The IEA recommends Spain sets long-term energy objectives and state that wind power is the cheapest technology

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Foto cortesía de AEE. Foto courtesy of AEE.

The International Energy Agency (IEA) believes that Spain has to set long-term energy objectives in line with the EU’s 2030 targets and that wind power, together with hydropower, is the cheapest renewable technology to do so. This is according to two recent reports, one of which was published last week. The IEA’s 5-yearly report on electricity generation costs using different technologies offers guidance to OECD Governments regarding the available electricity generation technologies and the potential cost of generating electricity for an installation that, in this case, would come online in 2020.

The comparative results are no surprise, taking into account the reports already published by IRENA, the European Commission and a range of investment banks: wind power is the cheapest generation technology compared to fossil fuel technologies and other renewables. As is to be expected, it is understood that wind installations are installed in places with sufficient wind resources.

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One new aspect of the 2015 report is that it includes data published by IEA on installations in Spain:

• A standard 25 MW wind farm coming online in 2020 would have an LCOE of 76.6 €/MWh (euros in 2013) and would be the cheapest renewable technology following hydropower (that has almost zero potential in Spain). The strange thing about the data handled by the IEA is that even though 2,100 equivalent hours for a standard wind farm is a reasonable value, albeit rather low (the sector average between 2000 and 2014 stood at 2,250 hours), 3,500 equivalent hours for hydropower is not (for Spain’s hydraulic stock the figures are 2,016 hours and 1,854 hours for 2014 and 2013 respectively – and both years were wet).
• The IEA does not provide data on new gas or coal plants in Spain, but does compare data in Portugal: 77.2 €/MWh in gas combined cycle; between 67.5 and 75 €/MWh for a coal plant.

The IEA report also compares the differences in values depending on the capital cost. As such, one MWh of wind power from the Spanish wind farm stock in 2020 would cost 61.1 €/MWh if the capital cost was 3%. The abovementioned figure of 76.6 €/MWh is if an interest rate of 7% is applied (the most widely-used percentage prior to the Energy Reform), and 90 €/MWh if the interest rate is 10%. The difference in the generation cost between the first and the last options is 47%. In other words: generating electricity from wind power with a capital cost of 10% is 47% more expensive than at a rate of 3% and 17.5% more expensive than at a rate of 7%.

Some conclusions on the energy policy can be drawn from this data. Currently the financial analysts of the renewable sector say that the capital cost for renewable projects in Spain stands between 10 and 11% due to the country risk arising from the retroactive effects of the Reform regarding existing installations. This would mean that one of the collateral effects of the Reform would have been the substantial increasing cost of bringing new installations online in future.

And here is where the recommendation that the IEA itself made to MINETUR in its second report on the Spanish energy sector published last July can best be understood: “The reform of the electricity sector has created a perception of regulatory insecurity among investors, and yet Spain is going to need more investment to comply with the EU’s shared target of 27% from renewables by 2030”. According to the IEA, Spain has to clarify with the markets how it is going to achieve the 2020 renewables target and guarantee regulatory security for the new support mechanism for renewable electricity.

If the Spanish Government follows the IEA recommendations and manages to reduce capital costs for new wind power installations of between 10-11% or at least by 7%, Spain’s society could save itself between 17% and 47% of the additional cost generated by the Reform in order to comply 2020’s renewable energy objectives.