The Spanish legacy of 2014

During 2014, many regulatory changes in the Spanish electricity system have taken place and some of them have deeply affected its structure. Among them we can highlight the new and polemic mechanism to finance the interruptibility, the establishment of the Efficiency Fund, the new definition of the six-period system (not implemented yet but expected to be soon), the measures to tackle the overcapacity, the new hydrocarbon tax which aims to promote the marine oil exploitation and the constant decrease in the oil price since August 2014 that has a direct impact in the gas price as most of the Spanish gas contracts are linked yet to the oil price. As in the previous year, 2014 has been characterized by the regulatory uncertainty. It is expected that this uncertainty will remain in 2015. Indeed it seems like it will be reinforced due the general elections taking place by the end of year.

The Ministry of Industry and Energy published in August 2014 a controversial mechanism to allocate the interruptibility service for 2015 where main consumers receive undercover subsidies for its grid disconnection in case of saturation events. The new mechanism consist of a reverse auction, where only the most competitive bidders will get “interrruptible blocks”. The first auction held, had a cost for the system of 352 million euros, 325 million euros less than the cost of this service for 2014, and almost 200 million euros less that the initial estimate of the government. Nevertheless some intensive industries, such as Alcoa, were dissatisfied with the auction outcome, and have threatened the administration with the closure of two of its plants and collective redundancies. After a tug-of-war between the government and Alcoa, a second auction was held at the end of December to offer extra power blocks up to a cost of 550 million euros as initially estimated. It is worth stressing that this service has not been used since 2009 and that Spain has an installed capacity much larger than the peak demand. To this day, the publication of the final cost of this service for the final consumers is still pending.

Last November, the 2014 system’s liquidation and the forecasted deficit for 2015 were published. According to this report, the tariff deficit will be close to zero for 2014. In this way, the government justifies the stagnation for 2015 of the access tolls. Some sources consider the stagnation in access tolls a populist measure considering that the general elections will take place by the end of 2015. It has to be borne in mind that the interruptibility service cost has been so far included in the toll access but, from January 2015, the cost of this mechanism will be passed on to the energy cost itself.

During 2014, the Spanish government set up an Energy Efficiency Fund to finance a package of measures in order to achieve the European Energy Efficiency Directive. This Directive established a common framework of measures for the promotion of energy efficiency within the European Union to accomplish the 2020 – 20% target on energy efficiency. The ERDF (the European Regional Development Fund), oil wholesale distributors and gas and electricity suppliers have started financing this fund retroactively as of October 2014. In the case of the suppliers, each of them will contribute depending on their market share. In December 2014, some suppliers have declared that this cost will be passed through to the end consumers, although many suppliers haven´t clarified its position yet.

Regarding the proposal of the new six-period system for the retail market calendar, it is still unclear when this new calendar will be applied. Although some suppliers have declared that it will impact the commodity prices, we consider it shouldn’t. What it is certainly evident is that the new calendar will affect the toll access, as August will no longer be entirely P6 anymore.

In January 2015, the mechanism that supports the power plants using national coal will be renewed as a consequence of the intense lobbying from the industry to maintain this subsidie . The European Union requires the Spanish government to progressively reduce these aids until 2018. As of 2018, only the profitable and without public aid power plants will keep its activity.

Last December, the Energy and Industry Ministry published an environmental sustainability report for 2015-2020. According to it, a big increase in renewable capacity is expected as well as a consequent reduction in the gas and coal power plants in order to accomplish the European targets in efficiency, renewables and emissions for 2020 set on 23rd and 24rd of October in the European Energy Summit held in Brussels. To fulfill these targets, the installation of approx. 7000 MW of renewables will be needed as well as a reduction of 7300 MW in conventional plants, mainly combined cycled plants. As part of this, a royal decree aiming at tracking the overcapacity is expected to be published in 2015. It is worth noting that most of the combined cycle plants aims at support the electricity system and that this back-up system is financed through the capacity payment and pay by all end consumers. It would appear reasonable to expect that a reduction in combined cycle plants will eventually result in a further saving.

Morevoer, in December´14, the government approved a draft law introducing a new hydrocarbon tax . This tax aims to promote the marine oil exploitation. Part of the collection will go to the autonomous communities where the exploration is located. This measure intends to win the local sympathy of the regional authorities who claims environmental damage.

In Spain, Brent price has a direct impact in the gas price as still most of the gas contracts are linked to the Brent and exchange ratio. Under the continuous fall of oil prices since August 2014, it has been possible to negotiate contracts at 24 €/MWh while in July the contracts negotiated cost the end consumer around 32 €/MWh for the commodity.

All in all, these regulatory changes show that Spain continues to struggle to regulate its energy markets in an orderly manner. The created systems are often unnecessarily complicated, giving rise to unwanted side effects which then need to be repaired by new adaptations which often do not much more than complicate matters even further. For the end consumers of energy, the consequence of this complexity is often cost increases. It is to be feared that some of the changes we comment in this article will have cost-increasing effects in 2015, we’ll keep track of those evolutions for you.

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