Case Study: Spanish Wind Power Industry

Case Study: Spanish Wind Power Industry

Wind energy is one of the great success stories of Spain, not just for the wind farm[…]

(Published in the Financial Times on October 27, 2005. Read the original here.)

The Spanish wind power industry is on a roll. Last year, a record 2,000MW of wind power were installed in Spain, pushing the country ahead of previous leader Germany in installed capacity for the first time.

Of course, Spain has its fair share of strong winds, but outsiders might be surprised at the country’s rapid rise to become the number one wind market. This, in turn, has created a sizable home-grown wind power industry employing more than 30,000 people.

As well as Gamesa, the world’s second-largest turbine manufacturer, Spain is home to more than 500 smaller companies making components. As the country’s wind market matures, many of the wind farm operators and manufacturers are now exporting their technology and expertise to less developed wind markets.

“Wind energy is one of the great success stories of Spain, not just for the wind farm promoters but for the suppliers as well,” says Stephen Taylor, head of Spanish operations at Ilex, the energy consultancy. He attributes the success to two factors: Spain’s long-standing policy of paying a premium for electricity from renewable sources, which helps to subsidise the industry; and the key role played by Spain’s regional governments, which see wind energy both as a tool of regional development and as a means to greater energy autonomy.

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Asociación Empresarial Eólica, the industry’s trade body, claims that Spain’s premium tariff policy is the most successful of the various subsidy mechanisms that other countries have tried for renewable energy.

Experts say the success of the premium tariff policy lies less in the value of the subsidy
– which some believe is now too high – than in the stability it provides. Because wind producers know how much they will be paid for their electricity many years into the future, they can look forward to a predictable income stream.

That makes it easier to make an investment case for a project and raise the finance. Unlike other energy projects, 80 per cent of the cost of a wind farm is paid for upfront. But it is not hard to find investors because, once built, a Spanish wind farm offers an above average return for minimal risk.

Mr Taylor says that a Spanish wind farm receiving an average of 2,000 hours of wind a year can produce a return on investment after tax of 8 or 9 per cent. If the wind blows more often, the economics are even more favourable. “If you get above 2,400 hours, you are on a very good deal,” he says.

The tariff regime has perhaps been too successful in attracting investment to wind farms, because there is now a long waiting list for projects. Because of the time needed to collect wind data and get environmental approval, each farm takes about six or seven years to develop.

Spain’s regional governments, which approve projects, have woken up to the big attraction that wind energy holds for investors. They are now putting conditions on projects to ensure some of the reward stays in the community. For example, the Extremadura region insists that wind farm projects create three full-time jobs for each MW of capacity.

In Galicia, one of the pioneering regions for wind power in Spain, the regional government has perhaps gone furthest in flexing its muscles. It has set an ambitious target to have 6,500MW of installed wind power capacity in the region by 2010.

El Perdón wind farm in Navarra, Spain

Unfortunately, that figure is almost twice the target set for Galicia in the central government’s latest renewable energy plan. Of the 20,000MW of capacity planned for the country overall by 2010, the Madrid mandarins have allocated Galicia just 3,400MW. However, the Galician government has already awarded contracts that total more than
4,000MW.

The most politically acceptable solution would be to make the cake bigger, which would avoid Madrid having to “steal” capacity from other Spanish regions to give to Galicia. But the Spanish government is worried that wind power could end up providing too much of the country’s energy needs, with a consequent destabilising effect on the grid.

Because of the inherent variability of wind – on becalmed days, the turbines do not spin
– grid management becomes more complex when there is a lot of wind power on the grid because other sources of power have to be kept on standby to cover the drop in capacity.

Industry experts say that this variability issue effectively sets an upper limit for wind energy’s contribution at between 30 and 40 per cent of a country’s generating capacity. However, Spanish wind farms already regularly contribute about 20 per cent in the blustery winter months. On a particularly good day, wind’s share can reach 30 per cent.

Representatives from the wind industry argue they are ready to sustain a higher level of contribution thanks to new technology that helps overcome the variability issue, such as better forecasting software.

Last year, the government made some concessions to their argument by allowing larger wind farms to bid their power into the “pool” of other electricity generators. In return for getting a higher price for this “pool” electricity, they must predict 30 hours in advance the power they can provide. If the wind drops unexpectedly and they fail to deliver the power they have bid for, they must pay a penalty.

The new pool pricing scheme will likely lead to consolidation because it puts smaller independent producers at a disadvantage.

But most experts welcome the move because it shows that in Spain, at least, wind is now considered a mainstream energy source. As Mr Taylor explains: “Spain is really leading the way when it comes to wind power.”

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