Spain and Portugal present their ‘energy island’ plan for cutting electricity costs

Spain and Portugal on Thursday sent Brussels their joint proposal for lowering electricity prices in the Iberian peninsula to a maximum of €30 ($33) per megawatt hour, Spain’s ecology minister said.

Spain and Portugal present their 'energy island' plan for cutting electricity costs
Spain's Prime Minister Pedro Sanchez (L) and Portugal's Prime Minister Antonio Costa speak ahead of a meeting as part of a European Union (EU) summit at EU Headquarters in Brussels on March 25th, 2022. (Photo by JOHN THYS / AFP)

The move came a week after the European Union agreed that Spain and Portugal could deviate from the bloc’s rules on energy pricing to ease the impact of energy prices on consumers.

Spain and Portugal are in a strategically advantageous position in that they’re not as dependent on Russian natural gas as many of their European neighbours, importing most of it from Algeria and other countries.

Spain is also the country with the largest gas storage and regasification capacity in Europe and together with Portugal is a renewable energy leader in terms of solar, hydraulic and wind power. Their energy markets are more self-sufficient and extremely well connected between both nations.

This has led the two countries that form the Iberian peninsula (as well as tiny Andorra) to be referred to as an “energy island” by Spanish Prime Minister Pedro Sánchez and his Portuguese counterpart António Costa, as a simplified way of describing why their countries should be temporarily released from the EU’s common market rules.

The decision to grant Spain and Portugal “special treatment” came after their efforts to convince Brussels to decouple electricity prices from the gas market fell on deaf ears.

“We have a joint proposal… and we’re working with the European Commission” to push it through, Teresa Ribera told reporters.

The proposal involves capping the price of gas used for the generation of electricity to the equivalent of “€30 ($33)” per megawatt hour, she said.

Such a cap, which would significantly reduce the price of electricity on the wholesale market in both countries, “is one of the technical elements of the proposal we need to discuss with Brussels”, she said.

Prices are particularly high in the Iberian peninsula, with both Spain and Portugal heavily dependent on gas to produce electricity.

Prices have risen sharply in both countries in recent months due to the rules governing Europe’s electricity market which obliges producers to sell electricity on the wholesale markets at a price determined by the most expensive production costs — that of gas-fired power plants.

READ ALSO: Is Spain ready to be the EU’s main natural gas supplier?

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‘Impossible to keep track’: Spain’s big gamble on green hydrogen

Major green energy projects are sprouting up across Spain as it seeks to position itself as world leader in this sector, but experts have urged caution over costs and demand uncertainty.

'Impossible to keep track': Spain's big gamble on green hydrogen

Spanish firms are ramping up production of emissions-free fuel and ploughing investment into green energy projects, despite fears over the high price of production.

“Everything is going very fast,” said Miguel Ángel Fernández, technical director at the Spanish National Hydrogen Centre, a public research centre based in central Spain.

“There are so many projects, it is impossible to keep track of them all.”

Most hydrogen is currently produced using polluting fossil fuels but so-called “green hydrogen” is made entirely using renewable energy such as wind, solar and hydropower.

While fossil fuels emit harmful greenhouse gases when they burn, hydrogen only emits water vapour.

Madrid launched a €1.5-billion ($1.7-billion) plan in in 2021 to support green hydrogen projects, using a European Union Covid recovery fund.

Spain is now home to 20 percent of the world’s green hydrogen projects — second only to the United States.

Last year Spanish energy giant Iberdrola started operating what it says is the largest green hydrogen plant for industrial use in Europe, in the former mining town of Puertollano.

The plant uses 100 megawatts of solar panels to produce green hydrogen, which is stored in huge white storage tanks.

The initial goal is for it to provide 10 percent of the energy needed by a neighbouring factory belonging to fertiliser maker Fertiberia.

This will prevent the release of 48,000 tonnes of planet-warming carbon dioxide per year according to Iberdrola.

From Andalusia to the Basque Country, green hydrogen megaprojects are multiplying in Spain, a leading country in this promising sector. It’s still a risky bet while the economic model for this ‘energy of the future’ remains to be found. (Photo by Valentin BONTEMPS / AFP)

If the pilot project works, Iberdrola will launch a “much more important second phase” to meet 100 percent of the fertiliser plant’s energy needs, said Javier Plaza, head of Iberdrola’s green hydrogen division.

Rival Spanish energy firms such as Cepsa and Repsol have in recent months launched similar projects.

In Spain’s sunny southern Andalusia region, three billion euros is being invested to create a “green hydrogen valley” where two large factories will produce 300,000 tonnes of green hydrogen per year from 2027.

In the northern region of Asturias 15 solar power parks will be built by 2030 to enable the annual production of 330,000 tonnes of green hydrogen.

Rafael Cossent, research associate professor in energy economics at Madrid’s Comillas Pontifical University, said there was an “effervescence” in the sector putting Spain in a leading role in green hydrogen production.

This is partly due to Spain’s abundant sun and wind power capabilities, he added.

The Spanish Hydrogen Association estimates there are currently 50 green hydrogen projects under development in the country.

Spain could potentially produce enough green hydrogen to cover its own needs and export to northern Europe, the association argues.

A major drawback for green hydrogen, however, has been the high cost of producing it.

Green hydrogen is made by using renewable energy such as wind, solar and hydropower. (Photo by ANDER GILLENEA / AFP)

While the price of the renewable energy used to make it has come down due to technological advances, green hydrogen has still not proven itself to be economically viable.

Massive use of green hydrogen will also require “complex transformations” by vehicles and industrial plants which make future demand for the fuel uncertain, said Cossent.

A green hydrogen economy will need a robust transportation infrastructure to transport it — which Spain is currently lacking.

The government is counting on a planned underwater pipeline between Barcelona and Marseille, dubbed H2Med, which is expected to transport some two million metric tonnes of hydrogen annually.

Hydrogen is difficult to contain without leakage however, making it challenging to store and transport, so delays to the pipeline are widely expected.

But the giants of the green hydrogen market are undeterred.

Iberdrola’s Plaza said it is important to get into green hydrogen early because “whoever starts first has the advantage”.

“We are talking about a long-term race,” he added.