Electric sector laws in Spain

November 2013 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

On 20 September 2013 the Council of Ministers approved the draft Law of the Electric Sector to replace existing Law 54/1997. The Official Gazette of the Spanish Congress (Boletín Oficial de las Cortes Generales) published on 4 October 2013 the draft law which will be discussed in Parliament and likely passed prior to the end of the year.

The draft law forms the main part of electric system reform, and will be complemented by a set of regulations consisting of Royal Decrees and Ministerial Orders. The following draft regulations have already been prepared and will likely be approved once the new law is enacted: (i) Draft Royal Decree on the methodology for calculating the remuneration of electricity transmission activity; (ii) Draft Royal Decree on the methodology for calculating the remuneration of electricity distribution activity; (iii) Draft Royal Decree regulating the production of electricity from renewable sources, cogeneration and waste; (iv) Draft Royal Decree regulating the self production and consumption of electricity; (v) Draft Royal Decree regulating the hibernation and modification of certain aspects of the electricity production market; (vi) Draft Royal Decree regulating the production of electricity and the dispatching procedure in extra-peninsular territories; and (vii) Draft Royal Decree regulating the commercialisation of electricity and conditions for contracting and supplying electric energy.

This new draft law has been preceded by controversial Royal Decree-Law 9/2013 (RDL 9/2013), which has adversely and retroactively affected the economic basis of renewable energies. In accordance with this new regulation, the remuneration of energy produced will comprise a capacity term (to cover the investment costs of a ‘standard’ installation) and an operating term to cover the difference between exploitation costs and the income generated out of the participation in the market which will be revisited every six years. The new economic regime is supposed to ‘ensure’ a ‘reasonable return’ calculated as a spread on the average return for the state long term bonds (10 years) in the secondary market. The regulation of RDL 9/2013 is now incorporated into article 14.7 of the new draft law. This regulation has retroactive effects (in addition to its ‘confiscation’ outcome represented by the significant reduction of existing feed-in tariffs) and means that the economic regime in accordance to which the investment was originally made (and that was meant to last for a longer period of time) is no longer applicable.

The main declared purpose and objective of the new law will be to guarantee the “financing and economic sustainability of the electric system”. This target, which is a ‘principle’ of the new regulation, is the result of the so called ‘tariff deficit’ – i.e., the difference between the costs and the income of the electric system. The ‘Statement of Principles’ (Exposición de Motivos) of the new draft law establishes that the reason for the tariff deficit should be found in the “excessive growth of certain costs due to energy policy decisions without the guarantee of the correlative income by the system, all aggrieved by the lack of growth of electric demand due mainly to the economic crisis.” It adds that “the lack of economic and financing stability of the electric system originated by the tariff deficit has hindered the guarantee of a stable regulatory frame, which is needed for the proper development of an activity such as electric activity which is a very intensive investment.”

The draft law acknowledges that “continuous legislative changes have originated an important distortion in the normal functioning of the electric system”.

Financing and economic sustainability, defined in article 13 of the new draft law as “the capacity to satisfy all the costs of the electric system”, are the main drivers of the new legislation and have been translated into the measures outlined below.

First, the costs of the electric system will always be financed by the income of the electric system. The costs are the following: carrying out transmission and distribution activities; specific remuneration of activities associated with producing electricity from renewable sources, cogeneration and waste; the extra cost for generating electricity in extra-peninsular electric systems (i.e., the Canary Islands, Balearic Island, Ceuta and Melilla); capacity payments; subsidies for production of national coal; payments associated with nuclear moratoria; funds for financing the National Plan for Nuclear Waste; payment of levies (tasas) to the National Commission of Markets and Competition and to the Ministry of Industry, Energy and Tourism; losses associated with cierre de energía (the difference between the energy contracted in the wholesale market and the real energy finally demanded); annuities in the tariff deficit; payments for the ability to interrupt supply; system operation; and any other cost expressly attributed by means of a law or regulation.

Second, the income of the system includes: tolls for access to the transmission and distribution grid to be paid by consumers and producers and by exporters to non EU countries; charges to be established to pay the relevant costs not covered by income from tolls and charges associated with the costs of the system (as provided for in article 16 of the draft law); any financial mechanism established by law; provisions in the General State Budget designated to cover, inter alia, the costs of generation out of renewable sources and the extra cost of production of electricity outside of the Spanish mainland; and any other income expressly established by a law or a regulation.

Third, the income of the system shall be sufficient to pay all the costs, so that no new tariff deficit arises.

Fourth, any regulatory measure representing an increase in costs or a decrease of income ought to be coupled with an equivalent reduction in costs or increase of income, as applicable.

Finally, a forecast of costs and income shall be carried out every year for the following six year period (the six year period is introduced as a ‘regulatory period’ to calculate the relevant remuneration for,inter alia, the production of electricity out of renewable sources. In accordance with this, the remuneration established may be reviewed every six years).

The main elements of the economic framework for producing electricity through renewable sources are as follows. First, the parameters for remuneration may be revisited every six years in accordance with the economic situation, the demand for electricity and ‘adequate returns’.

Second, the remuneration shall be the aggregate of: the price resulting from intra-daily and daily markets; the ancillary services; payments for capacity; the additional remuneration that may be established for the production of electricity outside of the Spanish mainland; and specific remuneration for renewable energies.

Third, in the case of renewable sources, the government may establish – although there is no obligation to do so – an additional payment which shall comprise a term for installed capacity and a term for operation.

To calculate the specific remuneration, the following shall be considered for the ‘standard installation’ during its ‘regulatory life’ and with reference to an activity carried out by a well managed and efficient company: (i) standard income for the sale of electricity calculated at market price; (ii) standard costs of exploitation; and (iii) standard value of the initial investment.

The remuneration shall not exceed the minimum level required to cover the costs that will allow the renewable plants to compete in the market with other technologies and to obtain a ‘reasonable return’ with reference to the ‘standard installation’. (This return before taxes shall consist of a spread over the average return for 10 year state bonds.)

Hermenegildo Altozano is a partner at Bird & Bird LLP. He can be contacted on +34 91 790 6000 or by email: hermenegildo.altozano@twobirds.com.

Hermenegildo Altozano

Bird & Bird LLP