The future of energy

With virtually no hydrocarbon resources of its own, a subsidized, uncompetitive coal industry, and a nuclear sector that is highly unpopular with the electorate, Spain, a world leader in renewables, faces a difficult energy future, dependent on the ups and downs of the hydrocarbon markets and international politics. Any upset, any disaster, whether the Arab spring or Fukushima, inflates an energy bill that is already beyond the means of an economy in crisis, and whose problems in large part are due to the rising cost of hydrocarbon imports in recent years. A $10 increase on crude prices adds $5 billion to the annual energy import bill. Unrest in the Middle East and North Africa is costing Spain the equivalent of 1.5 percent of GDP.

Unrest in the Middle East and North Africa is costing Spain 1.5 percent of GDP

A $10 increase on crude adds $5 billion to the annual energy import bill

These are sure signs of what is to come in a world where oil is going to be ever more costly as supplies dwindle and new sources become more expensive to extract. The outlook is bleak, and not just because the threat of climate change is finally forcing us to bring sustainability into the equation. Research suggests that at present rates of consumption and extraction oil reserves will run out within 40 years, and within the decade in Europe, while gas will have been used up in 63 years at the current rate, and within 12 years in Europe. Uranium will have gone within 80 years, and five in Europe, while coal will be available for another century and a half. And those estimates do not take into account China and India's growing needs.

At the center of the world economy energy is, more than ever, the key to international politics and diplomacy, the key to sovereignty and security. Will we be able to survive and join the energy revolution of the 21st century? Spain seems to have made the right choice by opting for renewables, but the experts warn that not enough has been done; in the words of one analyst, summing up the opinion of many, the situation is not far short of catastrophic: "Things could have been done differently, but not worse."

There are no certainties about the future, other than that the current model is not sustainable. "There is no solution at present that is capable of bringing together the four pillars of sustainability: low cost, abundance, environmental cleanliness, and security of supply," says Juan Luis López Cardenete, an academic and former head of Spanish electricity utility Unión Fenosa.

To begin with, he says that Spain has taken no steps to improve energy efficiency: some 10 percent of energy is wasted, not that better insulation and use of oil and electricity is going to make much difference in the long term, and neither will further development of renewables, the great hope for the future. He points to the recent "solar panels scandal," whereby the government subsidized private investment in photovoltaic parks to the tune of millions of euros.

Spain's electricity is among the least polluting in Europe, but it is also among the continent's most expensive, and that is still without the government passing on the full cost of generation to the consumer. This differential has generated a 20-billion-euro tariff deficit through the accumulated difference between the cost of generating, distributing and supplying electricity for regulated markets, and the tariffs for those markets fixed by the government since 2001.The deficit covers unprofitable business areas such as supplying islands with electricity and, more recently, Spain's huge renewable energy roll-out.

Spain has promised to eliminate the shortfall between consumer prices and generation costs by 2013 through a combination of further deregulation, reduced subsidies for renewable energy and higher tariffs for consumers. It has also considered a windfall tax on cheap power from nuclear and large hydroelectric plants.

Giving priority to renewable energy and bringing prices more into line with generating costs will not do anything to solve the problem of soaring oil and gas prices, as well as dependence on imports. So what needs to be done?

"We need a long-term energy policy, one that goes beyond this government or that. We need to be looking forward at least 15 years. If we are currently able to enjoy relatively cheap gas it is because we signed those contracts many years ago. We talk about businesses being competitive, about industrial policy, about technological development, about security, and about the overall wellbeing of the population, but the truth is that our energy policy is improvised; it simply isn't serious," says a government official. The 20-billion-euro tariff deficit that our grandchildren will still be paying off is symbolic of the problem, although only part of that amount is due to subsidies.

Many analysts question the amounts the electricity companies say that they are owed. Renewable subsidies, which are more than seven billion euros a year, could reach up to 20 billion euros. Which prompts the question as to whether a country whose GDP is two percent of the global total and has no energy resources of its own can really aspire to be the world leader in renewables.

Might it not have been wiser to introduce renewables gradually and allow wealthier countries to pay for the expensive research and development, and trial and error?

Not everybody shares this bleak analysis: Arturo Rojas and Diego Vizcaíno of Madrid-based Analistas Financieros Internacionales say that Spain has built up an important export sector as a result of its focus on renewables. They add that as well as making the country's model more competitive and productive, renewables help to spread development across the regions more evenly. They also point out that in 2008, renewable energy generation under the subsidized Special Regime allowed Spain to reduce dependence on imported energy from 82 percent to 79 percent, reducing imports and the trade deficit by 2.06 billion euros a year. Aside from that, renewable technology exports rose that year to 3.6 billion euros.

Being a pioneer in research into renewables certainly has brought benefits. The question is whether this country can afford to base its energy supply on a mix of electricity generation that comes with a bill of between 300 and 460 euros per MWh for solar panels, 85 euros per MWh for wind, between 50 and 65 euros for gas, 42 to 58 euros for coal, and 45 euros per MWh for nuclear.

Nuclear energy may have its drawbacks in terms of safely storing waste material, but nobody in the energy sector believes that for the foreseeable future, a combination of renewables, hydroelectric, and gas will be enough to replace nuclear. "In the medium term, we will have to continue with nuclear. Aside from Garoña, which will close in 2013, the rest of the country's nuclear plants will continue until 2020," says the Deputy Director for Energy Planning, Francisco Javier Maciá. He points out that for each wind farm that is created, a gas-generated electricity plant must be built to be able to step in when there is not enough wind.

Despite Spain's electricity grid being among the world's most advanced in having integrated renewables, there are times when it has to allow wind-produced energy to go to waste, so as to protect the rest of the network. "We live in an electricity island: even with a peak power output of 45,000 megawatts, we can only export 1,400 of that to France," explains Alberto Carbajo, the operations chief of REE, the Spanish National Grid. It is still not possible for Spain, which is highly productive, to export its surplus through France to a European market of 300 million people. The future of energy for Spain means being more efficient in terms of purchases, transportation, refining, generation, distribution and consumption, as well as changing its energy blend: in 2010, 47 percent of energy generation came through oil, 23 percent from natural gas, 12 percent from nuclear, 11, percent through renewables, and 7 percent from coal. The country needs to reduce dependence on hydrocarbons: it is still a mystery as to why successive governments have not made this a priority.

Spain is 75-percent dependent on fossil fuels in its energy mix, compared to the EU average of 50 percent, and 25 percent in the case of the United States. Oil makes up almost 50 percent of energy generation, 12 points higher than the EU average, and this in a country that produces just two percent of the oil it uses, and where 94 percent of goods are transported by road. Around 70 percent of Spain's imported energy arrives here by sea, with just one third of the gas the country buys from Algeria coming via pipeline.

As competition grows for access to the planet's dwindling energy supplies, and EU states opt to take care of their own needs rather than acting jointly, the question being asked is whether Spain should make energy supply a question of national security. Should more be done to prevent international mergers, buyouts and takeovers in the case of the country's main companies in the sector (Repsol, Cepsa, Endesa, Iberdrola Hidrocántabrico and Viesgo)?

"I know from experience that keeping these companies Spanish and keeping their headquarters in Spain is no small matter, and that size is also important in being able to buy at lower prices," says Iván Martén, the head of the energy division of the Boston Consulting Group.

"Free movement of capital should be there as long as it doesn't endanger supply security," adds María Teresa Costa, president of the National Energy Commission. In her opinion, the current model works. "Although we will have to put more emphasis on reducing costs." She believes that rather than a radical change to the country's energy mix, there has to be a greater focus on renewables.

Francisco Javier Maciá insists that progress has been made. "The 2004-2020 saving and efficiency plan has reduced our energy intensity - the relationship between energy consumption and GDP - in our economy," he says. "We have plans to increase the movement of goods by trains, along with new construction codes that improve energy efficiency, as well as an underwater connection to France. Around 12 percent of our energy now comes from renewables, and I think we can increase that figure to 20 percent by 2020 to meet EU directives," he adds.

The belief is that wind energy will become increasingly competitive in the coming years, while photovoltaic and thermal solar energy will take longer to reach break-even point, even as the cost of producing solar panels falls. There are reasons to be optimistic: Spain has several globally competitive companies in the renewables sector, its source of oil and gas imports are geopolitically diversified, and it has a wide network of regasification plants.

But the analysts warn that long-term energy survival depends above all on increasing awareness of the need to be more efficient, a cross-party, long-term energy policy, and the strategic determination to move to the new model based on less coal and more electricity, in which renewables take on a bigger and bigger role.