June 2014
corporate & commercial LAW
NEW RENEWABLE REGULATIONS IN SPAIN: NO MORE UNCERTAINTY?
After years of uncertainty regarding the future of renewable projects in Spain, the government has finally finalised the latest set of regulations regarding the remuneration of renewable facilities. On 6 June, the Spanish Council of Ministers approved Royal Decree 413/2014, regulating the generation of electricity using renewable energy sources, cogeneration and waste (the “New RD on Renewables”), which entered into force on 11 June. Ministerial Order ITC/1045/2014 on remuneration of renewable energy facilities of 16 June (the “Ministerial Order”) was published on 20 June (jointly, the “New Regulations on Renewables”).
The time has finally come to analyse the impact of the New Regulations on Renewables on existing projects, in order to determine their viability and potential restructuring in view of the fact that the conditions under which the projects were commissioned have now changed significantly. The remuneration framework seems to have especially affected wind facilities (particularly those commissioned before 2005, which will no longer be entitled to specific remuneration) and mini-hydro facilities.
This report highlights the most significant changes to the legal framework applicable to renewable energy projects to date. We do not intend to provide an exhaustive description of all the provisions of the New Regulations on Renewables (which exceed 2,000 pages) or their potential impact on the restructuring of existing projects or the development of new renewable energy projects.
For convenience, we refer to renewable energy, cogeneration and waste-to-energy facilities as “renewable energy facilities”.
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1. Scope of the New RD on Renewables
Facilities generating power from renewable energy sources, cogeneration or waste are now classified into 19 individual categories, reduced from 24, excluding hybrid categories, which are subject to specific rules. Perhaps the most relevant change, stemming from the new electricity law, Law 24/2013 of 26 December (the “2013 Electricity Law”) is that the 50 MW limit on installed capacity per facility has been removed. The former legal distinction between “ordinary” and “special” power generation regimes has also been removed.
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2. Scope of the Ministerial Order
The Ministerial Order establishes specific remuneration values for over 1,500 standard types of renewable facilities, each with specific investment and operation standard values.
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3. Authorisation of new projects
The moratorium on the development of new renewable energy facilities under the regulated remuneration scheme remains in force. Nevertheless, new facilities may be developed outside the remuneration framework.
New renewable energy facilities may exceptionally be developed under the new regulated remuneration scheme: (i) new renewable energy facilities outside the Spanish mainland; and (ii) cogeneration and waste projects, including biomass projects, which had applied for registration with the pre-allocation registry and complied with the corresponding conditions in the pre-allocation stage (other than the posting of the then-required bond) prior to the entrance into force of the moratorium (i.e., 27 January 2012) and that had obtained the commissioning certificate (acta de explotación) before 26 January 2014. Excluding those exceptions and the specific rules applicable to non-mainland facilities, the New RD on Renewables establishes that the special remuneration to new renewable projects will be allocated through future public tenders.
In general, the new authorisation process will not differ substantially from the current process. Development and operational permits remain the same and will continue to fall within the regional authorities’ jurisdiction; however, remuneration of renewable facilities falls within the central government’s jurisdiction To facilitate the supervision by both public authorities, the administrative registry of generation facilities (“RAIPRE”), in which all facilities need to be recorded, remains in place. As currently applicable, (or rather as was the case before the moratorium on the development of new renewable facilities was enacted on 27 January 2012), new projects continue to be subject to registration with the Regulated Remuneration Registry (registro de régimen retributivo) under the competence of the Ministry for Industry. Projects must obtain a pre-allocation status (estado de preasignación) before becoming entitled to regulated remuneration. A project must have all key permits, confirmation and access to the distribution and transmission grid and have posted a bond to apply for pre-allocation status. Once the facilities have been commissioned by the corresponding deadline (to be determined by the ministerial order calling the public tender process), the facilities must obtain the status of commissioned facility (estado de explotación) to grant the regulated remuneration entitlement. Renewable facilities will be entitled to the regulated remuneration from the latest of: (i) first day of the month following their commissioning; or (ii) first day of the month following its registration in the Regulated Remuneration Registry as pre-allocated status.
New facilities will not be allowed to start the authorisation process until access and connection to the grid are confirmed. As from this point, applying for any access and connection to the grid entails a cost for developers.
However, renewable energy facilities will continue to enjoy priority status over other types of facilities when applying for access and connection to the grid; however, this will be done pursuant to objective, transparent and non-discriminatory criteria that need to be regulated.
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4. Dispatch priority
The changes to dispatch priority represent a major change under the New RD on Renewables. The former dispatch priority for renewable facilities, expressed in absolute terms, gives way to dispatch priority based on “equal economic conditions in the market”, on terms to be regulated by government.
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5. Market participation
All renewable facilities must participate in the Spanish generation market. Sale offers must be submitted for each of the 24 hourly trading sessions, plus intra-day sessions. But the use of market agents or intermediaries continues to be allowed.
Renewable facilities will be allowed to participate in adjustment service markets upon prior registration with the System Operator (Red Eléctrica de España, S.A.) and subject to minimum bids of 10 MW. On the other hand, the RD on Renewables states that the Secretary of State for Energy will issue the mandatory detailed provisions to determine the conditions under which each technology may be deemed to have the capacity to provide these services. Until the Secretary of State for Energy (Ministry for Industry) issues that resolution, renewable facilities considered “manageable” pursuant to former regulations will not be deemed to have the capacity to provide those services. Facilities that have already passed the tests to participate in the adjustment services market by the time the New RD on Renewables entered into force will not be required to pass the tests again.
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6. New remuneration for Renewable Facilities
Renewable facilities will be remunerated on the basis of their installed capacity and their O&M costs rather than on production, if they accomplish a minimum number of operating hours.
For the first regulatory period, from 14 July 2013 to 31 December 2019, renewable energy facilities are entitled to a “reasonable return”, by reference to the Kingdom of Spain 10-year bond, plus 300 bps. However, for renewable facilities in operation, the 10-year average has been determined by reference to market yields for the 10-year bond during the 10 years prior to 14 July 2013. The Ministerial Order (Annex III) specifies that the average 10-year average for the 10-year bond is 4.398 per cent, which, plus 300 bps, results in 7.398% per annum. Nevertheless, for new facilities to be commissioned, the 10-year bond average is calculated by reference to the 10-year bond yields for April through June 2013, i.e., 4.503% p.a. or a total of 7.503% per annum (Annex VI).
The margin on 10-year bonds will be updated every six years by reference to “the cyclical situation of the Spanish economy and the profitability of the power generation business in view of the Spanish economy and the electricity demand”. Earlier drafts set out other criteria (e.g., the financial situation of the electricity system) and, therefore, the latest wording ultimately provides the Ministry for Industry with wider discretion to change the variable 300 bps every six years.
Renewable energy facilities will be paid annual regulated remuneration consisting of regulated remuneration for (a) investments in capacity and (b) for operation. The regulated remuneration, paid during the entire regulatory useful life of the facilities, is intended to afford the facilities a reasonable return.
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6.1 Regulated remuneration for investments
- A fixed remuneration charge for capacity installed is designed to compensate for investments in capacity that cannot be recovered through sales of electricity in the market. This fixed charge is determined by reference to the net asset value of a standard generation facility (instalación tipo) of an efficient and well-run undertaking.
- The Ministerial Order approves the specific values for each type of facility. It also determines the exact values of standard generation facilities, taking into account the different technologies, installed capacity, age, electricity system (mainland, islands, etc.) and any other factors deemed relevant. A three-month period following publication of the classifications will be provided in which to request amendments.
- 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 sale proceeds forecasts, O&M cost forecasts, price forecasts, variable generation costs, the financial remuneration rate and the reasonable return.
- Every three years (each a regulatory semi-period), the remuneration is revised based on market sales forecasts for the next three years and the market deviation adjustment factors. The first regulatory semi-period will end on 31 December 2016. The O&M cost remuneration will be updated every three years (every year for cogeneration facilities and other facilities that depend on fuel supply costs).
- Although the New RD on Renewables establishes that existing facilities will be classified in individual specific standard types of facilities, taking into account the installed capacity, capacity will be aggregated in certain cases. By way of example, for group b.1 facilities (solar energy), the capacity of facilities that (i) are connected at the same point of the distribution or transmission grid or have common connection infrastructures (or are located within the same cadastral unit), and (ii) have completed their respective commissioning and final recording in the administrative registry within 36 months of each other, will be aggregated. Nevertheless even if the above conditions are met, sponsors may claim that there is no continuity between the facilities, and the installed capacity of each facility will be taken into account separately. Continuity is deemed to exist if any of the physical elements of the facilities are located less than 500 metres from each other. This approach will inevitably lead to substantial litigation in the future.
- Remuneration for investments is calculated as the net asset value adjusted by a specific coefficient.
The following formula sets out the remuneration for investments:
Rinv¡j,a = C j,a.VNA j,a tj.(1+tj) VRj
(1+tj) VRj - 1
Where:
Rinv¡j,a: is the annual remuneration for investments in installed capacity for the relevant facility commissioned in year “a”, for each regulatory semi-period “j” expressed in EUR/MW. This value is the same for each three-year regulatory semi-period;
Cj,a: is the adjustment coefficient for each facility commissioned in year “a” for each regulatory semi-period “j”, expressed as X times 1;
VNAj,a: is the net value asset per MW unit of installed capacity at the start of each regulatory semi-period “j”, for each facility commissioned in year “a”, expressed as EUR/MW;
tj: is rate of return for regulatory semi-period “j” (currently 7.398% for existing facilities); and
VRj: is the regulatory residual life calculated as the regulatory useful life (VU) minus the number of years lapsed from the definitive operating certificate to the year of the start of regulatory semi-period “j”.
- At the beginning of each three-year regulatory semi-period, and for each type of standard facility, the net asset value will be updated (but not reset) by the applicable rate of return. The calculation method is set out in a schedule to the New RD on Renewables. A regulatory useful life not subject to modification will be established for each type of facility. The regulatory useful life of existing facilities will start running from 1 January of the calendar year following that in which they are commissioned.
- The adjustment coefficient (Cj,a) is intended to reflect investment costs that will not be recovered through market prices and has a value between zero and one.
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6.2 Regulated remuneration for O&M costs
- Regulated compensation will be payable if O&M costs for a given technology per unit of electricity generated exceed estimated electricity sales proceeds (less any capacity payments) for that same unit. As indicated, O&M costs are determined by reference to a standard type of facility managed by an efficient and well-run undertaking. Specific remuneration will be paid as long as O&M costs are not recoverable through electricity sales proceeds; however, if the Ministry for Industry states that electricity prices are such that O&M costs may be recovered, remuneration will no longer be payable.
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6.3 Adjustments
6.3.1 Minimum and standard equivalent hours of operation
- The Ministry for Industry sets a minimum number of equivalent hours of operation (funcionamiento mínimo) and a standard number of equivalent hours of operation (umbral de funcionamiento) per type of facility. The annual remuneration will be forfeited if the facilities fail to meet the minimum number of hours of operation (other than during the first and last year of operation).
- The number of equivalent hours of operation is calculated in a straightforward manner: energy sold (kWh) divided by the installed capacity (kW) for the corresponding period.
- The formula set out in the New RD on Renewables is:
D= Nhinst-Uf
Nhmin-Uf
Where:
D is the factor by which the annual remuneration is adjusted;
Nhinst is the number of annual operating hours of the relevant facilities;
Nhmin is the required number of equivalent hours of operation; and
Uf is the absolute minimum number of hours of operation.
- If the actual operating hours exceed the absolute minimum but fall below the required minimum, the annual remuneration (which should be understood as investment plus O&M) will be adjusted pro rata. Adjustments will be carried out on an interim calendar quarterly basis (10% for the 1st quarter, 20% for the second and 30% for the third quarter) and subject to a final annual settlement.
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6.3.2 Market price deviations
The remuneration for investments will also take into account the estimated sales proceeds of the facilities at electricity market prices over the three years of each regulatory semi-period. If the actual annual average hourly Pool prices in the daily and intra-daily markets have deviated from the sales price projections, using two cap and floor bands determined by the Ministry for Industry (LS1, LS2 and LI1 and LI2), a payment will be owed to, or due by, the facilities (the “market deviation adjustment factor”). Generators will bear the market price risk within the first band, will share it with the electricity system within the first and second band, but will be compensated if market prices deviate beyond the second band. Any adjustments will be carried out annually and compensated to or by the facilities during their remaining regulatory useful life (pursuant to certain formulae attached to the New RD on Renewables).
The Ministerial Order establishes the following bands and values (Annex II) for 2014-2016:
|
2014 |
2015 |
2016 |
2017 and onwards |
Estimated market prices (€/MWh) |
48.21 |
49.52 |
49.75 |
52 |
LS2 |
56.21 |
57.52 |
57.75 |
60 |
LS1 |
52.21 |
53.52 |
53.75 |
56 |
Ll1 |
44.21 |
45.52 |
45.75 |
48 |
Ll2 |
40.21 |
41.52 |
41.75 |
44 |
These values are then tweaked by an adjusting coefficient (coeficiente de apuntamiento), which varies from 0.8889 to 1.0207.
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7. Settlement of 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 a thirteenth once the annual figures and data are known (typically in February of the following year) and the final payment once all final data have been verified and corrected. However, specific provisions for the settlement of regulated remuneration for existing facilities are established (see further details in transitory provision eight of the New RD on Renewables).
Both the 2013 Electricity Law and the New RD on Renewables expressly establish that any amounts collected by sponsors prior to 14 July 2013 (the date on which RDL 9/2013 came into force) will not be available for any repayments and therefore need not be returned.
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8. Existing Renewable Facilities
Renewable facilities already included in the National Commission for the Markets and the Competition (“CNMC”) settlement system will be automatically recorded as facilities in commercial operation in the Regulated Remuneration Registry. Facilities not yet included in the CNMC’s settlement system but entitled to receive the regulated remuneration will be automatically given the pre-allocation status (estado de preasignación). These facilities will be required to apply for their registration as commissioned facilities (estado de explotación) within a month following the date on which the facilities are registered with the RAIPRE and have started selling electricity to the grid.
Furthermore, within six months following the approval of the New RD on Renewables, all existing facilities must submit specific topographical information to the RAIPRE and an affidavit (declaración responsable) pursuant to the form contained in Annex VIII declaring whether or not any public aid or subsidies have been received by the facilities (and if so, the amount of any aid or subsidies).
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Almost a year after the entrance into force of Royal Decree-Law 9/2013, the Spanish government has finally approved the set of regulations required to implement Spain’s new remuneration system on renewable energy facilities. The new remuneration system is entirely new and has been described as ground-breaking in view of the absence of any similar system in any other country. We hope that, with the New Regulations on Renewables now in force, the modification of adjustments to Spain’s regulatory framework, leads to a period of regulatory stability.
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This report provides preliminary comments on the most significant implications of the New Regulations on Renewables but is not a comprehensive description or summary of all its provisions, nor is it 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:
1. Scope of the New RD on Renewables