The new Law of the electricity sector once again affects renewable energy investments

On the 26th of December 2013 the Spanish Parliament approved Law 24/2013, of the electricity sector which replaces the Law 54/1997 after sixteen years from its entry into force. The Law has been published in the official journal on the following day and has entered into force on January 1st 2014.

This law is only one component of a long expected reform which supposedly aims to restructure the electricity sector and solve the structural problems that have plagued the electricity sector over the past decade, starting from the enormous tariff deficit.

The reform effort of the Spanish Government started on the 12th of July 2013 when the Council of Minister approved Royal Decree-Law 9/2013, adopting certain measures in order to guarantee the financial stability of the electricity sector. Royal Decree-Law 9/2013 only described the envisaged measures in a broad way, while the exact content of the new reform has been defined by the new Law of the electricity sector as well as by a series of royal decrees, of which some are still pending approval. In particular the RES royal decree is  likely to be approved in the following weeks.

The main goal of the new reform is to limit the tariff deficit of the Spanish electricity sector and for this purpose it replaces the support schemes applicable to electricity generation from renewable sources, cogeneration or waste (previously referred to as "special-regime installations") with a new remuneration system turning the previous system inside out. The reform is based on the so called “reasonable profitability” of the investment put in place by an "efficient and well-managed company", however, these concepts are only used for abstract reference.

According to article 14.7 of the new Law of the electricity sector, the new regime will apply to new installations and, only as an exception included in the Eleventh Additional Disposition, to any other installations already put in place at any date before the entry into force of the Law of the electric sector. 

No support schemes are awarded to new plants in Spain since early 2012 as a result of the moratorium contained in Royal Decree-Law 1/2012. Thus in practice the new regime is only applicable to installations built before its entry into force. It is retrospective and possibly retroactive.

Law 24/2013 does not define the details of new remunerative regime but it makes reference to the subsequent approval of a RES royal decree which is currently pending approval and will establish the numbers of the remunerative regime applicable to installations that generate electricity from renewable energy sources currently entitled to support schemes.

The electricity reform replaces the system of feed-in tariffs and feed-in premiums with a new retribution system. When the new system will enter into force, RES producers will not receive a regulated price for each MWh of their electricity sold anymore, but instead they will receive a specific retribution mainly based on their supposed initial investment.

That specific remuneration will be calculated taking into account the following parameters for a “standard installation”, throughout its useful regulatory life and on the basis of the activity that would be carried out by an “efficient and well-managed company” (art. 14.3):

a) Standard income from the sale of generated power valued at production market prices.

b) Standard operating costs.

c) The standard value of the initial investment.

All existing Spanish RES installations will be grouped and assigned to a “standard installation” based on the criteria listed above regardless of the real costs in which producers have incurred.

The exact parameters of the standard installation will be defined in a Ministerial Order that will be approved after or with the entering into force of RES royal decree. At that point RES producers will finally know the features of the standard installation that will be taken into account for their retribution.

The standard installation will be designed as to guarantee a reasonable rate of return before tax which is connected to the average yield of Spanish 10 year Government bonds on the secondary market (4.5% at the moment) plus 300 basis points. This return however bears no relationship to the real return of the real installation. It merely serves as an abstraction to formally justify a cutback. 

A the parameters of the remunerative regime may be reviewed every six years while some of them can be reviewed every three years.

According to Law 24/2013 the RES royal decree will create a registry for awarding and properly monitoring the specific remuneration awarded to renewable energy plants. Existing RES plants will automatically be switched to the new register being the inscription in this specific register a fundamental condition to be eligible to the applicable remunerative regime. The Registry of the Specific Remunerative Regime will resort under the Ministry for Industry, Energy and Tourism and will stipulate the remunerative parameters applicable to those plants.

Another registry will be created for RES installations destined to self-consumption, as described in the proposed royal decree of self-consumption, with a mandatory legal obligation for any citizen to register his installation if he wants to produce and consume his own electricity.

Registered installations will now pay a fee, called backup toll, for every MWh of electricity produced and self-consumed as a contribution to the fixed cost of the grid. This fee does not apply to off-grid installations.

The new reform will result in a new cutback for renewable energy producers which, for photovoltaic energy, will ratify the 30% average cut on support schemes put in place by RDL 14/2010 and that will be in force until the 14th of July of 2013 (which means until the reform itself enters into force) and thus will have very negative in impact on the Spanish RES sector. 

Besides that the new reform also displays its retroactivity prima facie as it applies the new regime to "the regulatory lifespan of the installations" therefore this application will have retroactive effect as far back as pre 2004 plants. These plants will not find themselves in the situation of having to return FIT received in the past, since the approved version of Law 24/2013 in its final clause 3.4 has ruled this out.

Moreover the new retribution system is straightforward discriminative. Combining large groups of RES producers in standard projects which do not reflects the real investment costs is for itself discriminative and obviously damages the most costly projects within each standard project group, to name just one example. 

The new energy reform has been presented, like every other plan or reform of the electricity sector over the past three years, as the permanent solution to the problems of the sector, while these problems have worsened each time afterwards.

With Law 24/2013 once again the Spanish government, heavily influenced by the dominant companies in the Spanish electricity market and their lobbying association UNESA, uses renewables as a scapegoat in order to re-allocate costs in the short term and avoid a cost audit of the sector which should be the key for solving the deficit problem and is the prerequisite of every reform effort.