This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MADRID 001676 
 
SIPDIS 
 
DEPARTMENT PASS TO EUR/WE 
 
E.O. 12958: N/A 
TAGS: ENRG EMIN ECON PGOV SP
SUBJECT: SPAIN'S COAL INDUSTRY: THE WAY FORWARD 
 
REF: A. 05 MADRID 00393 
     ¶B. 04 MADRID 04613 
     ¶C. 04 MADRID 04241 
     ¶D. 05 MADRID 00649 
 
¶1. SUMMARY: Coal is currently a critical part of the Spanish 
energy industry, although its domestic production continues 
to rely on public subsidies to remain viable.  The recent 
moratorium on EU coal subsidies to Spain will force the 
Spanish government to re-examine the future of the industry. 
Pressure from the EU, Kyoto Protocol obligations and the high 
cost of domestic coal production makes it likely that Spain 
will seek to reform its coal industry in search of more 
efficient methods of production and power generation.  This 
will mean reorienting industry focus on research and 
development, an area traditionally underfunded by the Spanish 
government.  Coal industry jobs have been a politically 
sensitive topic, although alternative employment efforts and 
the EU mandate to reduce production has lowered this 
sensitivity, allowing the Spanish government more latitude in 
its actions.  The Zapatero government will need to balance 
political, financial and environmental concerns as it 
formulates a viable plan for the future of its domestic coal 
production industry. END SUMMARY 
 
//MARKET OVERVIEW// 
¶2. Spain has been undergoing a steady transformation in the 
energy market, shifting away from traditional energy sources, 
such as coal, and focusing more on natural gas and 
renewables.  At this time, the Spanish energy sector is lead 
by petroleum, which accounts for 53 percent of the market. 
Natural gas is second, at 16.3 percent, recently passing 
coal, which provides 15.6 percent of Spanish energy. 
However, in electricity generation, coal remains the leader 
with 29 percent of electricity production, almost equaling 
petroleum and natural gas combined.  Of note, nuclear energy 
accounts for about 23.6 percent of electricity production in 
Spain.  Spain has twenty coal-fired plants, with half of them 
located around mining sites in northwestern Spain, including 
four in the province of Asturias and four in Leon along the 
area bordering Asturias.  The remaining plants are mostly 
located in the littoral regions in the east and south of 
Spain. 
 
¶3. Domestically, Spain produced approximately 12.3 million 
tons of coal in 2004, accounting for about 33 percent of 
consumption.  The main centers of production are: Leon (5.2 
million tons), Aragon (3.1 million tons), Asturias (1.7 
million tons), Cordoba (835,000 tons), Ciudad Real (730,000 
tons) and Catalonia (286,000 tons).  Lignite coal is produced 
only in Galicia, with centers in Garcia and Meirama.  Spain 
imported 24.6 million tons of coal in 2004, with the largest 
suppliers being: South Africa (10.2 million tons), Indonesia 
(3.5 million tons), Russia (3.3 million tons), Australia (3.2 
million tons) and the United States (2 million tons). 
Approximately 73% of Spain's imported coal is used in the 
production of electricity.  Of note, imported coal is cheaper 
and, on average, contains fewer contaminants than domestic 
coal. 
 
¶4. Currently, there are forty-one companies working in the 
Spanish coal industry, employing a total of approximately 
18,000 workers.  The largest employer is the sole state-owned 
company, Hunosa, which employs 4,100 workers (in addition to 
386 Czech contractors) and produces 1.6 million tons of coal 
per year.  Eight of the companies operating in Spain have 
less than 25 employees, eleven have between 25-50 employees, 
eight have between 50-100 employees, seven have between 
100-500 employees and seven have more than 500 employees. 
The eight largest companies account for almost 75 percent of 
coal production in Spain. 
 
//BACKGROUND AGREEMENTS// 
¶5. In 1990, the Spanish government stopped mandating coal 
prices and coal companies today negotiate market prices 
directly with the electrical companies.  In 1997, Spain 
enacted an action plan for the coal industry covering the 
time period 1998-2005.  The plan, which was agreed to by 
labor groups, would lead to a gradual reduction in domestic 
production.  Under this plan, Spain has reduced its 
coal-mining workforce from 24,000 to approximately 18,000 
workers, mostly through early retirement incentives for those 
workers aged 52 and above.  It also provided for the 
government to guarantee consumption of the coal produced 
domestically, with subsidies granted to electrical companies 
for buying domestic.  In 2004, Spain paid 260 million Euros 
(338 million USD) to electrical companies as an incentive to 
use coal that is produced in the region in which they are 
operating.  The Spanish government has produced a 
continuation of this plan covering the year 2006-2012, 
recognizing that domestic production will be gradually scaled 
down in accordance with EU guidelines. 
 
¶6. In July 2002, new EU regulations took effect, which 
dictated that Spain must lower its coal production by 65 
percent over the next ten years.  The regulation also stated 
that coal mines that do not improve their economic viability 
would only be able to receive production subsidies until 
¶2008.  The European Commission also proposed a new state aid 
program for coal, establishing the continuation of subsidies 
for hard coal production in member states through December 
31, 2010.  The Commission wanted to establish measures that 
will promote the development of renewable energy sources 
while maintaining a minimum level of subsidized coal 
production in the European Union as an "indigenous primary 
energy base".  The guiding principle was that subsidized coal 
production would be limited to the minimum necessary for 
energy security: maintaining access to coal reserves, keeping 
equipment in an operational state, preserving the 
professional qualifications of a nucleus of coal miners, and 
safeguarding technological expertise.  According to Ministry 
of Industry, Commerce and Tourism officials, the Spanish 
government considers it to be in their strategic energy 
interest to preserve coal production because it is a domestic 
energy source that is not subject to the price fluctuations 
common to the petroleum market. 
 
//EU SUBSIDIES FROZEN// 
¶7. In 2003, Spain received over 4 billion Euros (5.2 billion 
USD) in public assistance from the EU, accounting for .54 
percent of the Spanish GDP.  Of that amount, 1.125 billion 
Euros (1.46 billion USD) was used to subsidize coal 
production.  However, in March 2004, the EU opened an 
investigation into Spanish coal-related activities, amid 
allegations that the Spanish government was improperly using 
these funds.  Between 2003-2005, Spain received 5 billion 
Euros (6.5 billion USD) in coal subsidies, which was to be 
used towards the restructuring of the coal industry with two 
goals: to help improve production efficiency and to decrease 
coal extraction activity.  Some specific EU allegations 
include: that certain coal production centers were not closed 
by specific dates, as mandated in the aid package, and that 
aid destined to cover the exceptional costs of transition to 
higher efficiency plants was used to aid coal extraction.  An 
additional factor is that Spain allocates more than 60 
percent of coal aid to state-owned Hunosa, a company which 
claims that it can't cut production costs any further despite 
the fact that its coal is seven times the cost of imported 
coal.  Hunosa is also not considered to be an operation that 
could successfully transition to higher efficiency plants. 
The EU claims that the Spanish authorities have failed to 
adequately respond to EU inquiries on this matter and have 
announced that it is freezing coal sector funds to Spain. 
This development may endanger future coal aid from the EU, of 
which Spain is scheduled to receive from 8-10 billion Euros 
(10.4-13 billion USD) between 2005-2012. 
 
//CO2 EMISSIONS// 
¶8. Spain is struggling to meet its EU and Kyoto Protocol 
obligations to reduce CO2 emissions.  Spain's emissions in 
2004 were 45 percent over 1990 levels, which is three times 
Madrid's 2012 quota under the terms of the Kyoto Protocol. 
According to Ministry officials, Spanish coal plants' CO2 
emissions in the first quarter of 2005 exceeded 10 million 
tons.  In addition, they state that the Spanish government 
does not have the technological expertise to develop "clean 
coal" technology, forcing it to rely on equipment imported 
from Japan and Germany.  A major factor that has prevented 
Spain from developing this technology is the country's 
traditionally low level of investment in research and 
development.  In the past, Spain has allocated approximately 
5 percent of aid money to research and development, well 
below the 14 percent average among EU countries.  However, 
approximately 10 percent of future coal sector aid 
(2005-2012) is earmarked for research and development. 
Ministry officials estimated that the Spanish government 
would have to spend the equivalent of 2 percent of GDP on 
emission credits in the future to meet its Kyoto Protocol 
obligation, providing added impetus for greater investment in 
this area. 
 
¶9. In January, the Spanish government proposed cutting 
emissions in coal fired plants 21 percent from 2005 to 2007. 
Under this plan, coal-power emission would have been limited 
to 55.4 million tons in 2005, falling to 43.6 million tons by 
¶2007.  Companies that exceed these emission levels would have 
the option of paying fines to the Spanish government or 
buying emission rights from other countries.  At the same 
time, the plan would allow for an increase in emission limits 
for combined-cycle natural gas plants from 48.8 million tons 
in 2005 to 76.8 million tons in 2007.  This plan encountered 
stiff resistance from the country's leading coal power 
producer, Endesa, and the coal industry, while being 
supported by Iberdrola, Spain's largest combined-cycle power 
producer.  The Spanish government eventually altered the 
plan, maintaining an overall decrease in emission allowances 
for the country's power generation industry from 89 million 
tons in 2005 to 87 million tons in 2007, but modifying the 
ratio between coal and natural gas powered facilities.  The 
Spanish power industry expects to produce approximately 92 
million tons of CO2 a year, which implies that it would have 
to buy extra emission credits at an estimated cost of some 10 
Euros (13 USD) per ton, or 30 million Euros (39 million USD) 
in 2005. 
 
//COMMENTS// 
¶10. Coal remains a politically sensitive issue in Spain, 
although to a lesser degree than in previous years.  Despite 
the fact that only 18,00 Spaniards are employed in the coal 
production industry, the majority of the jobs are located in 
the Asturias region.  The Spanish government has introduced 
alternative plans for mining communities in conjunction with 
Sociedad Asturiana de Diversificacion Minera (Sadim), a 
company that helps communities develop alternatives to coal 
mining.  Their efforts in this field, combined with EU 
mandates to reduce coal production, have served to decrease 
the political impact of job reductions.  However, it would be 
difficult to completely phase out coal mining because of the 
region's continued dependence on the industry for employment. 
 The Zapatero government's sensitivity to public opinion 
ensures that any such plan will receive careful attention 
before it is enacted. 
 
¶11. Financially, the coal issue has a different aspect.  Over 
the past years, Spain has been called to task over alleged 
misuse of many of its EU subsidies, although the coal dispute 
has the potential to be one of the most damaging.  Failure to 
reform the sector, per EU guidelines, could endanger future 
funds.  Many sources have opined that the Spanish government 
would expend less money if it were to end domestic 
production, provide all coal workers with full pensions and 
rely solely on imported coal.  With the conclusion of EU 
subsidies to Spain looming in the near future, this would 
seem to be a more economically viable solution for the 
Spanish government, especially given that the price of 
imported coal is as low as one-seventh the price of certain 
types of domestic coal. 
 
¶12. The continued use of coal in Spain results in high 
pollution levels that will cause Spain to move further away 
from its Kyoto Protocol obligations (reftel A).  The Kyoto 
Protocol mandates that Spanish CO2 emission levels should be 
only 15 percent over 1990 levels by 2012.  By the end of 
2004, Spanish CO2 emission levels were actually running at 45 
percent over 1990 levels.  Spain's Socialist government views 
making serious efforts to implement Kyoto targets as a 
central part of the "return to Europe" strategy.  In part due 
to Kyoto-related pressure, the GOS is encouraging the 
increased use of renewable energies, such as wind and solar 
power, but the technology is not sufficient at this time to 
meet market demand (reftel B).  Nuclear, although clean and 
potentially sufficient for Spain's energy needs, is 
politically untenable due to strong public opinion against 
its use (reftel C).  The growing Spanish natural gas market, 
already the fifth largest in the world, indicates that Spain 
will increasingly rely on natural gas for its energy needs 
(reftel D).  Environmental factors, combined with Spain's 
political reorientation and the lack of economic viability of 
its domestic coal production sector, will put increasing 
pressure on the Zapatero government to introduce strong 
reform of the domestic coal industry.  If coal is to have a 
role in Spain's long-term energy mix, the Socialist 
government will need to commit itself to increased investment 
in research and development, in the hopes that it can develop 
more efficient processes that will allow it to protect its 
strategic domestic coal production capability within the 
constraints of a more generalized EU move away from coal 
production for electricity generation. 
MANZANARES