IEA Commends Rapid Market Liberalisation, but Stresses the Need to Ensure Supply Security and to Meet Kyoto Target

The Paris-based International Energy Agency published an in-depth review of Spanish energy policy today, in which it describes Spain as "one of the most advanced countries" in energy-market liberalisation, but warned of a number of challenges facing the country in the coming decade. In introducing the book, Robert Priddle, the IEA Executive Director said: "Spain needs to ensure that it can meet growing energy demand. It must introduce full competition in electricity, oil and gas, while also curbing the growth of carbon dioxide emissions, which destabilise the earth's climate."

Energy Security
Mr Priddle noted that Spain has limited energy resources, amounting to only 25% of total primary energy supply. Energy demand has grown at more than 3% annually over the past five years. The review recommends that Spain keep the issue of energy security under constant review.

Natural gas has increased its share in Spanish total primary energy supply from 5.5% in 1990 to 11.2% in 1999, thereby diversifying overall energy supplies. The Spanish government has decided that no more than 60% of gas imports should come from a single country. The IEA approves this emphasis on energy security, but Spain needs to seek to pursue this objective without adversely affecting competition. The review stresses the need to build new liquefied natural gas terminals and gas-network links with neighbouring countries, and to increase the capacity of existing links and terminals. Spain's electricity consumption has been growing about 6% per year. To ensure supply security, it is essential to invest in domestic power-generation capacity and infrastructure, and build new links with neighbouring countries.

Regulatory Reform and Competition
Though some important details are yet to be defined, Spain has gone well beyond the minimum requirements of the European Union in opening up its gas and electricity sectors and plans to liberalise these markets fully by 2003. Powerful companies now dominate the energy markets, and it is essential to further elaborate the groundrules in order to achieve effective competition. The electricity-transmission-system and market-balancing operations have been separated from the vertically-integrated utilities following the establishment of an electricity pool and a company that manages the transmission system. Another company has been established for the management of the gas transmission system, but it has not yet been separated from the Gas Natural Group. In the oil sector, the oil transport and storage company Compañía Logística de Hidrocarburos (CLH) grants third-party access to its facilities, but the separation of CLH from other oil market interests is not complete. Tariff setting for the captive market is a problem, as is the effort to ensure that the tariffs for the different consumer groups fully reflect cost. The government appears, in fact, to be using the tariff-setting process to transfer to captive consumers the efficiency gains from market liberalisation. On the other hand, captive consumers clearly bear a greater share of energy policy costs (e.g. stranded costs and incentives to use indigenous coal) than eligible consumers. Spain's National Energy Commission, an independent advisory body, deals with some regulatory issues in the electricity, gas and oil sectors, but the Ministry of Economy retains primary responsibility for regulatory matters. The IEA recommends that the government support the Commission and help it collect all necessary information. It encourages the Ministry to follow the advice given by the Commission, as when it set such stiff conditions for the proposed Endesa-Iberdrola merger that the deal had to be abandoned.

Energy and the Environment
Spain's efforts to curb the growth of greenhouse gas (GHG) emission have focused on the replacement of coal and oil by natural gas, and the promotion of renewable energy sources, co-generation, and energy-saving measures. The rate of emission growth has reduced slightly, but Spain's GHG emissions have nevertheless grown with its economy, with the major increase in emissions coming from the transport, residential and commercial sectors. Under the EU "burden-sharing" agreement, Spain's GHG emission target is set at 15% above 1990. In fact Spain's GHG emissions in 1998 were already 21% higher than in 1990. Spain needs to speed up the development of its climate-change mitigation plan, which should include clear targets and a set of measures chosen for their cost-effectiveness. A follow-up to the "Energy Saving and Efficiency Plan for 1991-2000" would help greatly in the more vigorous promotion of energy efficiency. Spain has ambitious plans to increase the share of renewables in its primary energy supply to 12% by 2010. Rather than subsidising the producers of renewables, Spain could consider developing a nation-wide green certificate system.