PORTUGAL ENERGY Raising the bar for the energy market

Reshaping, boosting and unifying the sector

MANUEL PINHO, Minister of Economy and Innovation, is the key decision-maker behind the Portuguese energy sector’s reforms and progress.

For much of its history, the Portuguese energy sector has been comprised of a few state-owned companies; today however, Europe’s westernmost country is undergoing a series of important changes. In 2004 the market began to open up, finally giving customers freedom to choose their suppliers, and now the National Energy Strategy is shifting its course. Portugal is putting a lot of effort into liberalizing the energy sector and preparing the Portuguese pole for the Iberian market, and the sector is being further reshaped, boosted and unified into a single Iberian electricity market called MIBEL, Mercado Ibérico de Electricidad.

Liberalization is being carried out through the ongoing privatization of large national producers and distributors such as Galp Energia, REN (Rede Eléctrica Nacional) and EDP (Energias de Portugal). The Portuguese state budget for 2006 forecasts a privatization revenue of almost $2 billion, mostly from the sale of stakes in energy companies. In the case of Galp, the government will be limited to a 10 percent share after its planned initial public offering (IPO) at the end of 2006, while Ren will be privatized at 50 percent. EDP, a €10 billion company, has already been privatized at 80 percent and has subsequently been listed on the stock market. Galp and Ren will follow suit.

The government’s strategy, which is based on finding a balanced structure of energy production, has three principal objectives. The first is to guarantee the stability of its energy supply through the diversification of natural resources and energy services with a view to promoting efficiency in the energy supply and demand chain. Secondly, the strategy seeks to promote the competitiveness within the economy to favor consumer protection and manufacturing. Its third goal is to adjust the national energy sector in accordance with environmental criteria in an effort to guarantee environmental sustainability of the entire energy process.

In terms of the gas sector, the government is trying to anticipate the timeframe of the natural gas market’s liberalization after having set up the single Iberian national gas market MIBEL. Now electricity and gas companies in Spain and Portugal are facing a merging process. José Penedos, CEO of REN, says, “Companies in both countries are reciprocally analyzing each other in order to find opportunities. Small companies which don’t have enough capital or the possibility of acquiring other companies will be acquired.”

The Portuguese government is also looking at countless new projects. One is a €1.5 billion investment to build various 3,200MW Combined Cycle Gas Turbine (CCGT) plants. New biomass proposals will allow companies to produce energy from wood and better prevent summer forest fires. BP Solar is looking to set up the world’s largest solar energy plant in Alentejo, while a new factory in northern Portugal will be building solar panels. Portugal is considered to be in an excellent position to become the first country in the world to harness ocean wave-power for commercial electricity consumption, and plans are underway. Bio-diesel and bio-ethanol projects are in the works, and the government is preparing to launch the largest tender in the sector’s history in Portugal, with a view to developing more than 2,000 MW of wind generation power, to be added to the existing 1,000 MW. Manuel Pinho, Minister of Economy and Innovation, emphasizes the importance of striking a balance in terms of energy production. All of these ventures will create a unique opportunity for innovation and for developing the country’s capital market.

Another growing market on which Portugal is capitalizing is renewable energy, primarily supplied by hydropower and biomass sources and wind power, which have a huge growth potential. Mr. Pinho explains, “Trying to reduce our dependency on nonrenewables drove us to make more investments in renewable energies and to promote measures improving energy efficiency. Nowadays we live in a world of very expensive energy, so we must be actively looking for alternatives.”

The U.S. Department of Commerce estimates that by 2013, Portugal will be the world’s third largest producer of alternative energy. A new initiative aimed at promoting renewables is a feed-in tariff which pays renewable electricity producers of, for example, wind energy. About 2.5 percent of the price paid to wind farms for the electricity supplied to the national energy grid must be reverted back to the municipality where the farm is located. This, of course, has led to a large increase in the number or partnerships looking to develop wind projects.

Two other important programs are the Support Measure for the Maximization of Energy Potential and for Streamlining Consumption (MAPE) and the Incentives Program for the Modernization of the Economy (PRIME). MAPE provides public and private organizations with subsidies for investments in four categories: renewables for electricity generation, energy management measures and co-generation, green fuels for transport fleets and fuel switching to natural gas. PRIME, as of this year, allocated $39 million to be channeled into projects to contribute to the development of the renewable energies cluster.