By the Blouin News Business staff

Cooperating with Iran won’t solve Spain’s energy woes

by in Europe.

Source: BP Images/flickr

Source: BP Images/flickr

Spanish foreign minister José Manuel García-Margallo said on Monday that his country and Iran will build a refinery in Spain’s North African enclave of Algeciras. Not that it will solve Spain’s chronic energy challenges. The country’s energy mix is in flux, and it may not reach its 2020 clean energy goals.

There are challenges on multiple fronts. Although about a quarter of the country’s electricity was generated by renewable sources in 2015, and counting nuclear and hydropower the share of clean energy was roughly 60%, all the rest were costly fossil fuel imports.

After many years of actively encouraging solar power with subsidies, as of last summer production exceeded demand by some 60%, leaving the government with a yawning debt of $34.73 billion to PV producers. To fix its finances, the government has imposed a wildly unpopular tax on solar power that the solar industry calls “punitive” and “unjustified.” All solar panels must be hooked up to the grid (or face a fine of up to $40 million); PV systems 10-100kW may not sell their electricity but rather are required to donate it to the grid free without compensation, and anything higher must be registered to sell excess electricity — although taxes will be based on total output.

Regulatory uncertainty is also hindering Spain’s wind industry, which has been paralyzed for several years with many projects left in limbo. Last week a much-hyped wind power auction of 500MW last week succeeded but fell short of expectations, netting zero premium over the market price. Furthermore, the European Wind Energy Association (EWEA) raised concern about the lack of a pre-qualification stage in the auction. Pre-qualification checks the financial and technical viability of the bids, so without it there is no guarantee that developers will be able to deliver on projects, said EWEA CEO Giles Dickson.

The Spanish Wind Energy Association warned that Spain needs to initiate new auctions for another 5.9GW before the summer, or risk missing its 2020 clean energy goals. Likewise, Dickson added “With no clarity on when the next round of auctions will take place, the industry does not have the necessary visibility to take investment decisions going forward.”

And then of course there is the issue of natural gas and refineries. As the E.U. tries to wean itself off of Russian gas, a replacement could be Iranian gas — reaching 25-35 billion cubic meters per year by 2030 — now that Western sanctions have been lifted. Given the absence of direct reliable pipelines from Iran to Europe, main points of entry could be Spain’s “underused” LNG ports. In fact, at the end of 2015 three of Spain’s six LNG terminals had their storage tanks below one-third full, and the average level across all of them was only 41% full. (Underutilization also raises the risk of a price hike for consumers if demand increases or supply decreases faster than is currently anticipated.)

Market penetration of natural gas is only 30% in Spain, well below that of other European markets such as France (42%) or Italy (88%). In large part this is due to a lack of gas infrastructure, which has also hamstrung North African gas transiting through Spain to other European countries. However, the infrastructure status quo is set to start improving soon. In late December, Spanish firm Gas Natural Fenosa signed an agreement with the European Investment Bank for a loan of up to $980 million through 2018 to develop natural gas networks in the country.

García-Margallo said the refinery deal – which would create much-needed jobs in a region that has the highest unemployment rate in Spain – would be the first among many between Spain and Iran. But Spain would be ill-advised to let its renewable energy industries stagnate while cozying up to Tehran.