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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #2266/01 3530801
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P 190801Z DEC 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 3975
INFO RHMCSUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 02 MADRID 002266 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON SP ENRG PREL EPET SENV
SUBJECT: SPAIN FIVE YEARS AFTER ELECTRICITY MARKET 
DEREGULATION 
 
 
¶1. (SBU) Summary.  Five years after all consumers were given 
the right to choose their own electricity providers, two 
companies control 80 percent of the Spanish electricity 
generation and distribution market.  This market dominance by 
Endesa and Iberdrola has remained consistent over the past 
five years, although deregulation has allowed some 350 small 
players to vie for the remaining 20 percent market share. 
Demand for electricity continues to increase at a rate higher 
than the EU average, but transmission grid expansions have 
failed to keep pace, resulting in high-profile blackouts. 
Coupled with price hikes, these weaknesses are cause for 
concern during this election year.  Meanwhile, Spain is 
working to increase its connectivity to Portugal and Morocco, 
but links to France remain stagnant.  End Summary. 
 
----------------------------------------- 
True Competition? Dominance by Just a Few 
----------------------------------------- 
 
¶2. (SBU) After almost five years since all consumers were 
given the right to choose their electricity provider, true 
competition has not flourished in Spain.  The market 
continues to be dominated by two companies, Iberdrola and 
Endesa, each with approximately a 40 percent share of 
generation and distribution activities.  According to Spain's 
National Energy Commission, the other principal market 
players include Union Fenosa (14.6 percent), Hidrocantabrico 
(4.1), Viesgo (2.3), and approximately 350 other small 
generators and distributors.  Endesa, based in Madrid, 
dominates the southern and eastern areas of Spain, while 
Bilbao-based Iberdrola controls markets in northern and 
western Spain. 
 
¶3. (SBU) Endesa, one of the largest electric utilities in the 
world, was created in 1944 as a Spanish state-owned 
enterprise and was privatized in 1998.  The Italian firm Enel 
and Spain's Acciona won their takeover bid for Endesa Spain 
in 2007 after a long drawn out battle which led many to 
question the GOS' involvement in the process.  The GOS 
continues to insist that Endesa maintain a semblance of 
Spanish identity by mandating that it be kept as an 
independent company, brand, and decision-making center in 
Spain.  The European Commission overruled these and other GOS 
restrictions on December 5 and it is unclear whether Spain 
will appeal this decision. 
 
¶4. (U) Electricity generation is divided among natural gas, 
coal, nuclear, hydro, wind, and other sources.  Natural gas 
and wind generation have risen in recent years, while coal 
and nuclear have remained relatively stable and hydro has 
fluctuated according to rainfall levels.  Wind now accounts 
for almost 10 percent of generation.  Although much 
investment is flowing into solar, most of these projects have 
not yet come on line, and total solar generation remains low 
(though second only to Germany within the EU). 
 
--------------------------------------------- ---- 
Increased Consumption, Blackouts, and Price Hikes 
--------------------------------------------- ---- 
 
¶5. (U) Electricity consumption has grown steadily over the 
past decade.  According to Spain's National Energy Commission 
(CNE), electricity demand increased by 2.9 percent, a rise 
that was higher than the EU average of 1.9 percent and 
reflects the fact that Spain is one of Europe's fastest 
growing economies.  Data through early December suggest that 
2007's increase will be similar. 
 
¶6. (SBU) In response to this increasing demand, Spain's 
national electricity grid operator, Red Electrica de Espana, 
augmented its transmission and distribution network with more 
than 400 km of new circuits in 2006.  These efforts were not 
sufficient to prevent embarrassing and high-profile blackouts 
in Barcelona and Madrid at times during the past year. 
Meanwhile, the CNE continues to look at ways to make the 
network more reliable by possibly devolving some of the high 
voltage lines that Red Electrica controls to other companies. 
 
MADRID 00002266  002 OF 002 
 
 
 With only three months until the general elections, these 
power outages have become issues of note in the political and 
media arenas. 
 
¶7. (SBU) Electricity prices also play prominently during an 
election year, especially since tariffs for the captive 
markets are set and partially subsidized by the government. 
In addition to pressure from domestic users who do not want 
price hikes, the GOS faces demands from electricity 
distributors who say that they are not sufficiently 
compensated.  Under Spain's partially liberalized price 
system, companies that serve the regulated part of the market 
often must sell below cost, producing a deficit that runs 
into billions of euros which the GOS later attempts to 
reimburse.  The GOS, which is under pressure from the 
European Commission to abolish regulated tariffs, says it 
needs three to four years to raise regulated prices in line 
with costs.  The Ministry of Industry, Tourism and Commerce 
recently announced that electricity rates would increase by 
3.3 percent in 2008, around the rate of inflation. 
 
--------------------------------------------- --- 
Connectivity to International Markets Increases? 
--------------------------------------------- --- 
 
¶8.  (SBU) On balance, Spain is a small net exporter of 
electricity.  Connectivity to Portugal and Morocco, where 
Spain is a net electricity exporter, is growing while 
connectivity to France's cheaper imported electricity is 
stagnating.  Electricity imports from France currently 
represent 3 percent of Spain's electricity demand, though Red 
Electrica's goal is to move to 5 percent.  Meanwhile, Red 
Electrica's partnership with Portugal's grid operator Redes 
Electricas Nacionais (REN) continues to grow, as do efforts 
to expand the new Iberian Electricity Market (MIBEL).  This 
past October, Red Electrica announced that it would construct 
three new lines with Portugal over the next five years, 
increasing electricity interconnection between the two 
countries to 3,000 MW (15-20 percent of Portuguese demand) 
from the current level of 1,200 MW.  Plans to build an 
additional 17 km of underwater lines to Morocco are also 
underway and will expand the current level of connectivity to 
North Africa. 
 
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Comment 
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¶9. (SBU) Although Spain was an early player in deregulation, 
the current electricity landscape calls into question the 
benefits of some of the earlier accomplishments.  First, 
Endesa and Iberdrola's market dominance has inhibited 
competition and stifled market entry by smaller firms.  We do 
not anticipate that this dominance will end soon.  Second, 
the GOS' desire to maintain a Spanish fingerprint on its 
former electricity company led many to question the validity 
of its involvement in the Endesa takeover.  Lastly, Spain 
remains resistant to fully liberalizing electricity prices 
since actual prices to end-use consumers could be 
significantly higher than what is currently charged. 
Allowing significant price hikes to occur would present a 
politically unpalatable scenario at this juncture and as long 
as Spain continues to enjoy a budget surplus, it may continue 
to subsidize prices. 
 
AGUIRRE