission
(CNE), electricity demand increased by 2.9 percent, a rise
that was higher than the EU average of 1.9 percent and
reflects the fact that Spain is one of Europe's fastest
growing economies. Data through early December suggest that
2007's increase will be similar.

6. (SBU) In response to this increasing demand, Spain's
national electricity grid operator, Red Electrica de Espana,
augmented its transmission and distribution network with more
than 400 km of new circuits in 2006. These efforts were not
sufficient to prevent embarrassing and high-profile blackouts
in Barcelona and Madrid at times during the past year.
Meanwhile, the CNE continues to look at ways to make the
network more reliable by possibly devolving some of the high
voltage lines that Red Electrica controls to other companies.

MADRID 00002266 002 OF 002


With only three months until the general elections, these
power outages have become issues of note in the political and
media arenas.

7. (SBU) Electricity prices also play prominently during an
election year, especially since tariffs for the captive
markets are set and partially subsidized by the government.
In addition to pressure from domestic users who do not want
price hikes, the GOS faces demands from electricity
distributors who say that they are not sufficiently
compensated. Under Spain's partially liberalized price
system, companies that serve the regulated part of the market
often must sell below cost, producing a deficit that runs
into billions of euros which the GOS later attempts to
reimburse. The GOS, which is under pressure from the
European Commission to abolish regulated tariffs, says it
needs three to four years to raise regulated prices in line
with costs. The Ministry of Industry, Tourism and Commerce
recently announced that electricity rates would increase by
3.3 percent in 2008, around the rate of inflation.

--------------------------------------------- ---
Connectivity to International Markets Increases?
--------------------------------------------- ---

8. (SBU) On balance, Spain is a small net exporter of
electricity. Connectivity to Portugal and Morocco, where
Spain is a net electricity exporter, is growing while
connectivity to France's cheaper imported electricity is
stagnating. Electricity imports from France currently
represent 3 percent of Spain's electricity demand, though Red
Electrica's goal is to move to 5 percent. Meanwhile, Red
Electrica's partnership with Portugal's grid operator Redes
Electricas Nacionais (REN) continues to grow, as do efforts
to expand the new Iberian Electricity Market (MIBEL). This
past October, Red Electrica announced that it would construct
three new lines with Portugal over the next five years,
increasing electricity interconnection between the two
countries to 3,000 MW (15-20 percent of Portuguese demand)
from the current level of 1,200 MW. Plans to build an
additional 17 km of underwater lines to Morocco are also
underway and will expand the current level of connectivity to
North Africa.

-------
Comment
-------

9. (SBU) Although Spain was an early player in deregulation,
the current electricity landscape calls into question the
benefits of some of the earlier accomplishments. First,
Endesa and Iberdrola's market dominance has inhibited
competition and stifled market entry by smaller firms. We do
not anticipate that this dominance will end soon. Second,
the GOS' desire to maintain a Spanish fingerprint on its
former electricity company led many to question the validity
of its involvement in the Endesa takeover. Lastly, Spain
remains resistant to fully liberalizing electricity prices
since actual prices to end-use consumers could be
significantly higher than what is currently charged.
Allowing significant price hikes to occur would present a
politically unpalatable scenario at this juncture and as long
as Spain continues to enjoy a budget surplus, it may continue
to subsidize prices.

AGUIRRE

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