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Bullish times

Spain – one of Europe's fastest-growing and most-liberalised gas markets – recently passed two milestones. Gas has become the main fuel for electricity generation and the regulated market has been abolished. Essential to both has been an enthusiasm for LNG that has made the country the world's third-largest importer. Alex Forbes reports

IN MOST European countries, where gas use has been in decline, an annual growth rate of 4% in consumption would be regarded as exceptionally high. Not in Spain: in the context of more than a decade of double-digit annual growth and a peak of 17.4% in 2005, year-on-year increases in consumption in 2006 and 2007 – 4.1% and 4.3% respectively – seemed modest. Between 1995 and 2005, the average compound annual growth rate was around 14%, with growth in double digits in every year except 1998 and 2001.

A return to double-digit growth is likely this year, following the commissioning of numerous gas-fired combined-cycle gas turbine (CCGT) power stations over the course of 2007.

The Spanish gas market differs from others in continental Europe in three fundamental ways: its high rate of growth; a heavy and growing dependence on liquefied natural gas (LNG) for its supply (see Figure 1), making it the world's third-biggest importer after Japan and South Korea; and its rapid pace of market liberalisation – in line with EU directives – which partly explains and is partly explained by its enthusiasm for LNG.

Rapid growth

The market began its era of rapid growth in the mid-1980s, driven mostly by high economic growth rates, which reached around 5% a year during the mid-1990s. Gas demand grew quickly enough for sales more or less to double every five years: from 2.3bn cubic metres (cm) in 1985, to 5.3bn cm in 1990, 8.1bn cm in 1995, 16.8bn cm in 2000 and 32.3bn cm in 2005.

Until around 2004, growth in demand came primarily from industry – notably glass and ceramics – rather than electricity generation, for which Spain then preferred to use coal. Industrial gas use grew from 1.3bn cm in 1985 to 6.0bn cm in 1995 and to 17.4bn cm in 2005, since when it has plateaued at around that level. Residential and commercial gas use began to grow rapidly from 1990, when consumption was 1.6bn cm, to 2005, when it reached 4.9bn cm, since when it too has plateaued. Further growth is likely, but at a slower rate than before as the market starts to show signs of maturity.

The big driver in recent years has been the power sector (see Figure 2), following a rush of investment in CCGTs over the past decade, the first of which were commissioned in 2002. Since then the number of CCGTs has mushroomed, with 14 400 megawatt groups commissioned in 2007 – taking the total number to 53, and taking total installed CCGT capacity to 21 gigawatts (GW). Enagás, Spain's gas-transmission company and operator of three of its six LNG-regasification terminals, recently said gas had become the main source of energy used for electricity production in Spain.

This wave of CCGT investment mirrors the UK's dash for gas in the 1990s and has occurred for many of the same reasons: increasing liberalisation of the gas and power sectors during the 1990s – with the passing of Electricity Law 54/1997 and Hydrocarbon Law 34/1998; the low energy prices that prevailed at the time the trend began; the relatively low investment cost of CCGTs, compared with, say, coal-fired plant; and the environmental advantages of gas over coal and oil in an era of increasing environmental concern.

Environmental pressures began with a desire to reduce emissions of sulphur dioxide, nitrogen oxides and particulates – the primary targets of the EU Large Combustion Plant Directive, adopted in 2001. But with the emergence of the EU Emissions Trading Scheme in 2005, they have since encompassed the need to constrain carbon dioxide emissions.

CCGTs have also begun to play a central role in keeping the Spanish electricity system balanced, following enormous investment in renewables, mainly wind power. By the end of 2006, Spain had 11 GW of installed wind-power capacity – but with that capacity dependent on wind conditions, other types of generation, mainly CCGTs, are needed to back it up. In 2006, for example, wind power accounted for 23 terawatt hours (TWh) of generation, around 2,000 full-load equivalent hours of production, a load factor of under a quarter.

It remains true that industry accounts for most of Spain's gas sales, but the electricity sector is catching up fast. In 2000, sales to the sector were under 1bn cm; by 2007 they had risen to 12.2bn cm. In January 2008, says Enagás, demand for gas for electricity generation was up by 31% on January 2007's figure.

This rapid growth in gas demand has posed challenges to the nation's gas and electricity companies, not just in sourcing sufficient supplies to satisfy demand, but also in constructing the physical infrastructure needed for processing, transportation and storage.

Domestic gas production is negligible and the country depends on imports for 99.8% of its supplies. Algeria is the largest supplier (see Figure 3). It supplies Spain both with pipeline gas, through the Pedro Duran Farell line (formerly the Maghreb-Europe Gasline), which transits Morocco, and with LNG. But its dominance has reduced significantly in recent years – largely as a result of policy. To control what used to be an overwhelming dependence on Algeria, Spain has set a maximum market share for any one country of 60% – almost exactly the share of Spanish supply that Algeria held in 2000.

At the same time, there has been a reassuring diversification of supply sources, as new entrants have come into the gas market to compete with incumbent Gas Natural, notably the large Spanish electricity companies, Iberdrola, Endesa and Unión Fenosa. These companies have secured supplies for their power plants through LNG. Spain's dependence on LNG has been on an upward trend, rising from just over half of total supply in 2000 to more than two-thirds in 2007. LNG consumption will continue to rise at least until the new Medgaz pipeline, direct from Algeria, comes on stream, probably in mid-2009.

The expansion of the LNG business has required large investments in infrastructure. According to the Spanish gas industry trade association, Sedigas, annual capital expenditure in gas infrastructure has ranged from €0.614bn ($0.967bn) to €1.208bn over the past decade and totals €9.344bn in the period from 1998 to 2007. The Spanish government is implementing policies to stimulate yet more investment.

One measure of how much construction has been needed is the expansion of the nation's gas-pipeline network, which trebled in size from 21,612 km in 1995 to 63,199 km in 2007. Another measure has been the expansion of the LNG regasification plants at Barcelona, Cartagena and Huelva, all operated by Enagás, and the addition of three new terminals: at Bilbao, Sagunto and Reganosa, the last of which came on stream in 2007. A seventh regasification terminal is being planned in the northwest and the nation also utilises the Portuguese terminal at Sines.

The preponderance of LNG in Spain has helped to make it the most liberalised market in continental Europe, not just in theoretical terms in the laws it has passed, but also in practical terms in the rate at which customers have exercised their freedom to switch supplier.

According to Antonio Llardén, chief executive of Enagás: "Since 1 January 2003, all customers, including domestic consumers, have been free to choose their suppliers from among the [large number of] distributors in the market. This large number of suppliers was undoubtedly fostered to a great extent because LNG enabled all of them to bring in different amounts of supplies from different sources, making Spain the most effectively open gas market in mainland Europe."

A fully liberalised market

This openness reached its peak on 1 January this year, when the regulated market disappeared completely. For customers that struggle to find a supplier in this new competitive landscape, arrangements and a set of regulated tariffs have been put in place for "a supplier of last resort".

The extent of competition in the Spanish gas market can be judged by a survey of residential gas markets conducted by European energy regulators in 2007. Carried out by the European Regulators' Group for Electricity and Gas (ERGEG) in advance of a 1 July deadline for full market opening in all EU member states, the survey analysed the obstacles to switching supplier that existed even in European countries that had implemented the EU gas directives of 1998 and 2003.

For the most part, it was pretty gloomy reading. ERGEG stressed that "mere implementation of the directives is ... not enough", adding that: "The switching rate in the gas retail market is still low in most EU countries ... despite a lot of substantial measures having been taken to enhance it."

Data about supplier switching rates showed that while most EU member states exhibited very low rates – notably Germany and Italy, two of the largest markets – two countries stood out as leaders. One was the UK, where 47% of customers (in terms of sites) had exercised their freedom to switch; the other was Spain, with switching rates of 48% for commercial and industrial customers and 17% for households.

Figures published by Sedigas show that in 2007, the liberalised market accounted for 42% of gas sales by volume to the residential and commercial market, a total of 23.597 TWh. In the industrial sector, the liberalised market accounted for 89.8% of sales, a volume of 196.152 TWh. In the electricity sector, sales in the liberalised market reached 100%, a volume of 142.057 TWh.

While Spain has taken great strides in developing and liberalising its gas market, there is still much that needs to be done. For example, when the Sagunto regasification terminal came on stream in April 2006, the failure to construct a transverse axis pipeline to connect the central and eastern parts of the gas grid meant that, for a while, there was congestion in the system – which prompted the Spanish regulator, the National Energy Commission, to take action.

Storage has also become a problem because Spain's existing underground facilities are no longer adequate, following the sustained growth of the market.

Infrastructure investment

But with liberalisation largely accomplished, regulators are now focused on improving the technical aspects of the gas system to ensure infrastructure remains capable of meeting demand. Under legislation introduced last year to bring Spanish laws in line with the 2003 EU gas directive, Enagás has set up a new department that will take on the duties, rights and obligations of technical system operator. It will be separate to the parts of the organisation that deal with the day-to-day gas transportation business. The board of directors has already approved the necessary new organisational structure.

Meanwhile, the Spanish government recently established a new pricing structure for gas and power infrastructure that guarantees returns in the distribution sectors for infrastructure starting operation from January 2008 onwards. The government said it was a response to the need for a "hefty investment cycle" over the coming decade. The signs are that Spain's gas industry will be growing robustly for some time yet.



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