US embassy cable - 04MADRID2118

UNCLAS SECTION 01 OF 02 MADRID 002118 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG, BTIO, EPET, SP 
SUBJECT: SPAIN:  ENERGY SECTOR DEVELOPMENTS 
 
 
1.  This cable summarizes selected developments in the 
Spain's energy sector.  In this issue: 
 
-- New Ministry of Industry, Tourism and Commerce responsible 
for energy policy (para 2) 
-- Possible merger of gas, electricity and water companies 
(para 3) 
-- Low gas supply reserve may lead to brownouts this winter 
(para 4) 
-- Iberian single market for electricity delayed (para 5) 
-- "Coal is important to Spain" says new Industry Minister 
(para 6) 
 
2.  NEW MINISTRY OF INDUSTRY, TOURISM AND COMMERCE 
RESPONSIBLE FOR ENERGY POLICY 
Energy policy is now primarily the responsibility of Spain's 
newly formed Ministry of Industry, Tourism and Commerce 
(Ministry of Industry), headed by Minister Jose Montilla 
Aguilera, a Catalan who has a reputation for being serious 
and disciplined.  In a recent interview Montilla stated that 
the principle aim of energy policy is "to guarantee supply 
and quality."  He said that the coal mining industry is 
important to Spain and affirmed that no new Spanish nuclear 
power plants should be expected, in line with PSOE election 
pledges.  Montilla also said that the new GOS will be serious 
about its commitment to the environment and will fulfill its 
Kyoto commitments "in a way that is manageable and without 
putting at risk the competitiveness of sectors affected by" 
these commitments. 
 
3.  POSSIBLE MERGER OF GAS, ELECTRICITY AND WATER COMPANIES 
Recent reports indicate that Spain's dominant natural gas 
supplier Gas Natural is again attempting to merge with other 
energy companies following an unsuccessful attempt last year 
to merge with electricity company Iberdrola.  Its preferred 
plan reportedly is a triple merger between the country's 
leading electricity supplier, Endesa, with 40 percent of the 
electricity market and the water utility Aguas de Barcelona 
(Agbar).  According to 2003 figures, a merger of the three 
companies would result in an entity with revenues of 16.2 
billion euros (USD19.83 billion at EUR1.0=USD0.816), offering 
water, gas and electricity services.  Pro forma earnings for 
last year would have been about 2 billion euros (2.45 billion 
dollars).  Industry Minister Montilla said in a recent 
interview that while he has not seen a formal proposal, "our 
intention is not to interfere."  While Gas Natural officially 
denies any moves to create such a merger, reports indicate 
that around 30 employees of the three companies have been 
working on a deal for the last two months, and that an 
announcement is being delayed until after the EU elections. 
COMMENT:  This merger would create an extremely large energy 
company that may be based in the region of Catalonia (which 
includes Barcelona).  Some experts believe that last year's 
merger was not permitted in part because its power base would 
have shifted to Barcelona, rather than remaining in Madrid. 
Montilla's comments suggest his Ministry would not oppose the 
merger.  However, the merger would still require approval of 
the competition and energy regulators.  End Comment. 
 
4.  LOW GAS SUPPLY RESERVE MAY LEAD TO BROWNOUTS THIS WINTER 
Spain could face an energy crisis this winter unless gas 
suppliers increase reserves, according to Pedro Mielgo, 
chairman of Spain's national electricity grid operator, Red 
Electrica de Espana (REE).  Per Mielgo, gas suppliers are 
maintaining minimal reserves while at the same time, Spain's 
gas-fired power plants are becoming Spain's main source of 
electricity.  Reportedly, natural gas suppliers are 
maintaining their reserves at less than half their full 
capacity, due to the high cost of gas and other fuels. 
According to the gas sector association Sedigas, demand for 
natural gas rose 16.4 percent in the first quarter from a 
year earlier to 86,660 gigawatt hours.  Reserves, however, 
have not increased proportionally.  Mielgo noted that REE is 
working closely with Spain's principal gas distributor Enagas 
and Industry Minister Montilla to avoid an energy crisis this 
winter.  The National Energy Commission (CNE) warned gas 
suppliers that they will face sanctions if they fail to keep 
reserves above minimum levels.  According to the 1998 
Hydrocarbons Law, suppliers must have minimum reserves 
equivalent to 35 days of consumption.  However, Enagas claims 
that only five out of 12 gas suppliers are currently due to 
have reserves at the end of the year. 
 
5.  IBERIAN SINGLE MARKET FOR ELECTRICITY DELAYED 
Once scheduled to begin in April, the tying together of the 
production and supply of electricity between Spain and 
Portugal will likely suffer further delay, reportedly due to 
delays in approvals by the National Energy Commission and the 
Council of State resulting from the recent change of 
government.  Nevertheless, many electricity companies believe 
that the delays will have a limited initial impact, at least 
until connections supporting 1,100 more megawatts are laid. 
Currently, Spain and Portugal have interconnectivity of 
between 600 and 1,100 megawatts at peak times.  With EU 
financing, this reportedly will double by 2005. 
 
6.  "COAL IS IMPORTANT TO SPAIN" SAYS NEW INDUSTRY MINISTER 
In a recent interview, Montilla argued for the need to 
maintain the Spanish coal industry by saying that Spain must 
have "a diversified sector and coal has its place."  Montilla 
added "We have little water, few nuclear plants and little 
renewable energy.  And it would make no sense to import coal 
and rid ourselves of national production because even though 
it's lost ground it is still important and it's vital for 
certain regions."  COMMENT:  Spain's coal costs far more than 
current world market prices.  But political factors make 
total shutdown difficult, with coal production centered in 
northern regions of the country which already suffer from 
high unemployment.  The GOS has been under investigation by 
the EC for several years regarding government support of the 
coal industry of as much as 600 million euros (735 million 
dollars) in contradiction of EU rules.  End Comment. 
ARGYROS