Spain's new government could axe power subsidies

 

Spain's likely new centre-right government plans a major overhaul of the energy sector, possibly axing subsidies for wind and solar power as the euro zone debt crisis makes funding very costly.

The PP is expected to win a Nov. 20 election by a wide margin and gain control of the lower house. Party leader Mariano Rajoy has repeatedly signalled he will reform the energy sector, without giving details.

Spain's huge rollout of renewable energy made it a world leader in the sector and reduced its dependence on imported fuel, but the result is debt-laden utilities and consumers facing crippling rate hikes to pay for power stations they are hardly using.

"We can't afford high-cost energy and the government can't continue to bet on extremely expensive sources of energy for Spanish households," said Jaime Legaz, head of the People's Party's FAES think tank.

Chopping subsidies for new renewable power plants would stop the debt mountain growing and allow consumer energy prices to rise gradually instead of suddenly, smoothing the adjustment to paying true costs for electricity.

Lower renewable subsidies would also free up cash for utilities to invest in the PP's pet project to boost power connections with the rest of Europe, which would help reduce over-capacity in the energy sector and stimulate investment.

Big power groups have recently stepped up pressure on the incoming government to tackle a deficit of over 20 billion euros they accumulated by selling power at regulated tariffs too low to cover costs for 10 years.

Unlike Germany, which passed the cost of renewable directly onto the consumer, Spain deferred them by obliging utilities to hold these costs on their balance sheets as a state-backed debt known as the "tariff deficit", promising the consumer would repay this debt through gradual increases in electricity bills.

The Socialist government, expected to lose badly in the election after seven years in power, reached a deal with utilities companies last year to eliminate the tariff deficit.

Under the deal the government has gradually been selling billions of euros in state-backed bonds, but the euro zone debt crisis has pushed up Spain's cost of borrowing, making the bonds costly to issue.

"At the end of the day a lasting solution to the power tariff deficit can only come from unpopular measures like making consumers pay more or cutting industry revenues," said Alvaro Navarro of Intermoney brokerage in Madrid.

"You could also merge it with the public deficit, but given Spain's deficit cutting targets and the eurozone debt crisis this looks extremely difficult."

SUN AND WIND

A PP government is expected to target subsidies for energy sources which have contributed relatively little to generation capacity considering their cost to consumers, such as solar photovoltaic (PV) panels and concentrated solar power (CSP), which uses mirrors to generate thermal energy.

But even the more cost-effective wind energy could get hit.

A new government would inherit a deadlock between the current government and the wind power industry over subsidies for new plants after 2012, after the sector rejected the government's final offer as insufficient.

Although Spain's big three utility companies - Iberdrola, Gas Natural and Endesa - have cashed in heavily from the renewable boom, they are not too worried about the end of subsidies for future capacity as long as existing ones remain untouched.

Wind-power generator Iberdrola's chairman Ignacio Sanchez Galan recently slammed the current subsidies policies.

"We made irrational decisions with solar PV power, let's not repeat it with solar thermal power," he said at a company event.

Utilities invested little in Spain's PV boom, which was taken up by small companies. A leading player in CSP is Spanish mid-cap firm Abengoa, which defends government support for renewable, saying it promotes jobs and technology.

Wind turbine manufacturer Gamesa could cope with a capacity freeze as it has offset a huge slowdown in new wind farms in Spain with sales elsewhere, although its factories in Spain could face closure if wind subsidies were withdrawn.

Smaller manufacturers and the wind and solar farm developers which rely on them will also be hit, endangering jobs in a renewables sector which employs over 100,000 workers in a country with nearly a fifth of its workforce on the dole.

One power industry demand specifically addressed in the PP's policy manifesto is to promote smart power grids and meters to match demand with quick-changing supplies of renewable energy.

The manifesto says nuclear plants shall be allowed to run for as long as the CSN regulator deems they are safe to do so, and Rajoy, the PP leader, has long said he would reverse the Socialists' decision to close the ageing Garona plant by 2013.

Analysts do not rule out a windfall tax on cheap nuclear power, which could ease some of the tariff debt consumers owe utilities and the power tariff hikes this is likely to cause, in exchange for an extension of the life of power plants.

"A tax on nuclear plants could be considered in order to reduce the system costs," Espirito Santo Investment said in a note.

The PP manifesto calls for lobbying the European Union to increase Spain's slender power connections with the rest of the continent and continue present government policy to make the country a conduit for North African gas entering Europe.

Plans to expand cross-border connections with France until they can carry the equivalent of one-third of Spain's gas demand by 2014, have been delayed by French energy planners.