Spain: The regulation of renewables

Author: | Published: 1 Oct 2008
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The growth experienced by renewable energies in Spain has to a large extent been based upon the economic regime applicable to the generation of electricity from renewable sources (the so-called special regime). The Spanish legislative framework of this special regime has experienced a substantial evolution during the past 15 years. The current regime is embodied in Royal Decree 661/2007 of May 25 2007 (RD 661/2007). In general terms, RD 661/2007 represents a significant improvement to the legal and economic regime applicable to the generation of electricity from renewable energy sources. However, the legislative history before RD 661/2007 has not always been a steady one. The government's policy changes have been implemented and have sometimes taken the sector off-guard. Similarly, the expectations created by the introduction of new regulatory provisions have not always been sustained through time. Even today, a few uncertainties exist.

History of the regulatory framework

Royal Decree 2366/1994 of December 9 1994

The first attempt to regulate the economic regime of renewable energies in Spain was RD 2366/1994. However, the number of projects and MWs developed under this royal decree was not significant and the economic regime set forth therein was based on a complicated formula, with no guarantee of stability in the future.

Royal Decree 2818/1998 of December 23 1998

The real lift-off in the Spanish renewable energy market did not take place until the enactment of RD 2818/1998. This royal decree was approved after the enactment of the Spanish Electricity Act in 1997.

Under RD 2818/1998, only one remuneration regime was established for the generation of electricity from renewable sources. This regime consisted of a feed-in tariff applied to the electricity generated. The value of the tariff was the result of the addition of: (i) the final average electricity market price; and (ii) a premium.

Royal Decree 436/2004 of March 24 2004

The approval of RD 436/2004 represented a significant change and improvement to the economic regime set forth in RD 2818/1998. The main change was that generation facilities under RD 436/2004 could choose, as remuneration for the electricity generated, between: (i) a feed-in tariff; or (ii) market price (electricity pool price) plus a premium plus (in some cases) an incentive. The possibility of choosing between these two options is in itself a significant advantage compared with RD 2818/1998. Besides, on average, the remuneration resulting from RD 436/2004 implied an improvement (sometimes quite substantial) when compared with the remuneration under RD 2818/1998.

Once RD 436/2004 was approved, the transitory provisions of RD 436/2004 set forth that those generation facilities already operating under RD 2818/1998 were allowed to either:

  • benefit from the economic regime established in RD 436/2004 from the date when RD 436/2004 entered into force; or
  • continue to be subject to RD 2818/1998 until December 31 2006 (with RD 436/2004 applying to plants from January 1 2007): even if this transition period did not cover the entire lifetime of the plants, this did not represent a negative impact because, in overall terms and as explained above, the economic regime under RD 436/2004 was better than under RD 2818/1998.

Current regulation: RD 661/2007

The need for a new regulation

The different royal decrees enacted so far in this matter represent the regulatory instrument that seeks to implement and give effect to the Spanish government's policy and strategy on renewable energies. Such government policy is reflected in the Spanish Renewable Energies Plan 1998-2010 (Plan de Energías Renovables en España 1998-2010 or PER 1998-2010). PER 1998-2010 was reviewed in 2005, thus giving rise to PER 2005-2010. According to PER 2005-2010, the government has the following objectives achieve in 2010:

  • a minimum of 12% of total energy consumption must be produced from renewable sources; and
  • a minimum of 29.4% of the total generation of electricity must be produced from renewable sources.

The government's objectives are: (i) in line with EU policies and objectives in this matter (as reflected in the White Paper approved in 1997 and in EU Directive 2001/77/CE of September 27); (ii) supported by all political parties in Spain; and (iii) in line with and necessary to meeting the government's commitments to reduce CO2 emissions under the Kyoto Protocol.

However, the review of PER 1998-2010 that was made in 2005 clearly showed that the growth of renewable energies in Spain was insufficient to reach the objectives established by the government. As a consequence, PER 2005-2010 states the need to reinforce the government's support of renewable energies through different measures (including maintaining or improving their economic regime).

The need to further enhance the development of renewable energies gave rise to the approval of RD 661/2007. In this respect, the report prepared by the Comisión Nacional de la Energía (Spanish National Energy Commission or CNE) to explain the justification and rationale for RD 661/2007 makes the following statements when illustrating the CNE's approach to this matter.

  • The economic incentives represent an essential regulatory instrument in order to reach the government's objectives in the field of renewable energies.
  • The regulation must offer the necessary guarantees so that the economic incentives are transparent, stable and can be forecasted for the entire life of the generation facility.
  • Any review of the economic regime can only apply to new plants.
  • The retroactive application of new regulations can only be made with the necessary guarantees and measures (such as transitory provisions and adequate compensations to investors) that minimise any impact on the expectations generated by prior regulations.
  • The greatest efforts of the new regulation (in reference to RD 661/2007) should seek to promote those technologies that are less developed with regard to the objectives set forth by the government (such as solar plants, both photovoltaic and thermo-solar). In order to promote these technologies, the respective tariffs for them will provide an internal rate of return (IRR) after tax above the minimum level considered by the CNE as a reasonable IRR for renewable energy plants (7%).

Economic regime of renewable energies under RD 661/2207

The economic regime set forth by RD 661/2007 is characterised by the following.

  • This economic regime is similar to that established under RD 436/2004 in the sense that generation facilities may choose between the tariff and market options as schemes to remunerate the electricity generated. Any generation facility under the special regime may change from one alternative to the other, provided that there is a minimum period of one year for the chosen alternative. Also, the ability to formalise bilateral contracts between a producer and a consumer at the price freely negotiated between the parties is expressly provided for.
  • In addition to the main components of the tariff and market options, RD 661/2007 also contemplates the right to receive some additional amounts depending on the circumstances of the generation facility (complement for efficiency of cogeneration plants and complement for reactive energy, among others).
  • Due to the need to increase the support of renewable energy projects in order to achieve the government's objectives in this field, the specific remuneration figures are either similar to or better than those provided by RD 436/2004.
  • RD 661/2007 provides for the annual review of those numbers in line with the evolution of the consumer price index (IPC).
  • The market option includes a cap and a floor on the total remuneration to be received by the generation facility.

Transitory provisions

Once RD 661/2007 was approved, the transitory provisions of RD 661/2007 in respect of generation facilities already operating under RD 436/2204 or under construction at the time RD 661/2007 was enacted set forth the following principles.

  • Plants that enter into commercial operation before January 1 2008 may choose between being under the prior regime of RD 436/2004 or benefiting from the economic regime set forth in RD 661/2007. If the plant chooses to be under RD 436/2004, two results may be possible: (i) if the option chosen is the feed-in tariff, then the tariff regime of RD 436/2004 will apply for the entire lifetime of the plant; or (ii) if the market option is chosen, the economic regime for this option under RD 436/2004 will be applied until December 31 2012, and the economic regime for this option under RD 661/2007 will be applied afterwards.
  • As an exception to the above, solar plants (both photovoltaic and thermo-solar) are automatically under RD 661/2007 from the date RD 661/2007 entered into force irrespective of the plants' date of entry into operation. This looks negative but is not: the economic regime under RD 661/2007 for solar plants is either similar to or better than the economic regime under RD 436/2004.

Features and novelties

Access to the grid

RD 661/2007 specifically recognises a priority right of those generation facilities under the special regime in respect of the access and interconnection to the grid. Such interconnection usually becomes a bottleneck in the administrative and permitting procedure. As a consequence, many individuals and companies tried in the past to secure grid interconnection with the only objective of speculating with those rights and selling them at the highest price possible. In other words, those developers did not have a real intention to complete their projects. Since grid capacity is limited, this situation could affect other developers with serious, real projects.

In order to avoid this situation, RD 661/2007 introduces the need to post a bank guarantee as a requirement before requesting grid access. This requirement is new for interconnection to the distribution grid. In the case of access to the transportation grid, the amount of the guarantee has been substantially increased. The amount will depend on the installed capacity of the plant. At present, the amount is €20 ($29) per Kw, with the exception of solar photovoltaic plants, where the amount is significantly higher (€500 per Kw).

The bank guarantee will be returned to the developer upon start-up of the plant. On the other hand, the bank guarantee will be executed by the authorities when the developer voluntarily renounces the licensing procedure of the project or does not respond to information requests from the authorities within three months. A lot has been said about what should be considered a voluntary renounce. RD 661/2007 gives guidance by stating that, in order to assess whether or not such renounce has taken place, it will take into account those acts of the authorities that could affect the feasibility of the project. Accordingly, if the project cannot be completed because, for example, an environmental permit is not granted by the relevant authorities, the bank guarantee should be returned to the developer. But if the reason is due to other circumstances (such as, for example, inability to obtain financing or to secure the supply of equipment), our view is that the authorities will be entitled to execute the bank guarantee.

Installed capacity and economic regime

As discussed above, RD 661/2007 represents a regulatory instrument that seeks to implement and give effect to the Spanish government's policy and strategy on renewable energies. As part of this policy, the Spanish government has set specific objectives of installed capacity (in MWs) for each technology, to be reached by 2010.

Consistent with these objectives, RD 661/2007 sets forth that when installed capacity represents 85% of the objective for a given technology, the government may establish a period of time for all existing projects using that technology (under development and/or construction) to be finished so that they can benefit from the current economic regime. This period is to be no less than 12 months.

The rationale behind this minimum period is that it should take into account different factors such as: (i) information received by the CNE on the nominal capacity installed that has been definitely registered; (ii) pace of implementation of new plants (per each technology); and (iii) the average construction period of the plants (per each technology).

There has already been a precedent of application of this provision. Shortly after RD 661/2007 was enacted and precisely as a result of the enhancement of the economic regime, 85% of the objective for solar photovoltaic plants was reached (371 MW). As a consequence, in September 2007 the government established a one-year period during which all solar photovoltaic plants under development/construction should be finished and registered in the Registro de Instalaciones de Producción en Régimen Especial (RIPRE) in order to benefit from the economic incentives established in RD 661/2007 (theoretically, this one-year period should be more than sufficient, taking into account the average 6-8 month construction period for a solar photovoltaic plant). Moreover, because of the number of PV projects under development, it is very likely that by the time this article is published the government will have approved a new RD, either extending the one-year deadline or establishing a new tariff (lower than the current one but still financially attractive) for those solar photovoltaic plants that become operational after the end of the one-year period.

Possibility of re-powering old wind parks

RD 661/2007 introduces the possibility of re-powering old wind parks registered in the RIPRE before December 31 2001, up to a total of 2,000 Mw and with the possibility of receiving an additional premium of up to €0.007/kW.

Caps and floors

Before RD 661/2007, a generation facility that had chosen the market option (under which the price for the electricity generated by the facility consists essentially of the market or "pool" price plus a regulated premium) was fully exposed to market risks and rewards. Should the pool price (the electricity market price that results from the negotiated market) go down, this could seriously affect the profitability of the plant. On the contrary, at times when the pool price was very high, the generation facility would be receiving significant income.

During the months immediately before the enactment of RD 661/2007, the increase in oil prices in the international energy markets caused an increase in the generation costs of power plants that used oil products or gas (such as CCGTs) to produce electricity. This situation translated into an increase in the prices at which electricity was negotiated for on the market. As a consequence, renewable energy plants that had chosen the market option were benefiting from a substantial increase in the pool prices. This situation had a negative impact on the so-called tariff deficit (the negative difference between remunerations received by distribution companies by means of the regulated tariffs and the generation costs) and was considered by the government to be a malfunction in the system, as the generation costs of renewable energy plants were not affected by the increase in oil prices. In order to correct this situation, the government introduced a cap on the total amount that a generation facility under the special regime would receive under the market option. Since the introduction of a cap alone could obviously be considered to be a negative measure and one that would affect existing rights, the government tried to balanced the decision with a "floor" so that remuneration under the market option would at all times be between the respective caps and floors applicable to each technology.

The introduction of the cap and floor can be considered to be an improvement of the economic regime as it is beneficial for the purposes of forecasting minimum future revenues and raising external financing. Indeed, these days most of the generation facilities under the special regime are under the market option.

Review of economic regime

Without prejudice to what has been written above on the impact of the installed capacity in the economic regime, RD 661/2007 contemplates the following possibilities of review.

(a) Annual review of the applicable tariffs, premiums, complements, caps and floors, taking as a reference the increase in the consumer price index less:

  • 0.25% (until December 31 2012); and
  • 0.50% thereafter.

During 2010 (and every four years thereafter) the tariffs, premiums, complements, caps and floors will be reviewed taking into account the following criteria:

  • the degree of accomplishment of PER 2005-2010 (and any subsequent plan that is approved);
  • the Energy Saving and Eficiency Strategy for Spain (Estrategia de Ahorro y Eficiencia Energética en España);
  • the costs associated to each technology;
  • the percentage of the electricity demand that is satisfied by the special regime; and
  • any impact of the special regime on the technical and economic aspects of the electricity system.

This review will ensure a reasonable rate of return for these generation facilities in relation to the interest rates in the capital markets. Furthermore, this review (in respect of tariffs, caps and floors) will not affect those generation facilities that enter into commercial operation before January 1 of the second year after the year when the revision takes place (January 1 2012 for reviews made in 2010).

Though far from perfect, the Spanish regulatory regime applicable to the generation of electricity from renewable sources is one of the best in Europe and indeed the world. This has been acknowledged by the European Commission (see communication from the EU Commission dated December 7 2005).

No one can question that the regulatory regime has been improved in recent years and, as a consequence, an increasing number of foreign and domestic investors are being attracted to this market. Current figures show that approximately 21% of the electricity generated comes from renewable sources. In percentage terms, solar photovoltaic plants are experiencing the biggest growth. A lot of thermal-solar projects are also in the pipeline. Wind continues to be the leading technology (the second largest in Europe in terms of installed capacity, after Germany), although increase rates are moderate.

Even if the 2010 objectives are still hard to reach, there is no reason to believe that renewable energies in Spain will not continue to grow in the years to come. Although there are some clouds on the horizon (the tariff deficit is growing and there may be the temptation to reduce the economic incentives to renewable energies as a – partial – measure to fight the deficit), we believe that the Spanish government will continue to support (and even improve) the economic incentives applicable to the special regime. Any other approach would have a negative impact on the economy and on the view that investors have of the stability of the Spanish regulatory system, not to mention on the environment.

Author biography

Javier Santos

DLA Piper

Javier Santos is a lawyer specialising in energy, M&A and finance. He has substantial experience of representing international and Spanish investors, including project finance work in the electrical utilities industry on behalf of Spanish financial institutions, management buyout financing, M&A, privatisation and energy assignments in Latin America, Africa and Europe. Javier has been listed among the best energy and project finance lawyers in Spain by the main international directories. He has participated as professor and speaker at various seminars, courses and conferences, including several at the Instituto de Empresa (Madrid, Spain) and El Club Español de la Energía (Energy Companies Association, Spain).