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Pain in Spain: New Retroactive Changes Hinder Renewable Energy

In his Poetics, the Greek philosopher Aristotle draws a distinction between Tragedies and Epics: he states that while Tragedies are confined to one revolution of the sun (i.e. one year), Epics can be of unlimited duration. In light of the seemingly unending saga of cuts and retroactive changes that have plagued Spain's renewable electricity sector since the fall of 2008, it can now be said that the situation in Spain has evolved decisively from a Tragedy into an 'Epic.'

Act One

Investors in Spain’s renewable energy (RE) industry once thought they had the best of all worlds: a stable European country, blessed with first-class wind and solar resources, an attractive system of feed-in tariffs (FITs), ambitious RE targets, all supported by a relatively transparent system of regulation and administration. This combination of factors made Spain one of the most attractive places for renewable energy investment worldwide.

Another important, though under-appreciated fact, is that between the mid-1990s and 2008, Spain’s RE policy was characterized by significant policy innovation: it was the first country to introduce a variable premium system for wind energy, the first to introduce FITs for concentrating solar power (CSP), as well as the first to provide bonuses for systems able to supply reactive power to the grid, to assist with grid stability and reliability.

Over this period, Spain leapt to the forefront of the European RE industry, ranking second in terms of overall installed wind capacity (22,213 MW), third in solar PV (4,400 MW), and first in CSP (1,878 MW). In 2012, renewable energy sources supplied fully 32 percent of total power demand, one of the highest percentages in the EU.

Act Two

In late 2008, this story began to unravel, fueled partly by ill-considered policy design and overly generous feed-in tariffs, and exacerbated by the onset of the financial crisis. Lurking in the shadows behind all of these factors was a growing deficit in the electricity system.

The electricity system deficit has emerged over the past decade as the costs of generating and distributing power have exceeded what utilities can lawfully recover from rates. In response, the annual deficit has grown by leaps and bounds since the early 2000s as fossil fuel prices have risen, and the share of renewable energy sources in the overall mix has grown. The total deficit stood at EUR 25.5Bn at the end of 2012 and continues to grow (CNE 2013).

The chart below shows the annual additions to the deficit since 2000. 

Source: CNE 2013

Partly in an attempt to deal with this deficit, Spain has introduced dozens of changes to its electricity regulations, including no fewer than three (3) major retroactive changes to renewable energy contracts, and culminating in a moratorium on new RE projects that took effect in January 2012.  The table below summarizes the key changes that have been introduced since 2008:

Act Three

By the middle of 2012, investors had hoped that with the moratorium, the worst was likely over and that some normality would gradually resume in the Spanish electricity market. Spain was starting to address its tariff deficit, it had already paid down a few billion Euros, and it had even created a special fund to begin securitizing and auctioning off the debt. It seemed that with a little bit of time and good luck, things would soon be on the mend.

This proved too optimistic. 

A 7 percent retroactive tax was levied at the start of 2013 on all electricity producers, directly impacting both conventional and renewable energy project owners, and just one month later, another far-reaching set of regulatory changes was introduced.

Without any former notice to the RE sector, on Friday, February 1st 2013, the Spanish Council of Ministers approved Royal Decree-Law 2/2013. This ruling introduced two significant changes to the electricity market. First, it abolished the so-called ‘premium option,’ a measure that enabled certain producers like wind and biomass operators to sell their electricity directly into the market, and then to receive an additional bonus or premium payment on top. Successive analyses have found that average remuneration levels under this option were notably higher than under the fixed FIT option, and the overwhelming majority of wind producers had switched from the fixed to the premium option as a result. The estimated savings from this measure range from EUR 220 Million to EUR 500 Million per year across the sector.  

The second major change of the most recent law (RDL 2/2013) is that it altered the indexation formulae that linked FIT contract prices to the consumer price index (inflation). Previously FIT projects received the full consumer price index adjustment, minus some nominal amount, according to the RPI-X formula developed in the UK in the 1980s and 1990s. Under the new rules, the inflation indexation will be based on core CPI, which excludes the volatility of food and energy prices, though at constant taxes. The end result is that FIT prices will be decoupled from food and fuel prices, and annual adjustments will therefore be significantly less than investors had previously been promised. The government estimates that these measures will save EUR 340 Million per year, though the savings could fluctuate based on the real trajectory of future food and energy prices.

In total, the government estimates that the measures introduced in the new RDL will save EUR 600-800 Million per year.

Act Four

As the industry attempts to recover from this barrage of changes, including the moratorium, the 7 percent tax, and this latest round of retroactive changes, the mood in Spain’s RE sector remains downbeat.

In a recent analysis, the ratings firm Fitch cited four major implications of the most recent retroactive changes: first, it deepened uncertainty for existing RE projects; second, it increased the possibility of future legal claims against the government’s measures; third, it further weakened the overall investment environment; and fourth, it significantly heightened policy and regulatory risk. Together, these impacts are likely to make it more difficult to attract investment to a range of regulated sectors (e.g. water, gas, and electricity). The changes are also likely to raise the cost of equity as well as debt for future projects, as investors price in the additional political and regulatory risk.

Without feed-in tariffs, those wishing to invest in new RE projects are left with four options: 1) to seek out bilateral contracts with existing utilities, 2) to sign off-taker agreements with willing electricity consumers, 3) develop projects themselves for their own consumption, or 4) to sell their power directly on the spot market.

Act Five

Uncertainty in Spain remains high, and the specter of further retroactive changes continues to hang over the electricity sector. The country is under pressure from the European Commission to resolve its tariff deficit, while concerns have been raised well beyond Spain’s borders over the reputational damage for the RE industry of this unrelenting sequence of major revisions and retroactive changes.

And yet, the dramatic changes that have shaken Spain’s electricity industry in recent years could be the catalyst for a deeper shift: faced with rising electricity rates, and historically low solar PV prices, those who seek to develop RE projects may start doing so on a stand-alone basis, thereby reducing their exposure to unpredictable government decrees. Beyond lacking transparency, these decrees are exceedingly difficult to challenge in court. If projects can be developed on a stand-alone basis, without relying on increasingly unreliable rules, this could inaugurate a new era in Spain’s renewable energy sector, one where self-consumption gradually becomes the norm, rather than the exception.

According to Aristotle, one of the functions of tragedy was cathartic, as it resulted in a cleansing or purification of the passions. The emergence of a growing number of new, independent power producers that are not exposed to sudden changes in Royal Decrees could provide a similar function for many in Spain as the renewable energy sector adapts to the moratorium, and to this new reality.

While it is unclear what the future holds for Spain’s electricity sector, if history is any guide, it’s going to be epic.  

Dr. Mischa Bechberger is the international affairs manager of the Spanish Renewable Energy Association (APPA), where he is responsible for European and International relations based in Barcelona. His responsibilties include the representing APPA at the EU level in nearly all European RES associations, heading EU-funded R&D projects, maintaining contacts with high-level EU politicians, and more. He has worked with different national and international think tanks on renewable energy policies. Mischa holds a PhD in political science with a scholarship of the German Federal Foundation for the Environment (DBU), as well as a diploma in political science, both from the Free University of Berlin.

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