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DE RUEHMD #1292/01 3441138
ZNR UUUUU ZZH (CCY AD0903E2 MSI4817-695)
R 091138Z DEC 08
FM AMEMBASSY MADRID
TO SECSTATE WASHDC 5744

UNCLAS MADRID 001292 
 
SENSITIVE 
SIPDIS 
C O R R E C T E D  C O P Y (CAPTION) 
 
STATE/H FOR ANDREW MACDERMOTT, PATRICIA DIGGS 
 
E.O. 12958: N/A 
TAGS: AMGT ASEC BEXP OREP AFIN SP
SUBJECT: SCENESETTER - CODEL DORGAN VISIT TO SEVILLE, SPAIN 
DECEMBER 18-19 
 
REF: STATE 128942 
 
¶1.  (SBU) Summary:  Embassy Madrid warmly welcomes your 
visit. You will be visiting Spain during a severe economic 
downturn, its first in 15 years.  Spain has become a leader 
in the development of renewable energy - particularly wind 
power - as the result of implementing feed-in tariff 
subsidies.  Several Spanish companies, including Abengoa, 
whose solar tower plant you will visit, are among the world's 
largest renewable energy companies.  Cooperation on renewable 
energy is an increasingly important part of our bilateral 
relationship.  As expected, Spanish renewable enregy 
companies reacted favorably to the extension of U.S. 
renewable energy tax credits as part of the Emergency 
Economic Stabilization Act of 2008.  End Summary. 
 
--------------------------------- 
Tough Times for Economy, Zapatero 
--------------------------------- 
 
¶2.  (SBU) President Zapatero's Socialist party (PSOE) 
narrowly defeated the conservative Popular Party (PP) in 
general elections last March.  The PSOE gained seats in 
Congress but fell just short of an absolute majority, forcing 
it to barter with small regional parties and the United Left 
party to pass legislation.  Foreign affairs did not play a 
major role in the campaign, but the PSOE reminded voters that 
it removed Spain's troops from an unpopular war in Iraq. 
 
¶3.  (U) Since Zapatero was re-elected, the GOS has faced a 
deepening economic slump.  After 15 years of rapid economic 
growth, the end last year of a long construction boom has led 
to surging unemployment, now almost 13 percent.  Inflation 
reached a high of more than 5 percent earlier this year, but 
has recently dropped to 2.4 percent due to the drop in oil 
prices and the economic downturn, spurring concerns over 
possible deflation next year.  The economy is almost 
certainly already in recession, having contracted 0.2 percent 
in the third quarter of 2008;  2009 is expected to be an even 
more difficult year.  Months of worse-than-predicted economic 
news have led to widespread criticism of Zapatero and his 
economic policymakers for their upbeat predictions during the 
campaign and for having downplayed the economic difficulties 
long after many others were saying Spain was in a crisis. 
 
¶4.  (U)  Spain's banks have so far weathered the 
international financial crisis of the last few months better 
than their counterparts elsewhere in Europe.  Conservative 
regulation by the Central Bank meant that they had high 
provisions against losses, and almost none had invested in 
U.S. mortgage-based securities.  However, Spain's domestic 
property crash has left banks with bad construction and real 
estate loans, rising unemployment has contributed to 
increased delinquencies, and the country's very high current 
account deficit makes it dependent on crossborder lending 
that is now scarce.  Spain has announced bank support 
measures like those elsewhere in Europe, including asset 
purchases, guarantees for new debt, and possible capital 
infusions.  The GOS announced on November 27 plans for 11 
billion euros in additional spending including 8 billion for 
municipal government infrastructure projects. 
 
¶5.  (U) The medium-term economic picture remains reasonably 
favorable.  Spain has the world's eighth largest economy and 
is the second largest international tourism destination and 
eighth largest auto manufacturer.  By one way of measuring, 
its per capita GDP is expected to pass Italy's in 2010.  In 
the bilateral economic relationship, investment is more 
important than trade.  U.S. investment has played an 
important role in the Spanish economy for decades, and U.S. 
firms employ over 200,000 Spaniards.  Spanish investment in 
the U.S. has surged in the last few years, particularly in 
renewable energy, banking and toll road construction.  In 
2007, Spain was the fourth largest foreign investor in the 
U.S. 
 
---------------------------------- 
Bilateral Cooperation and Security 
---------------------------------- 
 
¶6.  (SBU)  U.S.-Spain relations were seriously damaged by 
President Zapatero's decision immediately after his election 
in 2004 to abruptly withdraw Spanish forces from Iraq. 
However, over the last several years, both countries have 
made a concerted and successful effort to rebuild the 
relationship based on strong mutual interests in 
counter-terrorism, fighting narcotics trafficking and 
organized crime, and rapidly expanding economic ties. 
Following the March 11, 2004 train bombings in Madrid, Spain 
remains a target of Islamic extremists.  Al-Qaeda leaders 
often call for the recapture of the medieval "Al Andalus," 
 
and the uncovering in January of a cell allegedly sympathetic 
to Al-Qaeda and operating out of Barcelona has shown the 
public that this threat is not an idle one. 
 
¶7.  (SBU) Spain is no stranger to terrorism, having fought 
the domestic Basque terrorist group ETA for almost 40 years. 
ETA has been weakened by a series of arrests stemming in part 
from improved cooperation from France.  Last month, French 
police arrested ETA's presumed leader and military chief in 
Cauterets, France;  earlier this year, Spanish police 
arrested the organization's political leader.  However, ETA 
retains the capacity for violence and has carried out several 
small-scale bombings and killed four people this year. 
 
¶8.  (SBU) Narcotics trafficking is another area of common 
concern and excellent cooperation.  Spanish authorities 
acknowledge that Andean cocaine is a serious problem here, 
and Colombian trafficking organizations are active in Spain. 
Money laundering is another serious issue.  We are increasing 
bilateral cooperation and encouraging Spain to continue 
engaging more aggressively with law enforcement authorities 
in key Latin American countries.  Second only to the U.S. in 
terms of investment in Latin America, Spain is actively 
engaged in the region, both politically and economically. 
 
¶9.  (SBU) Spanish military cooperation matters.  The bases of 
Rota and Moron are strategic hubs, midway between the U.S. 
and Afghanistan and Iraq.  U.S. planes and ships account for 
around 5,000 flights and 250 port calls a year in Spain. 
Spain has nearly 800 personnel in Afghanistan and runs a 
provincial reconstruction team in Badghis province.  Spain 
has nearly 1,100 troops with UNIFIL in Lebanon and about 700 
in Kosovo. 
 
------------------------ 
Oil, Gas and Electricity 
------------------------ 
 
¶10.  (U) Although Spain is not dependent on Russian gas like 
many European countries, it does rely on imports for almost 
all of its oil and gas, so energy security is a significant 
concern.  Spain imports oil from a variety of suppliers, 
including Russia, Mexico and the Middle East.  Last year, no 
one supplier provided more than Russia's 22 percent of 
Spain's oil.  About 70 percent of Spain's gas is imported as 
liquefied natural gas.  However, nearly all of the imported 
pipeline gas and almost a third of Spain's total gas imports 
come from Algeria, leaving the country uncomfortably 
dependent upon one source.  Other main suppliers include 
Nigeria, Persian Gulf countries, Egypt, and Trinidad & 
Tobago. 
 
¶11.  (U) In recent weeks, Russian oil company Lukoil (partly 
owned by the U.S. firm ConocoPhillips) has sought to acquire 
up to 29.9 percent of Repsol, Spain's largest oil and gas 
company.  GOS officials, including President Zapatero, 
publicly opposed reported interest by the Russian 
government-owned Gazprom, but Zapatero has supported Lukoil's 
interest, saying the GOS "will not interfere" and referring 
to the negotiation as "an issue between two private 
companies."  Spain's conservative opposition Popular Party 
has been vocal in its opposition to the sale, which would 
make Lukoil the former national oil company's single largest 
shareholder.  Media reports indicate that Repsol and Lukoil 
have agreed to the GOS' requirement that Repsol continue to 
be directed by Spaniards, with Lukoil controlling 4 of 
Repsol's 16 board seats with up to 29.9 percent of the 
company's equity. 
 
¶12.  (U) The rapid economic growth of the last several years 
has led to a steady increase in electricity consumption.  The 
main electricity sources are gas, nuclear, coal, wind power, 
and hydroelectricity, in that order.  The use of gas has 
grown rapidly in recent years and now accounts for around 40 
percent of generation.  Nuclear production is around 20 
percent of generation and has remained roughly constant in 
recent years;  President Zapatero and the ruling PSOE party 
oppose new nuclear power plants and have committed to closing 
Spain's existing plants as their useful lives end. 
Coal-powered generation has fallen dramatically (down 39 
percent in the first 9 months of 2008) for price reasons 
including the added cost of CO2 emissions permits.  It has 
accounted for a little over 15 percent of generation this 
year.  Wind generation is growing steadily and now accounts 
for over 10 percent of the total.  There are no new 
large-scale hydro projects, and hydroelectric generation 
varies from year to year with changes in annual rainfall 
levels.  In this relatively dry year, it has accounted for 
around 8 percent of generation.  Solar and other forms of 
generation are still relatively minor sources of current 
generation, although investment in solar has boomed in the 
 
last couple of years. 
 
--------------------------------------- 
Renewable Energy Increasingly Important 
--------------------------------------- 
 
¶13.  (U) Renewable energy is an increasingly important part 
of the Spanish economy and of our bilateral relationship. 
Abundant wind and sun, and generous feed-in tariffs, have 
helped make Spain a world leader in wind and solar power. 
Iberdrola is the world's largest producer of wind power, and 
Acciona is the third largest.  Gamesa, partially owned by 
Iberdrola, is one of the world's largest manufacturers of 
wind turbines and also operates wind farms.  Spain is also 
the world's third largest generator of solar power and has 
undergone a boom in both photovoltaic and concentrated solar 
projects;  the GOS is particularly optimistic about the 
potential for cost reductions in concentrated solar projects 
like Abengoa's Solar Tower that you will visit. 
 
¶14.  (U) Spain's feed-in tariff system provides very high, 
guaranteed, inflation-adjusted tariffs for the life of the 
project for the first few hundred megawatts (MW) of projects 
that use a particular technology.  Future projects receive 
lower guaranteed tariffs.  For example, photovoltaic projects 
connected to the grid by September 29, 2008 qualified for 
tariffs of over 40 cents of a euro per KWh.  The first 367 MW 
of ground-based PV projects connected before the end of 2009 
will receive a still-generous 32 cents.  The steady decline 
in wind generation costs is an example of how the system has 
worked.  The guaranteed tariff for new wind power projects is 
around 7 cents/KWh, not much above the cost of other means of 
generation.  The high tariffs are designed to be factored 
into overall consumer electricity bills;  the volumes are 
small enough that the increase would be only around 8 percent 
so far.  U.S. companies are benefiting from Spain's system 
both by investing in (e.g., AES) and by supplying (e.g., GE 
and other U.S.-based firms) renewables projects in Spain. 
 
¶15.  (U) A factor complicating Spain's feed-in tariff system 
is that for the last several years, the GOS has not passed on 
the full cost of electricity to consumers and is building up 
a debt to generators for the remainder.  Although rates have 
increased more than inflation this year, bills are still 
around 20 percent below actual cost.  This is a matter of 
contention between the generators and the GOS, but it has not 
affected renewables policy discussions. 
 
¶16.  (U) Spanish renewables companies see the U.S. as an 
increasingly important market.  Spanish companies own wind 
farms in at least 17 U.S. states and continue to expand. 
Iberdrola's multi-billion dollar acquisition of Energy East, 
which closed in September, reportedly was delayed over the 
company's insistence that New York regulators allow it to 
keep Energy East's wind assets.  Iberdrola plans to invest as 
much as $11 billion in U.S. renewables in the next few years. 
 Gamesa and Acciona own four wind turbine manufacturing 
plants in Iowa and Pennsylvania.  Gamesa has wind energy 
projects operating or under construction in 18 states. 
Acciona owns the world's third largest solar plant, the 64-MW 
Nevada Solar One concentrated solar (parabolic trough) 
facility.  Abengoa Solar, which will be hosting you for a 
tour of its Solar Tower plant in Sanlucar la Mayor, is 
building a 280-MW concentrated solar (parabolic trough) plant 
in Arizona, which will be the world's largest of its kind. 
The plant, expected to begin operating in 2011, will supply 
electricity to Arizona Public Service. 
 
¶17.  (U) Abengoa Solar has received five contracts from DOE 
and NREL over the last year to develop parabolic trough and 
power tower technology.  Abengoa has also been awarded DOE 
grants for second-generation ethanol projects.  As of the end 
of 2007, Abengoa Bioenergy is the fifth largest producer of 
Bioethanol in the United States with 110 million gallons of 
installed capacity.  The company currently has biofuels 
operations in 7 U.S. states. 
 
-------------------- 
Bilateral Engagement 
-------------------- 
 
¶18.  (U) In February of 2008, Embassy Madrid and the Spanish 
government organized a visit to Washington and Colorado for a 
renewable energy delegation of Spanish government and 
business leaders including Santiago Seage, CEO of Abengoa 
Solar.  The group participated in meetings with federal, 
Senate, and state officials, business representatives, and 
the National Renewable Energy Laboratory.  The delegation, 
led by Ambassador Aguirre, met with Senators Craig, Domenici, 
Grassley, Martinez, Salazar and Thune, and several staff 
members. 
 
¶19.  (U) Two issues that may come up in your meeting with 
Abengoa are U.S. investment and production tax credits for 
renewables and U.S. biofuels subsidies.  Throughout 2008, 
Spanish companies have repeatedly raised with Congressional 
delegations and USG officials the importance of renewing tax 
credits.  In fact, Abengoa's planned 280 MW concentrated 
solar plant in Arizona was contigent upon the extension of 
federal tax credits.  Companies were pleased with the 8-year 
extension of credits for solar energy included in the 
financial sector rescue legislation, though we have not heard 
reactions to the one-year extension of wind credits.  Press 
reports have indicated that the same legislation eliminated 
the "splash and dash" incentive that had sparked U.S. exports 
to Europe of imported biofuels but extended the biofuels 
subsidy that also encourages U.S. exports.  GOS officials 
have expressed interest in confirmation of the measures and 
their impacts. 
 
-------------- 
Climate Change 
-------------- 
 
¶20.  (SBU) Climate change is one of the signature issues of 
the Zapatero Administration and one reason the GOS is so 
supportive of renewables.  The Socialist government has 
firmly embraced the Kyoto Protocol, under which Spain 
committed to reduce greenhouse gas (GHG) emissions to 15 
percent above 1990 levels by 2012.  Despite generally popular 
initiatives to promote renewables and energy efficiency and 
to implement EU commitments, emissions are currently 50 
percent above 1990 levels, in part because of years of rapid 
economic growth.  Spain is the EU country most out of 
compliance with Kyoto and will not meet its 2012 commitment. 
That said, Zapatero remains committed to fighting climate 
change and, despite the economic slowdown, may be willing to 
commit to costly actions if necessary. 
 
----------------- 
Personal Security 
----------------- 
 
¶21.  (U) In general, Spain is safe.  However, large cities 
attract a large number of criminals and pickpockets and 
frequent incidents of crime of opportunity against the unwary 
do occur.  It is best to carry only essential items including 
a photocopy of your passport's photo page.  Visitors can 
protect themselves against crime by being street-smart, alert 
and aware of their surroundings.  Travelers are encouraged to 
review the most recent Worldwide Caution issued by the 
Department of State.  As the Department of State continues to 
develop information on any potential security threats to 
Americans overseas, it shares credible threat information 
through its Consular Information Program documents, available 
on the Internet at http://travel/state.gov.  Additional 
information regarding safety and security in Spain is 
available on the U.S. Department of State's website 
(www.embusa.es). 
AGUIRRE