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Cablegate: Scenesetter for Doe Deputy Secretary Kupfer's

DE RUEHMD #1104/01 2941410
R 201410Z OCT 08




E.O. 12958: N/A

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1.(SBU) Summary: Embassy Madrid warmly welcomes your visit.
Your meetings with GOS officials and business leaders and
your press events will strengthen our close relationship on
energy issues, particularly renewable energy. After 15 years
of rapid economic growth, Spain is feeling the pain of an
economic slowdown that has hurt the Zapatero government's
public standing. Although the Spanish banking sector is in
better shape than many of its European counterparts, the
international credit crisis has aggravated the economic
slump. Our bilateral relations have recovered from a low
point after Spain pulled out of Iraq in 2004 and are based on
strong cooperation in areas such as the military, law
enforcement, counterterrorism, and renewable energy. End

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Tough Times for Economy, Zapatero

2.(U) 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 leftist IU 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 likely over 11 percent.
Inflation is above 4 percent, the economy may already be
contracting, and 2009 is expected to be an even more
difficult year.

4.(SBU) 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. Public
skepticism has been aggravated by the failure of a series of
GOS measures to noticeably affect the slowdown and by
Zapatero's efforts to blame the U.S. subprime mortgage crisis
for all of Spain,s troubles. Now that the budget surplus of
the last four years has become a rapidly growing deficit,
tensions have heightened over regional government financing
issues and the 2009 budget.

5.(U) Spain,s banks have so far weathered the international
financial crisis of the last several weeks 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

6.(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. Its per capita GDP (on a
PPP basis) 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

7.(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

MADRID 00001104 002.2 OF 005

organized crime, and rapidly expanding economic ties. The
real bilateral story is found in novel initiatives such as
the HSPD-6 agreement we signed last year to facilitate the
sharing of information between our national counter-terrorism
authorities. Following the March 11, 2004 train bombings,
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.

8.(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. However, it retains
the capacity for violence. It has carried out several
small-scale bombings and killed two people this year.

9.(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.

10.(SBU) Spain, second only to the U.S. in terms of
investment in Latin America, is actively engaged in the
region. In addition to cultural and historical ties, Spain
shares our interest in strong democratic and free market
institutions in the region. Regarding Cuba, we share with
Spain the objective of a peaceful transition to democracy but
differ markedly on how to achieve this end. Spain's
socialist government has led the EU in calling for
engagement, which it claims can encourage regime elements who
want change, and in lifting restrictive measures in light of
what Spain views as progress on human rights issues. Spanish
companies invested four million euros in Cuba in 2007. The
largest Spanish investments are in the tobacco and tourism
sectors, but energy companies such as Repsol, Endesa, and
Iberdrola are reported to have, or have had, interests as
well. Cuban FM Perez Roque visited Madrid the week of
October 13, and Spanish President Zapatero reportedly plans
to visit Cuba in 2009. We take every opportunity to remind
the Spanish that such measures only give oxygen to the Cuban
regime and that Cuban dissidents need and deserve the active
and visible support of democracies everywhere.

11.(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 contributed some 150 million euros in Afghan
reconstruction funds. Planning is underway to allow the
Spanish to train and equip an Afghan Army company, which we
hope will be a prelude to the training and equipment of a
full battalion. Spain has nearly 1,100 troops with UNIFIL in
Lebanon and about 700 in Kosovo. Spain,s total commitment
to the Iraq Compact was $225 million, and the GOS also has
contributed $22 million to the Basrah Children's Hospital and
a further $28 million in development funding.

Oil, Gas, and Electricity

12.(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% of Spain,s
oil. About 70% of Spain,s gas is imported as LNG. 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.

13.(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,

MADRID 00001104 003.2 OF 005

and hydroelectricity, in that order. The use of gas has
grown rapidly in recent years and now accounts for around 40%
of generation. Nuclear production is around 20% of
generation and has remained roughly constant in recent years;
President Zapatero and the PSOE 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% 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% of
generation this year. Wind generation is growing steadily
and now accounts for over 10% of the total. There are no new
large-scale hydro projects, and hydroelectric generation
varies from year to year with rainfall levels. In this
relatively dry year, it has accounted for around 8% 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

14.(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 as well as operating wind farms. Spain is also
the world,s third largest generator of solar power and is
undergoing a boom in both photovoltaic and concentrated solar
projects; the GOS is particularly optimistic about the
potential for cost reductions in concentrated solar projects.

15.(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 MW of projects that use a
particular technology. Future projects receive lower
guaranteed tariffs. For example, photovoltaic projects
connected to the grid by last September 29 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 supposed 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 (AES) and by supplying
(GE and U.S.-based firms) renewables projects in Spain.

16.(U) A factor complicating the above description 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 it has
increased rates by faster than inflation this year, bills are
still around 20% below the actual cost. This is a matter of
contention between the generators and the GOS, but it has not
affected renewables policy discussions.

17.(SBU) Spanish renewables companies see the U.S. as an
increasingly important market. Spanish companies own wind
farms in at least 14 U.S. states and continue to expand.
Iberdrola,s multi-billion-dollar acquisition of Energy East,
which was concluded last month, 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 up to 7 billion dollars in U.S. renewables in the next
few years. Gamesa and Acciona own four wind turbine
manufacturing plants in Iowa and Pennsylvania. Acciona owns
the world,s third largest solar plant, the 64-MW Nevada
Solar One concentrated solar (parabolic trough) project.
Abengoa Solar is building a 280-MW concentrated solar
(parabolic trough) plant in Arizona. The plant, expected to
begin operation in 2011, will supply Arizona Public Service.
Abengoa Biofuels has several ethanol plants in the U.S.

18.(U) Your visit will contribute to our efforts to
strengthen ties between our two countries on renewable
energy. In addition to the many investments mentioned above,
Spanish companies and government bodies collaborate with DOE

MADRID 00001104 004.2 OF 005

on research. NREL works with the GOS, Center for
Investigation in Energy, Environment, and Technology (CIEMAT)
and CIEMAT,s National Renewable Energy Center (CENER) on
wind and solar topics. Abengoa Solar has received five DOE
or NREL contracts over the last year to develop parabolic
trough and power tower technology. Abengoa has won DOE
grants for second-generation ethanol projects.

19.(U) DOE/EERE helped post and the Spanish government
organize the visit to Washington and Colorado last February
of a renewable energy delegation of Spanish government and
business leaders. The group visited Washington and Colorado
for meetings with federal, Senate, and state officials,
business representatives, and the National Renewable Energy
Laboratory. The delegation, led by Ambassador Aguirre, met
with then-Assistant Secretary Karsner and EERE COO Paul
Dickerson. Spain also sent a delegation to WIREC, although
the event's timing a few days before national elections
prevented ministerial representation.

20.(U) Two issues that may come up in your meetings with
government officials or Spanish companies are U.S. investment
and production tax credits for renewable and U.S. biofuels
subsidies. During this year, Spanish companies have
repeatedly raised with Congressional and USG officials the
importance of the tax credits. They were pleased with the
8-year extension of credits for solar energy included in
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

21.(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.

22.(SBU) After Zapatero,s March re-election, the former
Ministry of Environment was merged into the former Ministry
of Agriculture and the profile of climate change was
increased with the creation of a Secretary of State (Under
Secretary-equivalent) for climate change. GOS officials have
expressed their frustration over not being included in the
USG-initiated Major Economies Meeting process. In bilateral
meetings, USG officials have emphasized the USG's commitment
to combating climate change without jeopardizing economic
growth, the need to include commitments by developing
countries, and our support for technological research. The
technological argument is likely to resonate with GOS
officials; Minister of Trade, Industry, and Commerce
Sebastian is seeking to encourage development of electric


23.(SBU) An issue that might possibly come up if you meet
with CIEMAT officials (though they have agreed the meeting
would focus on Spain's feed-in tariffs and renewables
research) is the Palomares nuclear contamination. A 1966
collision of two Air Force planes caused four atomic bombs to
fall near the southern coastal village of Palomares,
dispersing plutonium across 558 acres. Since 1966, the USG
and GOS have worked together on remediation and monitoring
efforts in the area. DOE is providing $1.2 million to help
fund a radiological mapping project due to be completed at

MADRID 00001104 005.2 OF 005

the end of this year. The results are to be used to
recommend final cleanup measures. There is no agreement on
who will pay for the final cleanup. A DOE delegation visited
Spain in July to receive preliminary results of the mapping
project and begin steps towards a cleanup recommendation.
Following the visit, both governments agreed to begin
discussions with their militaries.

Personal Security

24.(U) In general, Spain is safe. However, Madrid and other
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

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