The getaway for our Energy Island

Spain can play an important role in the European gas market over the coming years. The launch of the organized market MIBGAS last December could make a real difference in the peninsula’s gas price model, especially when the market will reach greater maturity and liquidity, with the will to be the gas price benchmark in Southern Europe. From October, the agents will be required to make their balances in the market, which will certainly increase participation in part, representing a small step towards this vision.

However, all this model may have a higher or lower future path depending totally on a physical aspect, as is the interconnection betweenh Spain and Portugal and between the rest of Europe. Today, everyone knows that the Iberian peninsula continues to behave as an energy island, being unable to take advantage of its real capacity due to lack of infrastructure.

Spain mainly imports gas from Algeria, Nigeria and Qatar, both via pipeline and through the 7 existing regasification plants. Currently, about 45% of its gas is imported through LNG, which increases the price of the final product (by the costs of liquefaction, transportation and regasification), making Spain and Portugal less competitive compared to the rest of their European colleagues.

According to the Ministry of Industry, Energy and Tourism, the total import capacity of Spain with existing infrastructures could be at 92 bcm (22 bcm of which pipeline with Algeria), more than 3 times the annual consumption of the country. However, the decline in gas consumption in recent years, the closure of many cogeneration facilities and the lack of interconnection with the rest of Europe, prevented Spain to capitalize this infrastructure, with a lot of underused regasification plants.

Due to its geographical position and diversity in its supply, Spain could serve as an important player in the European energy market, especially focused on improving security and diversity of supply, a key goal for Europe, which still sees a third of its supply coming from Russia, with a 40% of it passing across Ukraine.

However, the current interconnection between Spain and France is limited to a capacity of 7.2 bcm/year by the Basque Country (Irun) and Navarra (Larrau) following the completion of the compression station in Irun last year. For that reason, the European Union established already in 2013 the construction of a new pipeline between France and Spain as a Project of Common Interest, this time through Catalonia, called MidCat. This project would double the interconnection capacity with France of current 7.2 bcm to 14.3 bcm/year. The aim is merely to improve the EU energy security, currently threatened by the gas conflict between Ukraine and Russia

It all began on March 4, 2015, when the so-called Madrid Declaration took place, in which the Commission President Jean-Claude Junker, the Commissioner for Climate Action and Energy Miguel Arias Canete, presidents François Hollande, Mariano Rajoy and prime minister Pedro Passos Coelho, and the president of the European Investment Bank Werner Hoyer met to boost electricity and gas interconnections between countries. The most important MidCat project momentum took place later, in October, when the EU decided to boost the first phase of the project, with the budget of 480 million euros, corresponding to a total of 235 km of pipeline from Hostalric, through Figueres, Le Perthus and Barbaira (near Carcassonne) on the French side. Of the total, 160m€ would go for projects on the Spanish side, managed by Enagas, while 320 m€ correspond to the French side, managed by TIGF. Tranport et Infrastructures Gaz France (TIGF) is the gas infrastructure operator in France, owned by a consortium of the Italian operator Snam (45%), the sovereign fund of Singapore GIC (35%) and EDF (20%).

Then, the second phase would take place, with the aim of achieving the targeted capacities, whose total investment is much higher, 3,000 million euros. All with the initial implementation objective of 2020.

On the Spanish side, hence, projects covered are:

What happened since then?

In April this year, the Project got a new impetus, when the European Commission announced that it would allocate 5.6 m€ to pay half of the studies for the project implementation (1,5m€ in Spain and 4.1m€ to France). Then the forecast was already to start the operation in 2021-22, running a couple of years late with respect to the date that was initially planned.

On the Spanish side the construction has been progressing. The stretch of Hostalric to Figueres is already built. However, on the French side uncertainty it’s taking over the project. The construction has barely advanced, and recent statements by the Commission de Regulation de l’Energie (CRE) have increased these fears.

This past June, the CRE questioned in a statement the viability of MidCat project, arguing that it would not increase security of supply, in fact it would lead to an extra cost in prices for French consumers. Under the current market environment, with a stable gas demand in Europe and a situation of overcapacity, they claim that the project is not justified. The project cost is very high, especially considering the second phase that still has to be launched, while Spain has already a regasification capacity that could allow them to acquire enough LNG for supplies.

On the other hand, they do not share the view of the European Commission in the allocation of funds to undertake investment between countries. The CRE advocates that this allocation should be made according to the expected benefit of the project for each part, in order to financially support more to whoever gets less return of it. In recent years, Spain has barely exported gas to France, the flow in the interconnection has been mostly gas import from France.

Consequently, the future of this project is now on the table. Europe statements have not been made yet, whil Spain is willing to continue the implementation of the project in order to meet the deadline.

The commitment by both sides is essential to ensure that a European project like this, whose objectives go beyond our borders, will be able to be fulfilled, without creating uncertainties in stakeholders or investors associated with the gas sector right now. We hope to continue to see progress and taht MidCat will end up being a reality, allowing both Spain and Portugal to be more integrated in the European market, reducing the competitive constraints that historically have been dragging.

Susana Gómez | Energy Consultant