The Spanish energy sector has undergone many positive changes during the last years. These include greater use of gas and renewables in power generation and further energy market reforms. Notwithstanding all these positive developments, the Spanish energy sector will face a number of challenges in the future. Meeting its Kyoto target will be difficult for Spain because emissions increased by 39% between 1990 and 2002. While Spain has developed an energy efficiency strategy, its implementation is delayed. Feed-in tariffs have been the primary tool to promote renewable electricity and have delivered impressive growth rates for wind generation. Nevertheless, the government should ensure that the system to promote renewables is cost-effective. Spain has had great success in fostering the fastest growing natural gas market within the EU. This requires substantial infrastructure investments in the future. The liberalisation of the electricity sector started in the mid 1990s. It should now be revised in order to achieve higher efficiency. This will be obtained mainly through better transparency. Weak cross-border electricity interconnections and trade tend to isolate Spain and lead to inefficiency. This situation also carries risks for security of supply with increasing energy demand and limits the role of competition. The introduction of the Iberian energy market MIBEL will help to create a stronger base for the market. Spain will have to invest in gas storage and stronger electricity interconnections to ensure security of supply.