July 2013

corporate & commercial LAW

THE 2013 ENERGY SECTOR REFORM


 1. The tariff deficit

 2. Renewable energy, cogeneration and waste-to-energy facilities

 2.1. The new regulations

 2.2. Permitting

 2.3. New remuneration for Renewable Facilities

 2.3(a) Regulated remuneration for investments

 2.3(b) Regulated remuneration for O&M costs

 2.3(c) A well-run and efficient undertaking

 2.3(d) The settlement of the regulated remuneration

 2.3(e) 3- and 6-year revisions

 2.3(f) Existing Renewable Facilities

 2.3(g) New projects

 2.3(h) Closure of existing Renewable Facilities

 3. Transmission

 4. Distribution

 5. Capacity payments

 6. The “bono social

 7. New tolls and charges

 8. Spanish non-peninsular territories

 9. Self-consumption

 10. Temporary closure of generation facilities (“mothballing”)

 11. Review of the production market


On 12 July 2013, slightly later than originally anticipated, the Spanish Government announced the reform of the legislation on the electricity sector and the main guidelines of a series of new pieces of legislation (the “Energy Sector Reform”). As with all other previous attempts to reform the electricity sector, the Government has said that this time will be different and the Energy Sector Reform will tackle for once and for all the enormous electricity tariff deficit and lay the foundations for a new electricity system. All participating agents, electricity consumers and the Government will have to bear their share of the additional costs and savings to finance the reforms.

Technically, the Energy Sector Reform package is made up of a series of different pieces of legislation: (i) a royal decree-law (“RDL 9/2013”), which entered into force immediately and has been endorsed by Congress on 17 July 2013, (ii) an Electricity Law bill (the “Electricity Law Bill”), which will be sent to the Spanish Parliament, (iii) a series of draft royal decrees that have been submitted to the Energy Commission (the CNE, which is currently merging into the “Comisión Nacional de los Mercados y la Competencia” or “CNMC”) and then to the Council of State for their consideration, and (iv) several ministerial orders that have also been submitted to the CNE for consideration. Some key regulations, however, are still pending and until such regulations are passed, it is virtually impossible to assess the precise impact of the Energy Sector Reform on businesses, particularly existing renewable energy and cogeneration facilities.

These comments and analysis should be read as an introduction to the Energy Sector Reform. Our intention is not to describe all of the regulations contained in well over 400 pages of legislation, but rather to highlight the more fundamental changes and considerations for investors and developers.

Finally, except for RDL 9/2013, all the other regulations contained in the Energy Sector Reform are in draft form. The final wording of the regulations may vary by the time of their final publication. Careful attention should therefore be paid to any differences between the drafts and the final text of the regulations.

1. The tariff deficit

  • This is the driver behind the entire Energy Sector Reform. On the one hand, the Government has been trying to rein in the deficit accumulated over many years when the regulated costs (such as the remuneration of distribution and transmission, the servicing of the tariff deficit debt, the subsidies offered to consumers outside the Spanish mainland, and the premiums payable to renewable energy facilities) have exceeded the regulated income (basically, tolls and charges for the use of the network).
  • The tariff deficit is currently financed by five vertically integrated companies (Iberdrola, Endesa, E.On, Gas Natural Fenosa and Hidrocantábrico) pursuant to the 1997 Electricity Law. These companies are entitled to recover the financing they provide (including interest). The securitisation of the rights to be repaid the amounts financed is expressly contemplated and the guarantee by the Kingdom of Spain of the securitization bonds thus issued expressly permitted.
  • RDL 9/2013 introduces measures on the financing of the tariff deficit accumulated from 2009 to 2012:
    1. New maximum values for the permitted tariff deficit for 2009 to 2012 are established (EUR 3.5 billion, EUR 3 billion, EUR 3 billion, EUR 3 billion and EUR 1.5 billon, respectively);
    2. The 2010 and 2012 deficits are to generate collection rights for the five vertically integrated companies and such collection rights may be securitised. Furthermore, the 2012 deficit amount is deemed final to allow its securitisation; and
    3. The maximum amount to be given in guarantees by the Kingdom of Spain in the context of tariff deficit securitisation for fiscal year 2013 cannot exceed EUR 4 billion.
  • The Electricity Law Bill provides that tolls and charges must be sufficient to cover all costs (so that no tariff deficit should arise). However, the Government cannot rule out the possibility that the same problem arises again and the Electricity Law Bill provides that, from 1 January 2014:
    1. Any temporary imbalance or deficit cannot exceed 2.5% of the estimated regulated income for the year in question, and the accumulated tariff deficit cannot exceed 10% of the estimated income for any given year. If the imbalance or deficit exceeds such percentages, tolls and charges will have to be increased by the amount needed to offset the excess; and
    2. Any imbalances not offset through tolls and charges will be financed by all the companies participating in the settlement system (i.e., distribution and transmission companies, but also owners of renewable facilities). This is a fundamental difference to the current situation. Renewable facilities have been assimilated, at least for these purposes, to regulated activities and as such will be expected to finance future tariff deficits.
  • The new financing regime will be applicable from 1 January 2014. Thus, the 2013 tariff deficit will be financed pursuant to the current regulations set out in the 1997 Electricity Law. That said, the Electricity Law Bill does not include the 2013 tariff deficit in the Electricity Tariff Deficit Securitisation Fund, so, in principle, the five companies that finance it are not entitled to assign their 2013 collection rights to the Securitisation Fund.

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2. Renewable energy, cogeneration and waste-to-energy facilities

Arguably, the core of the Energy Sector Reform is the planned total overhaul of the remuneration of renewable energy, cogeneration and waste-to-energy facilities. All of them fall under the existing category of “special generation facilities”, as opposed to ordinary generation facilities (such as coal-fired, CCGTs, large hydros or nuclear) that participate in the Spanish pool. The Electricity Law Bill eliminates that distinction. Renewable energy, cogeneration and waste-to-energy facilities (we will refer to all of them as “Renewable Facilities” for convenience) will be entitled to compensation until they are capable of competing in the market. Importantly, Renewable Facilities retain their priority in terms of access to the network and the guarantee that their entire net electricity output will be taken up by the grid.

The current regulatory framework applicable to renewables facilities[1] (although transitorily applicable until the Draft Royal Decree on Renewables is enacted) is repealed and the new rules to be approved by the Government will be applicable from the entry into force of RDL 9/2013 (i.e., 14 July 2013).

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2.1. The new regulations

The Energy Sector Reform deals with Renewable Facilities in RDL 9/2013, in the draft RD on power generation from renewable energy sources, cogeneration and waste (the “Draft RD on Renewables”), and the ministerial order on the use of fossil fuels in facilities using renewable energy sources as their primary energy source (the “Draft MO on Fuels”). The Electricity Law Bill incorporates the provisions of RDL 9/2013 on Renewable Facilities.

The Draft RD on Renewables is expected to be passed in a couple of months’ time, once the CNE and the Council of State issue their respective reports. However, the effects of the Draft RD on Renewables, particularly the changes to remuneration, will be effective from 14 July 2013, which is the date on which RDL 9/2013 came into force. The Draft MO on Fuels, which determines the power production available to Renewable Facilities combining renewable energy and, for certain purposes, other fuels, is also expected to be passed about the same time.

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2.2. Permitting

By and large the new permitting process will not be substantially different to the current process. Development and operational permits will continue to fall within the jurisdiction of regional authorities, but remuneration of Renewable Facilities falls within the jurisdiction of the central Government. Moreover, while off-shore generation facilities and facilities crossing the territories of two or more regions continue to fall within the jurisdiction of the central Ministry of Industry, Energy and Tourism (the “Ministry”), it will now be possible to develop Renewable Facilities with an installed capacity in excess of the former 50 MW cap applicable to “Special Regime” facilities. Renewable Facilities in excess of 50 MW will be permitted by the central Ministry (except in certain territories outside the Spanish mainland).

As is currently the case (or rather it was before the moratorium on the development of new Renewable Facilities was enacted on 27 January 2012), new projects need to be recorded in a registry kept by the central Ministry, the so-called Regulated Remuneration Registry (Registro de régimen retributivo). Projects must first go through the pre-registry status (estado de preasignación) to become entitled to the regulated remuneration. To that end, a project must have all key permits, confirmed connection and access to the distribution or transmission grid, and have deposited a bond amounting 20 EUR/kW. Once the facilities have been commissioned within the maximum permitted timeline (36 months, no extensions allowed), the facilities must be recorded in the commercial operation status (estado de explotación) to crystallise the regulated remuneration entitlement from the first day of the calendar month following the commissioning. This is essentially a very similar process to the pre-registration and final registration scheme in place until now. The Draft RD on Renewables contains detailed regulations on certain practicalities and specific situations that have arisen over the last few years.

Renewable Facilities are classified in the same large categories as before (cogeneration facilities are still “group a” facilities, solar is “group b.1”, wind is “group b.2” and so on), but the subgroups have been streamlined.

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2.3. New remuneration for Renewable Facilities

This is arguably the biggest regulatory change in the Energy Sector Reform. The new approach is fundamentally different: Renewable Facilities will be remunerated on the basis of their installed capacity and their O&M costs, rather than on their production (provided that a certain minimum number of operating hours is achieved). Allegedly, this will provide sponsors with more certainty with regard to the remuneration of their facilities.

For the first time in the history of Spanish renewable energy regulations, what constitutes a “reasonable return” on the investments made by renewable energy sponsors is defined. The 1997 Electricity Law provides that sponsors of renewable energy facilities are entitled to a “reasonable return” on their investments and this concept was used by many sponsors when challenging the regulatory changes approved by previous Spanish Governments. RDL 9/2013 provides that a reasonable return, pre-tax, is a given margin over the average yield, for the 24 months prior to June before the start of a 6-year regulatory period, of the Kingdom of Spain’s 10-year bonds. For Renewable Facilities, RDL 9/2013 provides that the margin will be 300 bps. A similar benchmark is used for the remuneration of power distribution and transmission facilities, but at lower margins (see sections 3 and 4 below). The inspiration for this benchmark comes from regulated natural gas activities, where the 10-year bond plus 375 bps is used to remunerate investments in gas pipelines and 350 bps for underground gas storage facilities and LNG terminals. Whether using that benchmark at all is indeed appropriate for a business such as power generation is another question.

Following the regulatory changes introduced in February 2013 (by RDL 2/2013), Renewable Facilities in effect no longer had the option of participating in the Pool and collecting an additional premium (which was left at zero). Since then, these facilities were expected to collect the regulated fixed tariffs. The Draft RD on Renewables is taking the same approach. Renewable Facilities will have to participate in the Pool, but will be paid an annual regulated remuneration made up of (a) a regulated remuneration for investments in capacity, and (b) a regulated remuneration for operation. The regulated remuneration, which is paid during the entire regulatory useful life of the facilities, will afford the facilities a reasonable return.

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2.3(a) Regulated remuneration for investments

The remuneration paid for investments is designed to compensate for investments in capacity that cannot be recovered through sales of electricity in the market and is to be determined by reference to the net asset value of a standard generation facility (instalación tipo) of an efficient and well-run undertaking.

Within three months following the definitive approval of the Draft RD on Renewables, the Ministry will determine the exact values of standard generation facilities, taking into account the different technologies, size, age, electricity system (mainland, islands etc.) and any other factors deemed necessary. This is absolutely essential, because without these base values it is impossible to calculate the remuneration to which any facilities currently in operation will be entitled under the new system.

The remuneration for investments will also take into account the estimated sales proceeds of the facilities at electricity market prices over the next three years (each a regulatory half). If the actual annual average prices have deviated from the sales price projections, there will be a payment owed to or due by the facilities (the “market deviation adjustment factor”).

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2.3(b) Regulated remuneration for O&M costs

If the O&M costs for a given technology per unit of electricity generated exceed the estimated electricity sales proceeds (less any capacity payments) for that same unit, then a regulated compensation will be payable. The O&M costs will again be determined by reference to a standard type of facility managed by an efficient and well-run undertaking. Interestingly, once the regulatory useful life of a facility has been exhausted, the Ministry may determine an additional remuneration for a limited period to maintain that facility in operation.

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2.3(c) A well-run and efficient undertaking

This is a concept developed by the European Commission as representative of an undertaking under satisfactory management, in the context of the analysis of public aid when granting compensation for the provision of services of general economic interest (vid “Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest”, 2012/C 8/02). It is not the same as simply an undertaking generating profits. Consideration must also be given to compliance with accounting standards and productivity.

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2.3(d) The settlement of the regulated remuneration

The regulated remuneration will be paid in 14 instalments, following the pattern used for the settlement of other regulated activities in the electricity and natural gas sectors: 12 monthly instalments, plus another one once the annual figures and data are known (typically in February the following year) and a final one (the fourteenth payment) once all the final data have been verified and corrected. However, specific provisions for the settlement of the transitory period (i.e., until the Draft of the RD on Renewables is in force) are established.

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2.3(e) 3- and 6-year revisions

An important aspect of the new remuneration scheme for Renewable Facilities is that the regulated remuneration is in principle determined for six-year periods (each a regulatory period). At the end of each regulatory period, the new remuneration will be determined by updating the sales proceeds forecasts, O&M cost forecasts, price forecasts, variable generation costs, the financial remuneration rate and the reasonable return. The first regulatory period will end on 31 December 2019.

Every three years the remuneration will be revised based on market sales forecasts for the next three years and the market deviation adjustment factors.

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2.3(f) Existing Renewable Facilities

Existing Renewable Facilities will be automatically recorded as facilities in commercial operation in the Regulated Remuneration Registry, although within six months following the approval of the RD such facilities must submit certain topographical information to the Registry.

Once the values for the standard type of facilities have been approved, it seems that the standard values will be attributed to each type of facility in operation. The remuneration will be based on such standard values from the facility’s commissioning date and, presumably, taken into account for the purposes of the remuneration payable after 14 July 2013. However, details of such calculations and the settlement of the new regulated remuneration in view of any regulated remuneration (through the former regulated tariffs or as pool process plus premium) already collected are still scarce. Nevertheless, it seems unlikely that any amounts already collected via the existing regulatory schemes would have to be returned, as that would most probably be classed as retroactivity of a type commonly held to be prohibited.

It is worth noting that for existing Renewable Facilities the reasonable return is still 300 bps on the average yield of the Kingdom of Spain’s 10-year bonds, but the average is calculated by reference to the 10 years prior to 14 July 2013. Apparently, this should work out as a (pre-tax) total of 7.5%.

Finally, the reactive energy surcharge and, for cogeneration facilities, the efficiency surcharge are immediately scrapped. From 1 January 2014, the voltage dip surcharge will also disappear.

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2.3(g) New projects

The moratorium on the development of new Renewable Facilities under the regulated remuneration scheme still remains in force. However, the Draft RD on Renewables leaves the door open to new cogeneration and waste projects, including biomass projects, which had applied for registration with the pre-allocation Registry and complied with the pre-allocation stage conditions (other than the posting of the then required bond) before the entry into force of the moratorium (i.e., 27 January 2012). An application must be submitted within two months following the entry into force of the Draft RD on Renewables and the new facilities completed within 36 months.

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2.3(h) Closure of existing Renewable Facilities

The Government is expressly authorised to offer incentives for the closure of Renewable Facilities provided that the generation costs of such facilities are excessive for the electricity system (in the context of an economic recession), there is no risk to the guaranteed supply of the grid, and the renewable energy policy targets are not compromised. This is a tool the Government could presumably use to buy out some of the smaller generation facilities (such as solar PV plants) developed by small investors.

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3. Transmission

The regulated activity of power transmission has been identified as a candidate for a significant reduction in the amount of regulated remuneration it receives. According to Red Eléctrica (REE), the cuts amount to roughly EUR 100 million for 2013 alone. A new draft royal decree dealing with the new remuneration scheme for transmission develops some of the key provisions of RDL 9/2013:

  • On the one hand, the Government’s target of reducing the costs of transmission activities for the electricity system is achieved mainly by reducing the financial remuneration for investments, both for the remainder of 2013 (100 bps over the yield of the Kingdom of Spain’s 10-year bonds for the three months prior to 14 July 2013, which is said to work out at 5.5% in aggregate) and for 2014 and beyond (200 bps over the 10-year bond or 6.5% in aggregate). For the first time since the 1997 Electricity Law, the remuneration formulae are set forth in a regulation with the force of an act of Parliament (see Annexes III and IV of RDL 9/2013). This is probably intended to convey the message to investors that the new remuneration framework for Red Eléctrica (REE) will be more stable than until now.

    It is worth noting that the development of new transmission facilities was already severely curtailed in March 2012 (by RDL 13/2012) and that the remuneration base was restricted to the net value of transmission assets not fully amortised in July 2012 (by RDL 20/2012).
  • On the other hand (in common with the rules on distribution), the draft royal decree contains some totally unprecedented caps on the aggregate remuneration of transmission, as well as rules intended to force transmission companies to abide by their network development and investment plans.

    The total remuneration for investments in transmission assets may not exceed 0.06% of Spain’s projected GNP, except in certain limited events and unforeseen circumstances. Annual investments in network development may generally not exceed 1.15 times the annual remuneration. Lower investments than planned during one or two years may lead to cuts in the annual remuneration of 15% and in some cases 25%.
  • Of particular interest to developers of generation capacity are two provisions found in the draft royal decree:
    1. Sponsors may bring forward the commissioning of new transmission facilities already approved and planned, provided that such sponsors bear the full cost of the regulated remuneration for the period between the actual and the planned commissioning date; and
    2. There are additional charges to be paid by sponsors of new facilities to the relevant transmission company and the system operator for producing their respective reports on connection and access of new projects. The Ministry will set out such charges in a separate piece of regulation.

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4. Distribution

The regulated remuneration of distribution activities took a major hit back in 2012 and early 2103. It was then expressly stated that the regulated remuneration would move to a net asset based remuneration (thus excluding assets already amortised), payable from 1 January of the second year after the commissioning of any new distribution assets. The regulated remuneration was also to be linked to the general inflation rate less constant taxes, non-processed foodstuffs and energy (rather than the general inflation rate).

In parallel to the regulation of transmission, the regulated remuneration for distribution:

  • is fixed for six-year periods. The first period will start on 1 January 2014 and end on 31 December 2019. A special remuneration package has been regulated for the period from 14 July 2013 through to year end;
  • will be determined on the basis of a well-run and efficient undertaking, pursuant to formulae attached as annexes to RDL 9/2013;
  • is deemed a low risk activity and as such is remunerated at the 10-year bond rate plus a 200 bpp margin (100 bpp during the remainder of 2013); and
  • is contingent upon Spain’s forecasted GNP: it cannot exceed more than 0.12% of that GNP forecast. Distribution companies will be asked to respect and abide by their annual and three-year investment plans.

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5. Capacity payments

A new regulation of the capacity payments is introduced. Some of the changes are immediately effective, such as the reduction in the long-term incentive passed by RDL 9/2013, while other changes will be effective upon the approval of a new RD on the new capacity payments, the mothballing of generation facilities and other changes in the production market (the “Draft RD on capacity payments and mothballing”), submitted to the CNE for consideration on 18 July 2013.

The long-term investment element of capacity payments (incentivo a la inversión) has been further reduced from EUR 23,400/MW/year (which was reduced from EUR 26,000 in 2012) down to EUR 10,000/MW/year. In contrast, however, generators whose long-terms capacity payments were due to elapse after 14 July 2013 will see their entitlement to capacity payments extended by twice the period pending from that date until their original expiry date of their capacity payments.

No investment capacity payments will now be available for new facilities (unless commissioned no later than 1 January 2016). Nevertheless, the Draft RD on capacity payments and mothballing contemplates auctions for capacity payments to be held in the future to incentivise the development of new capacity (over 50 MW) in the Spanish mainland. New Renewable Facilities are expressly excluded from such auctions. The System Operator is expected to monitor the security of supply index on a 10-year basis and publish a report every semester. If the System Operator determines that the security of supply index for the following 4-year horizon is too low, an auction will be held for new capacity. Developers willing to participate in the auction will be expected to put a 1% bond calculated on the respective project’s budget. The capacity payments will be paid during the first 10 years after the commissioning of the new generation facilities.

But another important change is contained in the Draft RD on capacity payments and mothballing. The incentive for mid-term availability of generation capacity, which was introduced at the end of 2011 at a base value of EUR 5,150/MW, is scrapped.That incentive was available not only to CCGT plants, but also to coal- and fuel oil- fired power stations as well as to hydropower and pumping stations. The Draft RD on capacity payments and mothballing introduces a new incentive to compensate the availability of thermal capacity, recognizing its value as a back-up for the increased level of generation from renewable sources in the Spanish production market. It will now be available to CCGT and coal-fired power stations only. The amount of this incentive will be determined by reference to the opportunity cost of the availability of the marginal generation technology, CCGTs. The actual values will be determined by the System Operator (Red Eléctrica) every year, and will remunerate every hour in a month during which thermal generation capacity was made available. The new system is reinforced through inspection mandates given to the System Operator.

The aggregate costs of the new incentive is estimated to be in the region of EUR 210 million (a slight increase over the former mid-term availability incentive), but as the supporting report to the Draft RD on capacity payments and mothballing expressly indicates, such costs will be shared by suppliers and consumers directly participating in the Pool, and, importantly, by all other generation facilities. The higher the contribution to the stability of meeting the electricity demand peaks, the lower the share of costs to be borne by each generator. A chart in the RD on capacity payments and mothballing sets out the Ministry’s determination of the contribution per technology to the stability of the system. Clearly, some renewable energy generators should expect to pay more than others. The System Operator has been mandated to submit a proposal for the determination and the sharing of such cost among all generation facilities.

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6. The “bono social

The “bono social” is a subsidy that has existed since 2009 for a certain type of vulnerable consumer. The financing of this social subsidy was imposed as a public service obligation on certain generation companies, which were forced to finance it pursuant to certain percentages the calculation of which was never properly explained. The Spanish Supreme Court deemed such provisions inapplicable (judgment of 7 February 2012) due to the failure to justify why the companies should have such an obligation and at those specific rates. Since then, the “bono social” has been financed by the entire electricity system as another regulated cost.

RDL 9/2013 designs a new system. The parent company of the vertically integrated groups carrying out generation, distribution and wholesale supply will bear and finance the “bono social”. RDL 9/2013 states that imposing this obligation on the vertically integrated companies allows the charge to be shared among the principal business activities in the electricity sector and may be recovered through the market prices (unlike, for example, transmission companies). This argument does not justify why other activities (such as wholesale suppliers or other generation companies that are not vertically integrated) should not also share this obligation.

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7. New tolls and charges

Pursuant to RDL 9/2013, the Ministry is exceptionally entitled to review access tolls (i.e., capacity charges and active energy charges) on a quarterly basis to the extent that exceptional circumstances affecting the regulated costs or the parameters used for their calculation arise.

A revision of the current access tolls is underway and is expected to be approved within one month. The capacity charge of the tolls will be increased proportionally more than the current charge. This is the mechanism contemplated to make electricity consumers shoulder their share of the Energy Reform costs.

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8. Spanish non-peninsular territories

Regulations on electricity activities in areas outside the Spanish mainland are comprehensively reviewed. Electricity rate payers in these territories were paying the same electricity prices as if they were on the mainland, despite the higher costs of generating and supplying electricity in such territories. As a result, the additional costs were being borne by all electricity rate payers. The major change is that 50% of such additional costs will be financed through the State’s budget (despite an earlier regulatory initiative (2009) whereby a regulatory path was established to pass on 100% of such costs from the State’s budget from 2013).

There are other provisions contemplating special incentives to Renewable Facilities located in non-peninsular territories if their generation output is cheaper than thermal (fuel-based) generation in those territories.

A new draft royal decree specific to renewable energy facilities in those territories has been prepared. This will have to be consistent with the bill on electricity activities in non-peninsular territories currently being considered by the Spanish Parliament.

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9. Self-consumption

A specific registry is created to monitor and supervise consumers supplied by their own facilities, as well as consumers supplied by a generation facility of an internal network or through a direct line. Pursuant to RDL 9/2013, the registry is necessary to develop the conditions applicable to other self-consumption supply schemes and generation with self-consumption schemes. This is the cue for net-metering regulations which have been expected for several years already.

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10. Temporary closure of generation facilities (“mothballing”)

The Draft RD on capacity payments and mothballing, for the first time, regulates the temporary closure of CCGT generation facilities over 50 MW (mothballing). This provision basically responds to the request made by CCGTs to alleviate their difficult situation in the current market conditions. Currently, CCGTs are said to be providing the back up for renewable energy facilities and thus providing flexibility to the system. In this scenario, it may be preferable for a CCGT to temporarily close its facility until the market recovers.  To that end, on the basis of System Operator’s reports and forecasts on the security of supply margin, an auction will be organized for the capacity to be mothballed for the following year. Participants will bid for the compensation payable until the capacity threshold is reached.  But there are still several aspects of such an auction that need to be regulated in sufficient detail. The mothballing period is in principle set for a maximum period of a year, a period arguably too short, but exceptionally the first auction may be for a longer (non-defined) period.  Nonetheless, the Government is estimating that 6,000 MW of CCGT capacity may be mothballed.

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11. Review of the production market

In the last couple of years, a heated debate has taken place in the energy community in Spain as to whether the Spanish production market is functioning properly and, in particular, if its design as a margin price-based market is correct. The 2013 Energy Sector Reform does not appear to contemplate changing the fundamental design of the market. Nevertheless, a working group for the review of the production market will be set up, made up of representatives of the Ministry, the CNMC, the System Operator and the market participants. That group has been tasked to produce specific proposals for the review of the production market within six months from the passing of Draft RD on capacity payments and mothballing (failing which, the Ministry will submit its own proposals).

In parallel, the System Operator and the Market Operator will be asked to submit proposals to the Ministry to adapt the current operating rules and procedures for the daily and intra-daily markets, as well as the settlement processes, to bring them into line with the EU regulations, the new network codes and a long list of other specific adjustments set out in the Draft RD on capacity payments and mothballing. Both operators will have two months from the passing of that Draft RD to produce their proposals.

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Although some of the measures contained in the Energy Sector Reform will no doubt be very controversial and the specific impact on companies cannot be determined until all the secondary legislation is in place, it must be acknowledged that the Electricity Sector Reform will be the end of the uncertainties that have paralysed the electricity sector in the last couple of years.

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The main purpose of this note is to provide some preliminary comments on the most significant implications arising from the Energy Sector Reform. However, it is not a comprehensive description or summary of all its provisions, nor is it intended to constitute legal advice for any specific company, project or transaction. Our Energy and Project Finance Practice Area will be pleased to provide further information or specific legal advice upon request. Please contact:

Juan I. González

T: +34 91 586 03 81

M: +34 639 21 32 53

juan.gonzalezruiz@uria.com    

 

María José Descalzo

T: +34 91 586 03 81

M: +34 661 23 02 47

mariajose.descalzo@uria.com

 

 

Javier Valle

T: +34 93 416 56 15

M: +34 639 20 73 57

javier.valle@uria.com

 

 


[1] Royal Decree 661/2007 of 25 May, Royal Decree 1578/2008 and article 4 of Royal Decree-Law 6/2009 of 30 April.

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The information contained in this Newsletter is of a general nature and does not constitute legal advice