SPAIN FIVE YEARS AFTER ELECTRICITY MARKET

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