In evaluation: renewable power coverage and regulation in Spain

An extract from The Renewable Energy Law Review, 5th Edition

The policy and regulatory framework

i The policy background

In July 2013, Spain began an electricity market reform, with the stated aim of ensuring the financial sustainability of the Spanish electricity system.8 Parliament passed Law 24/2013 of 26 December 2013 (the 2013 Electricity Act), which was followed by secondary legislation passed between June 2014 and March 2022 (the Specific Remuneration Regime).9 The Specific Remuneration Regime switched from the previous performance-based incentive system to a variant of rate base regulation, and it applies to both existing renewable plants built prior to July 2013 and new renewable installations assigned by the 2016 and 2017 auctions.10

Price-based mechanism

The Specific Remuneration Regime established an incentive mechanism that aims to allow an efficient plant to cover its costs and obtain a pre-tax target return (before financing). Under the Specific Remuneration Regime, the bulk of remuneration comes from a fixed investment incentive per MW of installed capacity.11 Spain also offers an operating incentive per MWh produced to compensate for the standard operating costs that an ‘efficient, well-managed company’ could not recover on the market. Spain reviews and may update the estimates of produced hours and operating costs for standard installations and the Spanish electricity prices forecast every three years (the semi-regulatory period),12 and the target return on investment every six years (the regulatory period).

In November 2019, Spain announced a reduction of the pre-tax target return level from 7.398 per cent in the first regulatory period13 to 7.09 per cent for the second regulatory period starting in January 2020. The 7.09 per cent target return applies to renewable installations under the Specific Remuneration Regime whose owners have initiated legal proceedings against Spain due to the 2013/2014 regulatory reform and have decided not to waive them. Spain retains the discretion to alter the target return every regulatory period.14

Capacity-based mechanism

The 2013 Electricity Act envisaged the possibility of launching competitive concurrence mechanisms to provide financial support for new renewable installations.15 Due largely to the renewable generation moratorium initiated in 2012,16 starting around 2014, Spain began to miss the interim annual targets to reach the long-term target of providing 20 per cent of final energy consumption from renewable energy sources by 2020.

Spain ended the moratorium in 2016. Pursuant to the provision in the 2013 Electricity Act, in 2016 and 2017, Spain launched auctions for 8.7GW of additional renewable capacity. New renewable installations assigned by the 2016 and 2017 auctions were entitled to financial support under the Specific Remuneration Regime.17

In June 2020, Spain approved a new regulation for the promotion of renewable energy, including auction rules based on a pay-as-bid mechanism (the 2020 Regulatory Regime).18 The 2020 Regulatory Regime overhauls the Specific Remuneration Regime. Where the prior auctions launched in 2016 and 2017 set discounts to the capacity payment per MW, the new system applies a traditional performance-based incentive in the form of a FiT per MWh. The new auction rules apply to both new renewable facilities and the repowering of existing renewable facilities.

In the pay-per-bid mechanism,19 renewable developers bid a specific strike price.20 The daily financial support awarded to the winning bidders will be the strike price adjusted by the difference between the strike price and the market price, multiplied by an adjustment factor. The adjustment factor is specific for each technology and contingent on the ability to dispatch, totalling 25 per cent for renewable installations with dispatchable capabilities21 and 5 per cent for non-dispatchable technologies.22

The financial support will also depend on two thresholds:

  1. a maximum energy threshold, defined as the maximum volume of energy from the auction which can receive financial support; and
  2. a minimum energy threshold, which refers to the minimum volume of energy that needs to be delivered in order to be entitled to financial support.23

Any generation sold beyond the maximum threshold will not be entitled to receive financial support on top of the market price. Penalties may be imposed on facilities that do not reach the minimum threshold. The awarded facilities may also face penalties if, for instance, they suffer construction delays or opt out of the scheme.24

Once set, the strike price will not be modified during the maximum delivery period, which is set between 10 and 20 years depending on the type of technology,25 and defined as the maximum period within which winning bidders have to comply with the obligation to sell the minimum energy.26

The CCET Act also introduces a commitment to publish an annual forecast for the auctions planned in the five years ahead, indicating approximate time frames, frequency of the auctions, expected capacity and, if applicable, planned technologies.

The first auction under the 2020 Regulatory Regime was launched in January 2021, setting a maximum delivery period for the energy at auction of 12 years.27 Spain awarded approximately 2GW of PV capacity (required to come online before the end of February 2023) and 1GW of wind capacity (required to come online before the end of February 2024). The average price was €24.50 per MWh for PV and €25.30 per MWh for wind.

The second auction was launched in October 2021 and awarded a total of 3.1GW. Of that, 2.3GW went to wind projects at an average FiT of about €30.20 per MWh and 0.9GW to PV at an average price of €31.70 per MWh.28 FiTs were €5 to €7 per MWh higher in the October 2021 auction than in the January 2021 auction due to market energy prices rallying in 2021 in the wake of covid-19 pandemic-related recovery.

A third auction is expected in the second half of 2022 for a total of 0.5GW of additional renewable capacity, divided into 0.2GW for thermoelectric solar, 0.14GW for distributed solar PV, 0.14GW for biomass and 0.02GW for other technologies.

Clawback mechanisms

In September and October 2021, Spain adopted urgent regulatory measures on a temporary basis to reduce the effect of record wholesale energy prices on consumers’ electricity bills since the beginning of the 2021 energy crisis.29 This new legislation established a gas clawback mechanism to redistribute the alleged excess remuneration received by infra-marginal and clean generation technologies, including nuclear and renewables, due to the increase in prices in the wholesale market as a consequence of the escalation in natural gas prices.

Pursuant to the September and October 2021 legislation, the alleged excess remuneration for each MWh produced is determined on a monthly basis, provided that the average monthly price of gas in the Iberian gas market (MIBGAS) exceeds €20 per MWh, and increases with the price of gas and the number of hours in which CCGTs set the marginal price in the wholesale electricity market. The gas clawback mechanism was originally set to apply only during the third quarter of 2021. Subsequent legislation has extended its validity until 30 June 2022.30

Renewable technologies affected by the gas clawback mechanism have internalised the cost imposed on their bids by the mechanism, thereby increasing their supply bids. In the absence of the internalisation, renewables could end up producing at a loss.

Certain generation facilities are exempted from the gas clawback mechanism, including facilities and projects that meet at least one of the following conditions:

  1. are located outside Spanish mainland;
  2. are remunerated under the Specific Remuneration Regime;
  3. were assigned by the 2021 auctions under the 2020 Regulatory Regime; and
  4. have a net capacity of 10MW or less.

Exemptions also apply to energy supplied through certain long-term (physical or financial) PPAs,31 including:32

  1. PPAs not indexed to the wholesale electricity price;
  2. fixed-price PPAs indexed to the wholesale electricity price, provided that they were signed before 31 March 2022 or at prices below €67 per MWh; and
  3. intra-group PPAs between vertically integrated power generation and commercialisation companies if final consumers pay a price below €67 per MWh.

According to Spain, the exemptions to PPAs are trying to avoid irrational situations in which generation facilities with a signed PPA have to pay to produce the electricity committed in the PPA, thereby producing at a loss.

An additional CO2 clawback mechanism is expected to take effect in the second half of 2022.33 The new mechanism aims to further reduce the alleged excess remuneration received by infra-marginal and non-CO2-emitting technologies to the extent that their variable costs are below the prevailing high wholesale electricity prices driven by the price rise in CO2 emission rights. The CO2 clawback mechanism would apply to infra-marginal non-emitting technologies, including nuclear, hydro and wind technologies commissioned prior to the publication of the EU Emission Trading Scheme Directive in October 2013.34 The reduction in remuneration under the CO2 clawback mechanism will be calculated on a monthly basis, and based on the electricity production of the aforementioned facilities and the difference between the average price of the equivalent ton of CO2 for that month and a reference value of €20.67 per ton of CO2.

Other legislative tax measures

In June 2021, Spain approved a temporary suspension from July to September 2021 of the 7 per cent generation levy on gross revenues for all generation plants.35 Subsequently, new legislation approved between September 2021 and March 2022 extended the suspension until 30 June 2022.36

Since the second half of 2021, Spain has further adopted other exceptional and transitory tax measures to reduce the cost of the final electricity bill, including, among other things, the reduction to the taxable amount for value added tax purposes on certain supplies from 21 per cent to 10 per cent37 and the reduction of the excise tax rate charged on electricity bills for electricity use from 5.1 per cent to 0.5 per cent.38 As at May 2022, the exceptional and transitory tax measures have been extended until 30 June 2022.39 The legislative tax measures described in this section could be extended beyond June 2022 if energy prices remain high.

ii The regulatory and consenting framework

The Secretary of State for Energy within the Ministry for Ecological Transition is the ministerial department responsible for the regulation and implementation of the economic regime governing renewable energy. Autonomous regions have the competence to regulate the deployment of renewable projects and may introduce additional requirements in their territory.

The independent regulator, the National Commission for Markets and Competition, has authority to, among other things:

  1. supervise the management, allocation and charges for connection capacity;
  2. monitor the origin of electricity from renewable energy sources and high-efficiency cogeneration;
  3. issue reports in relation to authorisations, amendments or closures of facilities and in application for approval or authorisation of economic or remuneration regimes; and
  4. implement and enforce rules contained in certain secondary regulation published by the Ministry for Ecological Transition.