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Spain's major energy consumer group AEGE is in talks with the likes of Endesa, Iberdrola and Union Fenosa over a potential electricity supply agreement that could span up to two decades, according to Utility Week.
Spain's government is promoting the use of bilateral contracts as a means of bypassing its volatile wholesale pool mechanism, whilst reducing the number of industrial consumers on state regulated tariffs. Spain still maintains prescribed electricity tariffs for large industrial users - to the dismay of regulators in Brussels.
Discussions may, however, be protracted. Spanish domestic and industrial consumers enjoy retail electricity tariffs below the costs of production with the state subsiding utilities' losses via a tariff deficit reimbursement scheme. Temporary market reforms seeking to reduce the government's financial burden have met severe opposition from Spanish utilities who argue they are being made to sell electricity at a loss. The drive to promote direct bilateral contracts between industry and generators effectively cuts out the state's involvement.
In response to the unpopular new measures, some leading Spanish generators have reportedly reduced their involvement in the Spain's already illiquid wholesale pool mechanism. This has served only to increase price volatility with wholesale contracts trading in a massive E50/MWh range within-day in recent weeks. The overall volume of trade in the Spanish market also fell 58% in May 2006 to its lowest level in 10 months. The 290MW traded last month were equivalent to just 0.2% of the volume dealt in the UK wholesale market over the same period.
While the Spanish government will be keen to avoid politically sensitive hikes in the cost of power to industry, generators will undoubtedly be pushing hard to recoup their full costs of production under any length of contract. Confirmation that regulated industrial tariffs will come to end in Spain by 2011 at the latest will have some bearing on negotiations. If AEGE - accounting for 15% of annual Spanish energy consumption - does secure a long-term agreement, Spain's beleaguered wholesale market will ultimately attract even less interest.
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