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1 Energy Policies of IEA Countries - In-depth Review of Spain 2015 IEA Executive Director Maria van der Hoeven Madrid 23 July 2015 Thank you and good morning. I am pleased to be here with you today to present the main findings and policy recommendations from our In-Depth Review of energy policy in Spain. The IEA undertakes such a review for each of our member countries every five to six years, and no matter which country there is always something to applaud and of course always something that can be improved. Let me begin by thanking Minister Soria, Secretary of State Nadal, and the staff in the Ministry of Industry, Energy and Tourism, and the Spanish delegation to the OECD, for their co-operation throughout the entire review process. Ladies and gentlemen, the energy sector in Spain exhibits a number of strengths, notably regarding security of supply. However at the same time, the economic situation has brought new challenges challenges that have prompted government action. This has been particularly true for the electricity sector. These actions may have served to solve one problem while creating another. They also serve to highlight one of the central challenges of Spain s energy sector. It is operating almost as if your great country is an island. Yet it is not an island, neither literally nor figuratively. The future of energy in Spain lies in connecting itself with Europe and the world.

2 Since the IEA last conducted an in-depth review in 2009, a number of things have changed. First, we are glad to see that the Spanish economy, after several difficult years, is finally growing again. But of course economic growth is never free. Now, it is important to follow closely how this economic growth will affect energy demandd and greenhouse gas emissions in Spain. Evidencee from many countries shows that ambitious policies on energy efficiency and low-carbon energy supply reducee the energy and carbon intensity of the economy. Commendably, this has also been the case in Spain. However the question now becomes: will the trend of decoupling continue? Second, decisions being made in Brussels are having a growing impact on Spain s energy and climate policies. Since 2009, the progressive liberalisation and cross-border integration of the electricity and natural gas markets has continued, notably by means of the third Internal Energy Market Package. Also, the EU targets for 2020 have both obliged and encouraged Spain and other EU member countries to take broad-ranging measures on greenhouse gas emission reduction, renewable energy, and energy efficiency. Yet more measures are needed to meet the eventual targets for On energy supply, Spain is very secure. Spain s major fuel oil is imported from a broad range of countries, and Spain also holds far more oil stocks 131 days in April 2015 than required under its obligations as an IEA member. You also have an internationally competitive refinery sector. Regarding natural gas, Spain has pipelines from North Africa, France and Portugal, and plentiful LNG capacity one-third of the EU total. Gas is imported from more than ten countries, a very highh figure, and you have also limited the share of any given country as a supplier to your largest importing companies. In addition, gas storage has been enhanced and obligatory gas stocks stand at 20 days. This

3 is all very robust. As a further step to increasee gas security, we encourage Spain to assess its shale gas potential. In the electricity sector, Spain has built a large, well-diversified power generation fleet and a very reliable power system. You have succeeded in integratingg a large share of wind and solar power while limiting renewable curtailment. The increase in renewablee energy supply has also helped Spain reduce its dependence on energy imports from around 80 percent in 2009 to around 70 percent in Security of energy supply has been improved as a result of both laws and regulations, but also because of significant capacity increases over the past 15 years and declining demand for primary energy and electricity during the recession. Yet what is good for security of supply may not be economically ideal. Combine increased capacity with declining demand, and what are you left with? An accumulation of tariff deficits in the electricity and natural gas systems. When the current government took office, it inherited an economic and financial emergency a house on fire. In the electricity sector, a massively ncreasing tariff deficit required immediate action. Costs had spiraled out of control and revenues had not increased sufficiently. Solving that problem was never going to be easy or popular: the accumulated deficit was so large, so many depended on the subsidies from the electricity system, and electricity users were struggling in a recession. After several rounds of reform, legislation now in place ensures that costs and revenues in the electricity system will remain in balance. In this respect, we congratulate the government for successfully navigating a challenge that nobody would envy. We are also glad to note that in the natural gas sector, the tarifff deficit issue has also been solved. Yet thesee reforms were not without costs: reducing subsidies and increasing taxes and charges discourages new investment in energy sector. The changes in the remuneration of existing installations have the same impact. These experiences provide investors with important lessons about political and regulatory risks in a system that is financially unsound, and they are lessons that they will not soon forget.

4 As a consequence of the high level of costs in the electricity system, end-user prices in Spain are among the highest in IEA member countries. We suggest removing any cost components from end-user prices that are unrelated to the supply of electricity and recovering these costs via more appropriate mechanisms. End-user prices with a lower share of taxes and charges would be more directly linked to market price signals, which in turn would enable a wider use of demand side response. Let me now turn to renewable electricity, a sector that has been particularly affected by recent electricity market reform. From 2004 to 2014, the share of renewablee energy in electricity supply doubled from 19% to 40%. Capacity increased by 20 gigawatts, or 70% %. The combined share of wind and solar, at around 25% of total generation today, is one of the highest in the world. This boom in wind and solar power started relatively early and at a large scale. However investments were driven by the government through subsidies at a volume that eventually proved too much for the Spanish economy. The current government then took rather draconian measures to reform the subsidy system. These were effective in one regard, as I mentioned just a few moments ago they brought balance to an unaffordable energy sector. But they have also brought new investments to a halt. Ladies and gentlemen, such measures have a cost: they send a very negative signal to investors, shaking their confidence in any future investment decisions. They ultimately may have the effect of stagnating the development of the electricity sector. There is much work to be done if you wish to regain the trust of investors. Indeed, despite the recent turmoil in the renewable electricity sector, we see a high potential for the sector in the future. Spain s great wind and solar resources have not gone anywhere. They are still here, and will be here for years to come. However Spain will eventually need new generating capacity, to account for expected decommissioning of coal and possibly nuclear power plants, and to meet domestic and European renewable goals. Of course, we can hope that with appropriate technological development and carbon pricing, wind and solar power will become increasingly competitive. If this can be realised, it could dramatically reduce the need for subsidies and eventually eliminate them.

5 Stepping back and looking at the region picture, you all know that creating a single energy market covering electricity and natural gas has long been a priority for the European Union. For obvious reasons, physical cross-border capacity in electricity is essential not only for market integrationn but also for security of supply and renewable energy integration. However Spain s electricity interconnection capacity remains very low at around 4% of installed capacity in But new momentum for additional interconnections is evident since the October 2014 European Council. The first new interconnection with France in almost three decades was inaugurated in February 2015, and several more gigawatts of apacity Spain and France are being planned. After so many years of limited results, it is encouraging to see these steps in the right direction but let us be clear, they are first steps. Indeed we will need many times more interconnections for such efforts to truly show their worth. For now, the IEA welcomes the strong political support for better interconnections between the Iberian Peninsula and France and acknowledges the key role Spain has played in this success. The planning and construction of new interconnections should be now vigorously pursued and EU funding sources used to the full. We are also glad to note the significant improvement in electricity market integration with the rest of Europe over the past few years. Since May 2014, the Iberian electricity market area has been coupled with other European market areas. This is essential for optimising the use of interconnections. It also better enables the integration of variable renewables wind and solar PV. Furtherr efficiency would be gained by integratingg the intraday and balancing markets closely with the rest of Europe. Regarding natural gas, we expect LNG imports in Europe to double between now and Spain s underutilised LNG capacity could help to increase flexibility, diversity and security in the EU internal market. For that to happen, as in electricity, more interconnection capacity with France is needed. The IEA therefore welcomes the recent decisions to expand this capacity, in particular through the MidCat project, and recognises Spain s key role in driving this development at the EU level. We also welcome the recent work to develop and launch a gas hub. An organised gas hub would benefit Spain by providing a more transparent price reference for gas and enhancing competition.

6 Underpinning many of the topics I have spoken on thus far is, of course, climate. This is a topic that will be with us for a long time to come and I am glad to see a growing recognition across the energy sector that decisive action is needed to curb climate change. Spain s current measures to reduce energy-related CO 2 emissions focus on energy efficiency and renewable energy. A lot has been done, but more is needed for Spain to reduce emissions in sectors outside the EU Emissions Trading Scheme. This is also evident from the scenarios laid out in Spain s Roadmap 2020, which was adopted in October The Roadmap, however, does not consider what kind of incentives would be needed to triggerr the required investments and in what proportion they would be divided between the public and private sectors. We urge the government to consider raising tax rates in a revenue-neutral way. In particular, fuel taxes are relatively low by international comparison, and raising them in a revenue-neutral way can encourage more efficient oil use which would deliver environmental and energy security benefits. Ambitious policies on energy efficiency bring multiple benefits beyond emissions reductions: they save money, reduce import dependence, and improve air quality. An important new funding source is the National Energy Efficiency Fund, set up in July And, as we said in our 2009 review of Spain, we encourage Spain to ensure that any spending on energy efficiency and renewable energy contributes to the overall cost-effectiveness of energy policy. From the financial and environmental perspective, the IEA applauds Spain s decision to significantly cut subsidies for hard coal production since For understandable reasons, the government s immediatee focus since early 2012 has been on restoring financial stability in the electricity and natural gas systems in the short-term. Now that these extensive

7 reforms have been successfully implemented, the government should focus on providing guidance on long term energy policy. Spain has several action plans that extend to 2020, but we believe it is time to turn the focus to the next decade and beyond. The EU is working on its 2030 targets now and climate change is a long-term issue with direct implications for the energy sector. The government should therefore prepare an integrated long-term energy strategy, with a particular focus on energy demand and energy efficiency. This should be done with the long-term greenhouse gas reduction objective in mind. In this context, Spain should keep all options open for low-carbon power generation. This includes nuclear power your low-carbon baseload power source. You should also increasee efforts to limit peak electricity demand through energy efficiency and other demand-side measures. As can be seen here, oil use should merit particular attention in any plans for a transition to a low-carbon energy system. For the long term, research and development on low-carbon technologies is needed. On this point, we must acknowledge that Spain has never been a leader in R&D spending. Indeed, Spain has for many years had the second-lowest R&D spending among all IEA member countries. Of course it is understandable that during the recession, the government cut spending in this area, but we urge Spain to reconsider these spending cuts as soon as possible. Consider that the less funding there is for research, the less likely it is that your best and brightest will stay in Spain, and the cycle will continue. Ladies and gentlemen, I have raised a number of challenges, but of course there is much for Spain to be proud of. Weathering an economic storm is no small accomplishment. But of course, there is always more to be done. While I invite you all to read this year s review, I will leave you today with some of our main recommendations. First, Spain should align short-term policy objectives with long-term energy goals by establishing detailed pathways and measures to achieve them. Second, remember the lessons learned from your own experience: maintain fiscal discipline and ensure investor confidence.

8 Third, recall that all challenges can turn out to be opportunities. Continue to work closely with your neighbours and maintain your strong voice in Brussels to create the Internal Energy Market and help to make the Energy Union a reality. Ladies and gentlemen, six years from now, we will come back to see how much progress Spain has made. I am confident that the story will be even brighter than it is today. Thank you very much - muchas gracias!