In-depth analysis of the Spanish energy sector

The complex Spanish energy sector is experiencing changes. After the rise of its economy in the 1990’s that boosted several productive sectors, including energy, Spain is now suffering a stagnation that started with the 2008 recession and has plunged the country into a spiral of cutbacks, restrictive policies and a total lack of investments. The current recovery of the GDP that reached 3.2 percent in 2015 gives reasons to be optimistic about its economy, although energy indexes are still significantly lower than those the country had before the crisis, according to the last International Energy Agency’s (IEA) report on Spain.

The economic recession has restrained both consumption -mainly dominated by hydrocarbons- and production of primary energy, that has included renewable energy in recent years as one of the main sources, followed by nuclear energy. However, the total energy demand has barely evolved from 30,278 tons of oil equivalent in 2009 to 33,623 in 2014, which has posed new challenges, especially for the domestic market, free from 1997 but limited to few operators that control electricity, oil and gas. These companies, subject to regulations of the National Commission of Markets and Competition (CNMC in Spanish), have had to shift expectations due to numerous changes in energy regulations and a tariff deficit.

Even so, investors see regulations as a safe value, a guarantee. At international level, Spain is still highly dependent from oil to satisfy its energy demands; therefore, a greater diversification of local sources of energy is perhaps one of the biggest energy challenges the next Government of Spain, hopefully to be formed after summer, will have to overcome. In addition, as a member of the European Union, Spain is increasingly pushed to meet emissions targets, incorporate renewable energies to the energy mix, and assure energy efficiency by 2020. Additionally, the debate about creating a European Energy Union is on the table, and its members are already analyzing impacts and possibilities of a community and integration policy, especially in electricity and gas markets. In this context, “Spain has many strong points, specifically related to technology development and safe supply”, affirmed the Spanish Energy Club. This will call for the implementation of a common policy, but also for new investments in key areas like infrastructure.

Foreign Dependency

“The future depends on the capacity of countries to adapt themselves to changes affecting balance between their energy supply and demand”, said the IEA. The Iberian Peninsula is known by its high dependency from foreign oil and gas imports to satisfy its demand as a result of the limited hydrocarbons present in the country, which are the main source to fulfill primary energy consumption (see Figure 1). This demand panorama contrasts with its production that, although having evolved in recent years towards a more balanced and diversified structure, still forces the country to import a great part of the energy it needs. The Spanish electricity generating system was based until recent years on the production of nuclear and coal energy. Nevertheless, electricity generation has added new sources during the last decade such as renewable energies that now covers 50 percent of the electricity supply, including hydroelectric energy figures, according to the Spanish Secretary of Energy (see Figure 2).

Despite all progress made in diversification, Spain dependency on energy imports is still high and imposes a burden to the country economy, particularly when commodities prices are as high as they were until mid-2014. The drop in oil prices ever since, a lower consumption during recession and the rise of renewable energies thanks to the support given during prosperity times have slightly relieved expenses from imports, although they are still high since Spain imports 70 percent of its energy demands, according to Eurostat data. While experts highlighted a reduction of 10 percentage points, current numbers are still way above the average 53.2 percent for the EU-28, placing Spain as the ninth country with highest rates of energy imports within the Eurogroup (see Figure 3).

PRIMARY ENERGY CONSUMPTION vs PRIMARY ENERGY PRODUCTION (Figures 1 and 2)

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Energy Supply Security

The importing nature of Spain has allowed it to develop one of its strongest points: energy supply security. “Spain has been able to diversify the origin of its partners, mainly Russia, the Middle East and North and West Africa, so as to avoid being at the expense of a sole region stability to satisfy its demands, highlighted the IEA. Simultaneously, the country is part of the response system developed by the OCDE to cope with possible supply disruptions and other emergencies. This strength is the result of a commitment to an investment policy in this matter during the last decade, as part of the National Energy Plan 2015. In recent years, investments in oil refining have placed Spanish refineries, mostly owned by Repsol, Cepsa and BP, at the world top, contributing with qualification and flexibility to adapt supply to domestic and export markets. Indeed, investments in logistic infrastructure are a proof of it: from improvement of oil delivery ports in the South of the country to gas installations, including important terminals such as those belonging to Enagas or Gas Natural Fenosa. It is also important to highlight regasification plants, since Spain has a third of the total regasification capacity of liquefied natural gas (LNG) in the European Union, according to the Spanish Energy Club.

In the electricity sector, Spain has also built a great fleet, although limited to few companies like Iberdrola, Endesa and Red Electrica Española. New sources of generation, such as solar and wind energy, have increased their reliability and even produced exportable volumes. The exponential growth in electric energy experienced until 2008 has also been responsible for the excess of installed power capacity in recent years (that has surpassed 100,000 mW, 59,000 mW of which belong to the programmable power capacity of thermal and nuclear plants), a fact that has put financial stability of the electric power industry under pressure. In addition, we witness “an economic sustainability problem that is evidenced in both a lack of competitiveness of energy prices in Spain and a financial burden carried by companies”, affirmed a recent study on the sector conducted by the Fundacion de Cajas de Ahorros Española (Funcas in Spanish). A capacity excess also affects gas due to numerous regasification plants and combined cycle power facilities located in Spain. In order to clear this collapse, experts are advising creating a sustainable and affordable market to make the most of refining, building an Iberian gas system, as well as improving energy connections with France, Portugal and Algeria, most of them already planned.

 Opportunities

One of the most important problems for Spain from the energy point of view is the insufficient number of connections between the Iberian Peninsula and the rest of the European Union, making it an “energy island”. With the purpose of easing that isolation and allowing its full integration to the Internal Energy Market, different Governments have called for the need to increase Spanish energy connection capacity with Europe. Just until 2015, several Governments listened and European institutions engaged to promote submarine electric connection with France from Vizcaya Gulf, with an expected investment of €1,9 billion, and two additional networks across the Pyrenees, through Navarra and Aragon. Regarding gas, MidCat is the primary project that will bring gas from the North of Spain to France through the European corridors.

Concerning oil, the International Energy Agency is encouraging Spain to assess its shale gas potential, in line with the search of local unconventional resources, such as those located in the Atlantic basin, in order to guarantee a safe supply. However, it is necessary to overcome a strong opposition in the national public opinion against fracking that has unsuccessfully tried to make progress in exploratory drillings in Burgos. Regarding Spanish refining, as well as the European, it is facing great challenges to reduce costs and be able to compete within its own territory and market with products coming from other countries less affected by environmental regulations and with inexpensive workforce. “Survival of refineries in Spain will depend on its capacity to stay at the cutting-edge of technology and to keep the highest flexibility to process any type of oil”, affirmed the Spanish Energy Club that also fosters players to take advantage of oil infrastructures in the country.

Likewise, the future of energies that were key in the past, like coal, and are still important to generate energy, like nuclear power, are now being assessed. Indeed, the latter is subject to debates because of the risks it implies. For instance, Enerclub recommends to hold a debate on whether it is convenient or not to extend the useful life of six nuclear plants currently operating, since legislation has put a moratorium on this energy since the 1980’s. That is also the case of renewable energies, which stopped receiving investments after the Royal Decree 2013. Coalfired plants (including the oldest combined cycle power plants) that have complied with regulations will need to make significant investments in the near future if they want to comply with the most rigorous environmental regulations. Nevertheless, it is probable that their owners decide not to invest due to the current regulatory framework.

Future investments in the sector “should assure an affordable energy price level that guarantee not only fair access, but also competitiveness of the industrial sector”, said Mariano Marzo, professor at the UAB. Investments will depend on juridical security offered by the country, which, apparently, is now facing a complicated situation that hinders the entry of capital flows. Additionally, there is uncertainty regarding not only possible changes in front of regulations and economic crisis, but the absence of Government from the December 2015 elections, not to mention doubts about energy policies that may be adopted by the new administration expected to be formed after the summer.

SPAIN'S OIL INFRASTRUCTURES MAP

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