SCENESETTER FOR DOE DEPUTY SECRETARY KUPFER'S

UNCLAS SECTION 01 OF 05 MADRID 001104 SENSITIVE SIPDIS DOE FOR A.PATTERSON, PI:G.KERESTES/K.BALLOU/G.BISCONTI, EERE:A.CHIANG STATE FOR EUR/WE AND EEB/ESC/IEC E.O. 12958: N/A TAGS: ENRG OVIP PREL SP SUBJECT: SCENESETTER FOR DOE DEPUTY SECRETARY KUPFER'S VISIT TO MADRID OCT. 28-29 MADRID 00001104 001.2 OF 005 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 Summary. -------------- 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 �A;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 scarce. 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 cars. -------------- Palomares -------------- 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 (www.embusa.es). AGUIRRE