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

291444Z Jun 05

UNCLAS SECTION 01 OF 02 MADRID 002484 
 
SIPDIS 
 
DEPARTMENT PASS TO EUR/WE 
EB/IEC 
 
E.O. 12958: N/A 
TAGS: ENRG ECON SP
SUBJECT: SPAIN: ONGOING PROBLEMS WITH THE ENERGY SUPPLY 
 
REF: A. 05 MADRID 01676 
 
     ¶B. 05 MADRID 00649 
     ¶C. 05 MADRID 00393 
     ¶D. 04 MADRID 04613 
     ¶E. 04 MADRID 04241 
 
¶1. SUMMARY: Spain's national energy grid, Red Electrica de 
Espana (REE), was forced to temporarily cut power to hundreds 
of businesses in various parts of Spain in June due to record 
demand and inadequate supply.  The businesses affected have 
contracts with the electricity supplier that allow for 
interruption of service in return for lower prices.  REE 
officials cite reduced output due to repairs, drought and low 
winds as the primary cause for the shortfall.  The Spanish 
energy grid is currently operating near maximum capacity, due 
to a 43 percent increase in energy consumption over the last 
seven years, and this problem is likely to continue into the 
near future.  As a result, the Spanish government will likely 
have to strike a better balance between the need for 
increased energy prices and the resulting inflationary 
economic impact of such an increase.  END SUMMARY. 
 
¶2. Red Electrica de Espana (REE) interrupted the power supply 
to hundreds of Spanish businesses in north central Spain on 
June 21 and 22 for three hours in order to avoid an overload 
of the energy grid.  During the peak hours on those days, 
energy demand reached record levels of 37,400 MW and 38,600 
MW, respectively.  REE also had to cut power to a number of 
companies in Catalunya on June 27 and 28, despite the fact 
that total demand was significantly lower, at just over 
36,000 MW.  The companies that had their supply interrupted 
had contracts with REE that afforded them lower prices 
(between 15 and 25 percent lower) in return for agreeing to 
have their power supply interrupted subject to certain 
conditions.  In all, about two hundred businesses in Spain 
have this type of contract. 
 
¶3. REE cited a number of factors that contributed to the 
decision to interrupt the power supply to various businesses. 
The main reason was a combination of record demand and 
reduced supply.  Electricity consumption in Spain has 
increased 43 percent between 1997 and 2004, and is already up 
7.3 percent for 2005.  In addition to increased demand, REE 
officials cited current problems with the power supply. 
Dozens of Spain's energy facilities, including two of Spain's 
nine nuclear power plants (currently closed for repair and 
renovations), are experiencing output problems, resulting in 
a 7,300 MW reduction in available power supply.  Renewable 
energy sources, such as wind and hydroelectric, have also 
experienced a reduction in output due to environmental 
factors.  Low winds have resulted in a reduced yield of 
3,000-3,500 MW from wind power facilities, almost one-third 
their potential production.  Hydroelectric facilities, which 
currently have water reserves of 54.9 percent of capacity due 
to an ongoing drought, are supplying power at less than half 
of their potential (7,864 MW out of 16,000 MW).  Finally, REE 
cited a temporary problem with the energy grid connection 
with France, where a decrease in output resulted in a 
reduction of 1,000 MW in the Spanish grid. 
 
¶4. Spanish power companies have attributed some of the fault 
for this situation to sectoral issues, primarily the 
government-regulated fees that they are allowed to charge. 
According to these companies, the regulated electricity fee 
fell 32 percent between 1996 and 2005, harming electricity 
suppliers ability to increase output to meet growing demand. 
Company sources state that Spain's electrical suppliers 
invested EUR 15.5 billion (18.6 billion USD) in the 
distribution network between 2001-2005 and are calling for 
increased rates to help finance further network 
modernization.  In addition to lower revenues, REE sources 
cited higher production costs due to recent increases in the 
price of petroleum and natural gas as an aggravating factor. 
 
//COMMENTS// 
 
¶5. The first hints of this ongoing problem appeared last 
year, when problems with the natural gas supply forced 
Spain's electrical companies to cut power to numerous 
businesses.  Spanish Ministry officials attributed the 
problem to the lack of output from two of Spain's nuclear 
reactors, which were shut down for repairs and renovations. 
However, recent studies show that Spain's margin between the 
potential output of the power grid and the maximum 
electricity demand has almost disappeared.  Industry sources 
state that Spain should have potential output of 10 percent 
more than the maximum demand to be within acceptable safety 
margins.  REE sources have publicly stated that this problem 
is temporary, and will be alleviated by repairs to power 
facilities and an resumption of normal grid connections with 
France.  However, the most recent interruptions in service 
come at a time when the energy demand was significantly lower 
than the record set the previous week. 
 
¶6. As stated in reftels, rising demand is likely to put 
pressure on the Zapatero government to take further action. 
One obvious option is to raise energy prices in the hopes 
that increased fees will curb electricity demand growth and 
the resulting extra revenue will allow electrical companies 
to upgrade the power grid.  However, such a proposal is 
likely to encounter strong resistance from Vice President and 
Minister of the Economy Solbes, who would find the resulting 
inflationary impact on the economy undesirable.  Another 
option is to pursue the development of other energy sources 
(i.e. increase supply).  Nuclear, which is potentially 
sufficient for Spain's energy needs, is politically untenable 
due to strong public opinion against its use (reftel E). 
Coal, abundant in Spain and relatively inexpensive, results 
in high levels of pollution and would run counter to current 
EU policy (reftels A and C).  The GOS is encouraging the use 
of renewable energies, such as solar and wind, but the 
technology is not sufficient at this time to meet market 
demand (reftel D).  Natural gas, relatively clean and 
affordable, appears to be the GOS' choice for future 
production as demonstrated by its commitment to the 
construction of an underground gas pipeline between Spain and 
Algeria (reftel B).  However, Spain is experiencing some 
difficulty in competing for natural gas resources in the 
global market due to government-imposed price restrictions. 
Therefore, it is increasingly likely that Spain will have to 
raise electricity prices to depress the demand growth while 
simultaneously strengthening various production capabilities. 
AGUIRRE