A Win-Win Energy Deal for Spain and Europe

Pedro Fresco

6 mins - 5 de Mayo de 2023, 07:00

Analysing the recent statistics from Eurostat on the price of electricity in European countries during the second half of 2022, something interesting can be observed. Domestic electricity in Spain, traditionally expensive, has improved its position compared to the rest of the other European countries. Spain, which used to have the fourth or fifth most expensive electricity on the continent in this segment, is now eighth, behind countries such as Italy and Germany. In sectors where Spain’s performance traditionally has been somewhat better, such as large consumers, improvements likewise can be seen. For the largest consumers (more than 70 GWh per year), the price of electricity in Spain is slightly below the euro area average, eliminating a huge gap of around 4 cents/kWh that existed in the previous semester.

Part of this relative improvement is due to the Iberian exception, but the Iberian exception works precisely because of the Iberian Peninsula’s significant renewable contribution. In fact, in recent months the Iberian exception has been inactive as the cost of natural gas has been reduced and, without its effect, wholesale electricity prices in the Iberian market are improving almost daily compared to those in Central European markets. More than 70% of Portuguese electricity generation in the first quarter of 2023 was from renewables, while in Spain, despite having to use more gas generation to export electricity to France, it reached almost 52%, a percentage that would be somewhat higher if the Red Eléctrica Española did not count reversible pumping as non-renewable.

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Predictably, and in view of what the future markets indicate, this price differential in the wholesale markets will be a constant over the coming years. The relative isolation of the Iberian Peninsula is driving this reduction, even though the idea is to improve interconnections. More than 2,000 MW of additional interconnection between France and Spain that are expected to come on stream between 2027 and 2028 will increase Iberian interconnection capacity, but even so, it will not couple Iberian prices with French prices. The renewable potential will induce lower prices in Iberia, and Spain will also start to see a significant price reduction in the smaller consumer segments from the end of this decade, as the tariff deficit payment disappears, and the regulated costs derived from the renewable premiums of two decades ago begin to fall.

This situation is undoubtedly beneficial for the Iberian countries, but it is also beneficial for Europe. In a context of geostrategic crisis in terms of energy, having partners such as Spain and Portugal is important for the European Union. Spain and Portugal have always offered to provide energy to Europe, either by building more interconnections or with projects such as H2Med, which can allow the export of renewable energy in the form of hydrogen beyond simple electricity interconnection. The Iberian countries have the possibility and the will to do so.

But it is clear that Iberian countries must also be able to enjoy the advantage of being able to generate this cheap renewable energy. Competitive electricity is a powerful factor for industrial development and attraction, and it is legitimate and appropriate for countries to use it. Perhaps one of the most paradigmatic cases in the world is Iceland, a small country of less than 400,000 inhabitants with enormous hydroelectric and geothermal resources, which has enabled it to attract the aluminium industry and become the tenth largest producer of aluminium in the world, with a production level similar to that of the United States.

Europe is in the midst of a process of readjusting the production of its own goods as a result of the new geopolitical reality. We want to produce basic goods here that we consider sensitive and stop depending on countries that could create problems in the future. The Commission’s Green Deal Industrial Plan points directly to these reasons. Indeed, the Iberian countries have a lot to contribute to this process, because they are willing and able to do so, and also because it makes sense as a strategy for the Union’s development and cohesion.

A few months ago, some German travel agencies suggested that pensioners should spend the winter in Spain to save gas in Germany. German retirees are welcome in Spain, but what makes strategic sense is not to export retirees but to implement industrial production. The technologies that Europe needs, from solar panels to electric vehicles to heat pumps and electrolysers, can be manufactured in Spain and Portugal, which have everything they need to do so at competitive costs and with a strategic European vision.

In any case, it will not be easy. Competing with the enormous power of Chinese companies, on the one hand, and with the generous US Inflation Reduction Act on the other, will require extraordinary measures and a new economic vision adapted to these times. This will involve generous public support programmes, measures to give preference to European production and economies of scale. To give you an idea, a company like Jinko Solar, the second largest solar module manufacturer in the world, has more than 1,000 people working in R&D and in the technical department. Competing against this requires courageous measures and dogma-proof conviction. The desirability of economies of scale reinforces the strategic interest in the Iberian Peninsula as a hub for green technologies.

The development of a powerful industry for the energy transition in Iberia based on its renewable potential should not be seen as a threat in any European country; on the contrary, it represents an opportunity to be able to develop in Europe all the technologies needed for the transition. It would clearly be a win-win situation, which would imply neither exclusivity nor exclusion of anyone, but simply recognising how to match opportunity and necessity. For Spain and Portugal, moreover, it would be an extraordinary way of recovering the industrial power lost in recent decades, modernising their economies, and converging in terms of GDP with the central countries of Europe, which is one of the central objectives of the Union.
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