US embassy cable - 04MADRID4613

UNCLAS SECTION 01 OF 05 MADRID 004613 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR OES/EGC, EB/ESC/IEC, AND EUR/WE; NRC FOR 
INTERNATIONAL PROGRAMS: ROSALES-BUSH; DOE FOR INTERNATIONAL 
PROGRAMS 
 
E.O. 12958: N/A 
TAGS: ENRG, SP 
SUBJECT: SPAIN BETS ON WINDPOWER 
 
REF: MADRID 4241 
 
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SUMMARY 
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1.  (SBU) Spain's "new" Socialist Party (PSOE) Government, 
unlike its center-right predecessor, appears be taking quite 
seriously the commitment, enshrined in domestic law and EU 
Directive, to derive 12 percent of energy consumption from 
renewable energy sources by 2010.  Renewable energy sources 
currently only provide 6.8 percent of Spanish energy 
consumption.  Spain believes windpower represents its most 
promising renewable energy source and hopes wind will carry 
it toward compliance with the 12/2010 target.  A quick glance 
at the numbers, and an analysis of the economics of renewable 
energy in Spain, suggests that windpower is indeed Spain's 
best option.  But Madrid's pointman on renewable energy 
believes the 12/2010 target could only be met if the growth 
of energy demand was also suppressed vis-a-vis higher energy 
prices.  He noted, however, that his proposals to increase 
energy prices had been blocked by Second Vice President and 
Minister of Economy and Finance Pedro Solbes, for fear that 
higher prices would increase inflation and put Spain's 
macro-economic fundamentals off kilter.  Whichever way the 
energy price debate goes, renewable energy sources do not 
offer Spain a way out of its worrisome dependency on foreign 
energy supply or a magic solution to allow Madrid to 
implement its Kyoto Protocol commitments without significant 
economic dislocation.  END SUMMARY. 
 
2.  (U) Higher oil prices and the GOS' decision to take its 
Kyoto Protocol commitments seriously have led to greater 
public focus on both nuclear and renewable energy sources. 
Reftel addressed prospects for a nuclear energy revival in 
Spain.  This cable focuses on the renewable side of the 
energy mix equation. 
 
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12 PERCENT BY 2010 TARGET 
------------------------- 
 
3.  (SBU)  In December 1999, the then-ruling center-right 
Popular Party (PP) Government promulgated the Renewable 
Energies Promotion Plan (REPP).  The REPP called for Spain to 
increase the share of energy consumption met by renewable 
energy sources to the level of 12 percent by 2010.  It also 
called for renewable sources to provide 29.4 percent of 
electricity generation by 2010.  These targets were 
consistent with the EU's "White Book" on renewable energy, as 
well as EU Directive 2001/77/CE.  However, by most accounts, 
the PP made no serious effort to meet these targets, 
preferring to let markets determine Spain's energy mix. 
Spain's "new" PSOE Government, which was elected in March 
2004, announced that it would make serious efforts to meet 
the 12/2010 target.  The new government, under the leadership 
of Prime Minister Zapatero, underscored that expanded 
renewable energy production, combined with greater emphasis 
on energy efficiency and a reduced energy demand growth rate, 
were integral parts of Spain's strategy to meet its Kyoto 
Protocol commitments (another initiative that the PP paid lip 
service to, but no made no serious effort to implement). 
Indeed, the government calculates that achieving the 12/2010 
target would reduce annual Spanish CO2 emissions by over 40 
million metric tons in 2011. 
 
4.  (U)  To get a better handle on the PSOE's plans and level 
of commitment to renewable energy sources, ESTHOFF met 
recently with the Francisco Javier Garcia Breva, Director 
General (A/S equivalent) of the Industry Ministry's Institute 
for the Diversification and Savings of Energy (IDAE). 
Garcia, Spain's pointman on renewable energy, began with a 
general overview of renewables in Spain.  His general sales 
pitch is that a greater focus on renewable energy sources 
would:  (1) reduce dependency on foreign energy sources; (2) 
help Spain comply with its Kyoto Protocol greenhouse gas 
emissions limits; and, (3) help boost the Spanish economy (as 
Spanish industry is a world leader in wind and solar 
technologies).  Garcia said it was his job to both increase 
the supply of renewable energy and reduce overall energy 
demand (or at least reduce the growth rate of energy demand). 
 
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CURRENT ENERGY CONSUMPTION SNAPSHOT 
----------------------------------- 
 
5.  (U) According to Garcia, Spain's degree of external 
energy dependency (80 percent) is approximately double the EU 
average.  According to 2003 IDAE figures, 50.3 percent of 
overall Spanish energy demand is met by petroleum, 15.8 
percent by natural gas, 15.2 percent by coal, 11.9 percent by 
nuclear, and 6.8 percent by renewable sources.  Of this 6.8 
percent renewable share, 2.9 percent comes from biomass, 2.5 
percent from hydroelectric, 0.8 percent from wind, and 0.2 
percent from biogas.  All other renewable sources, including 
photovoltaic and thermal solar, represent less than 0.3 
percent of Spanish energy consumption. 
 
6.  (U) Expressed as percentages of electricity consumption 
vice overall energy consumption, coal provides 28 percent of 
Spanish electricity consumption, followed by nuclear (24 
percent), renewables (24 percent), natural gas (16 percent) 
and petroleum (eight percent).  Of the 24 percent of 
electricity consumption supplied by renewable sources, 18.5 
percent comes from hydroelectric, followed by wind (5.1 
percent) and biomass (0.6 percent). 
 
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REPP TARGETS NEED REVISION 
-------------------------- 
 
7.  (U) Under the current REPP targets, Spain should generate 
35,733 megawatts (MW) of electricity from renewable sources 
by 2010.  The target breakdowns are as follows:  16,571 MW 
from hydro, 13,000 MW from wind, 2,230 from minihydro, 3,098 
from biomass, 262 from urban solid waste, 200 from 
thermoelectric solar, 144 from photovoltaic solar and 78 from 
biogas. 
 
8.  (U) Garcia underscored that both the renewed emphasis on 
actually trying to meet the 12/2010 target, as well as energy 
consumption growth rates that had exceeded those predicted in 
the REPP (the original REPP targets were based on a 2 percent 
average annual energy consumption growth rate between 
1999-2010, while the actual average annual growth rate 
between 1999-2003 has been 3.5 percent) had forced the GOS to 
reassess the original REPP targets.  Since energy demand had 
grown faster than anticipated in the REPP, Spain would need 
even more renewable production to meet the 12/2010 goal. 
Garcia estimates that renewable energy production in Spain 
would have to increase 22 percent a year between 2005-10 in 
order to meet the 12/2010 goal.  He also stressed that the 
business/technology environment in Spain had evolved since 
the targets were mandated in 1999 and they thus needed to be 
updated.  Finally, he noted that electricity generation was 
the only segment of the renewables sector that could 
realistically help Spain meet the 12/2010 target. 
 
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PSOE BETS ON WINDPOWER 
---------------------- 
 
9.  (U) IDAE's proposals to adjust to these new realities, 
which are pending the approval of Commerce, Tourism, and 
Industry Minister Montilla, represent a clear GOS bet on 
windpower to meet the REPP targets.  Under the current 
proposed/revised REPP targets, the 2010 windpower goal would 
increase from 13,000 MW to 20,000 MW.  Besides wind, the 
proposed changes would increase the solar and biofuels 
targets, while reducing the biomass target.  What is under 
discussion is not the 12/2010 target itself.  That would stay 
the same.  What would change is that windpower would emerge 
as the renewable technology of choice to meet the existing 
12/2010 target.  Indeed, some in the windpower industry are 
calling for the GOS to expand the 2010 windpower target to as 
high as 28,000 MW (which would represent 18.5 percent of 
electricity demand).  They note that over 30,000 MW of 
economically feasible windpower resources have already been 
identified.  This is not wishful thinking, as Garcia noted 
that the GOS had already authorized permits for close to 
24,000 MW of wind parks.  The final revised REPP targets are 
expected to be issued by the Commerce, Tourism and Industry 
Ministry by March 2005. 
 
10.  (U)  Garcia said windpower clearly offers the single 
best chance of meeting the revised REPP targets and more 
broadly, along with solar, represents the future of renewable 
energy in Spain.  Why wind?  Garcia offered the following 
arguments:  (1) the technology is ripe and mostly homegrown; 
(2) the economics work (i.e., it is profitable); (3) the 
regulatory framework is already in place; (4) the amount of 
unexploited wind resources offers long-term opportunities; 
and, (5) wind is the "greenest" of the renewable sources. 
Garcia said windpower in Spain "was not a chimera, but a 
reality; a brilliant reality."   The GOS would play its part 
by continuing to renew annual agreements that guarantee that 
above market rates are paid for electricity entering the grid 
from renewable sources.  But the key driving force, Garcia 
noted, was that production costs were dropping dramatically, 
making windpower an ever more lucrative business opportunity. 
 
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WINDPOWER IN SPAIN:  FACTS AND FIGURES 
-------------------------------------- 
 
11.  (U) As of 2003, Spain had 6,075 MW of installed 
windpower.  This represents 16 percent of total global 
installed capacity.  It is also eight times the amount of 
installed windpower existing in Spain in 1998 (when Spain had 
only six percent of global installed capacity).  The 6.075 MW 
also represents 47 percent of the current 2010 REPP target of 
13,000 MW.  In 2003, Spain was second in Europe after Germany 
and third in the world (behind Germany and the U.S.) in terms 
of installed windpower.  Spain is set to pass the U.S. and 
move into second place in installed windpower during the 
course of 2004 (8,000 MW of installed windpower by the end of 
2004 versus 15,000 MW for Germany).  Half of the wind 
turbines installed globally in 2003 were installed in either 
Spain or Germany.  During 2003 alone, installed windpower 
capacity in Spain increased by 28 percent (the global growth 
rate was 27 percent and the EU growth rate was 23 percent). 
The 2004 installed windpower growth rate for Spain has been 
estimated at 29 percent.  What all these numbers suggest is 
that windpower represents Spain's only realistic hope of 
meeting the 12/2010 targets. 
 
12. (U)  As for the regional breakdown of Spain's windpower 
resources, it is clear that the dominate region is Galicia 
(1,614 MW installed), followed by Castilla-La Mancha (986 
MW), Aragon (985 MW), Castilla y Leon (925 MW), and Navarra 
(722 MW).  These five regions house 85 percent of total 
installed windpower capacity in Spain.  Garcia said the 
development of windpower in other regions with great 
potential (i.e., Cataluna, Asturias and Cantabria) had been 
stymied by environmental opposition (mostly defenders of 
migratory bird species that perish when they fly into wind 
turbines and those who believe windmills represent a type of 
visual pollution). 
 
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SPANISH INDUSTRY WELL-PLACED IN WINDPOWER 
----------------------------------------- 
 
13.  (U) The Spanish firm GAMESA is the world's third largest 
producer of wind turbines, with 17.5 percent of the global 
market in 2003.  Spanish firms produced 78 percent of the 
wind turbines installed in Spain in 2003.  Foreign firms, 
including GE (which is the world's second largest producer of 
wind turbines with 18 percent of the world market), installed 
the remaining 22 percent.  IDEA estimates that 350 Spanish 
firms are now involved in the windpower sector, representing 
over 81,000 jobs (20,000 direct, 61,000 indirect).  This is 
expected to grow to 200,000 jobs by 2010.  IBERDROLA, Spain's 
second largest electricity supplier, claims to be the world's 
largest generator of renewable energy, with 3,100 MW 
installed by the end of 2004 and plans to have 5,500 MW 
installed by 2008.  Garcia told ESTHOFF that China plans to 
make major windpower investments and that Spanish business 
(e.g., GAMESA) has an excellent chance of capturing a large 
part of this potentially lucrative wind turbine market. 
 
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REMAINING WINDPOWER CHALLENGES 
------------------------------ 
 
14.  (U)  When asked about major impediments to windpower's 
continued growth in Spain, Garcia cited three items all 
related to ensuring a seamless connection of wind parks to 
the Spanish electricity grid:  (1) the need for better wind 
turbine technology to ensure electricity supply security in 
times of low winds; (2) the need for more effective 
connection of wind parks to the electricity grid; and, (3) 
the imperative to connect the Spanish electricity grid with 
the rest of Europe (e.g., France) to better stabilize the 
domestic electricity grid.  All three measures, Garcia 
stressed, would help ensure that greater reliance on 
windpower does not lead to a higher rate of electricity grid 
collapse (thus increasing the economic attractiveness of 
windparks). 
 
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SOLAR A LONGER-TERM BET 
----------------------- 
 
15.  (U) Garcia clearly believes that after windpower, solar 
energy has the best long-term growth potential in Spain. 
Spain, with 9.3 percent of the global market, is the EU's 
second largest producer of photovoltaic cells (after Germany) 
and the world's fourth largest producer (after Japan, the 
U.S., and Germany).  Most of Spain's production is exported 
to Germany (which has 10 times more installed panels than 
Spain).  To stimulate the domestic panel market, the Zapatero 
Government plans to alter Spain's building codes to require 
the installation of thermal solar energy panels in all new or 
renovated buildings.  The idea is for these panels to become 
the main source of sanitary hot water for all new or 
renovated buildings.  But Garcia stressed that the bet on 
solar was long-term and that neither type of solar would 
really help meet the 12/2010 target. 
 
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DEMAND REDUCTION ALSO KEY 
------------------------- 
 
16.  (U) Garcia underscored that the demand side of the 
equation was also key.  He said Spain needs to promote 
greater energy use efficiency while simultaneously reducing 
the growth rate of energy demand.  Expanded renewable energy 
production is far less significant if energy demand growth 
exceeds domestic energy supply growth.  To foster greater 
efficiency, the PSOE Government plans greater efforts to 
implement the 2003-12 Energy Efficiency Strategy passed by 
the former PP government in November 2003.  The building code 
changes referenced above are the first significant new 
efficiency-related measure adopted by the PSOE government. 
Garcia said others would soon follow. 
 
17.  (SBU) But the best way to reduce demand, according to 
Garcia, would be to increase energy prices (presumably via 
higher taxes).  At Garcia's urging, Industry Minister 
Montilla vetted such a proposal with his Cabinet colleagues. 
But the proposal was shot down by Second Vice President and 
Minister of Economy and Finance Pedro Solbes, for fear that 
higher energy prices would increase inflation and put Spain's 
macro-economic fundamentals off kilter.  Montilla is now 
playing the loyal cabinet soldier, stating in repeated public 
remarks that he does not plan to increase energy prices 
beyond current inflation rates.  Indeed rates are expected to 
rise by only 2 percent in 2005, well below the anticipated 
2004 Spanish inflation rate of 2.8 percent. 
 
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COMMENT 
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18.  (SBU) While hydroelectric represents by far the biggest 
source of renewable electricity generation in Spain, most 
economically feasible hydro resources have already been 
exploited and most analysts doubt hydro could make a 
significant new contribution toward meeting the 12/2010 
target.  The bet on wind appears intelligent.  Windpower is 
the fastest growing renewable energy source in Spain and the 
one with the greatest immediate potential for expansion.  The 
business community clearly sees a bright future in windpower. 
 But it is also clear that the wind boom is not the result of 
GOS sponsorship.  The real reason, not surprisingly, is that 
there is money to be made in this business.  In this regard 
and notwithstanding PSOE denials, there is not that much 
difference between the PSOE and PP renewable energy policy. 
The PSOE's bet on windpower is best viewed as a recognition 
of the market potential of windpower in Spain. 
 
19.  (SBU) The economic viability of solar energy in Spain, 
on the other hand, is less well established and it remains 
doubtful that solar could emerge as a significant player in 
the short to medium term.  The building code changes should 
boost domestic demand for photovoltaic panels and are a 
necessary, but probably not sufficient boost for this sector. 
 Spanish companies are well established in both the wind and 
solar markets, being world leaders in the production of both 
wind generators and photovoltaic panels.  Thus there are 
possibilities for interesting synergies. 
 
20.  (SBU) However it is important to remember that the 
renewed focus on renewable energy will not significantly 
alter Spain's serious dependency on foreign energy sources. 
The best solution for that larger question would probably be 
nuclear, but that remains a political taboo for now (see 
reftel).  Prospects for significant change on the demand side 
are also uncertain.  Higher energy prices seem out of the 
question (at least in the short-run) for both political and 
economic reasons, as attempting to curb demand via higher 
prices and/or other mechanisms would likely have a negative 
impact on economic growth.  Promoting better energy 
efficiency via tax incentives is probably the easiest way for 
Spain to slow the growth rate of energy demand, but this 
again would likely be a drop in the bucket and not a solution 
in itself.  What is clear is that there are no easy answers 
to the problem of how Spain can reduce its foreign energy 
dependency, stimulate renewable energy production, and meet 
Kyoto Protocol commitments while simultaneously trying to 
grow its economy. 
MANZANARES