Spain Imposes “Temporary” Halt to New Renewable Energy and Co-generation Projects

Faced with growing fiscal challenges and the specter of increasingly trigger-happy credit rating agencies, the new center-right Spanish government has acted to temporarily put a halt to awarding new feed-in tariff (FIT) contracts starting in January 2013. The move is expected to have immediate impacts on approximately 4,500 MW of wind power projects, 550MW of solar PV projects, as well as a number of projects in other technology classes.

The change was passed as part of Royal Decree-Law (RDL 1/2012) in January 2012 and it will prevent proponents of new cogeneration, renewable energy and waste-to-energy plants from receiving contracts to sell their electricity to the grid, effectively putting the domestic RE industry on hold while the government drafts a new strategy for the electricity sector. 

As expected, this move has triggered a storm of debate from many within the renewable energy industry, who argue that Spain is further undermining its credibility as a stable country in which to invest. The Spanish Renewables Foundation, a leading advocacy group, has warned that the move risks wiping out hundreds of thousands of direct and indirect jobs, along with tens of billions in existing and future investments.

The main driver behind this decision is addressing the country’s electricity system deficit, which stands at over €24 Billion. Compounding the problem is that electricity demand in peninsular Spain has been declining since the global financial crisis of 2008, resulting in significant excess generation capacity.

While the current changes are in many ways less dramatic than the retroactive changes put forward in 2010, there is no question that they have added yet another complex plot twist to this ongoing saga, and re-galvanized the debate around the future of renewable energy in Spain. (For a look at previous changes to the Spanish electricity market, see this earlier Brief.)

This analysis takes a closer look at the situation occurring in Spain, with a focus on the challenges facing its electricity system and the solutions being proposed to address them. 

Where does the electricity system deficit come from?

For over a decade, the Spanish government has prevented utilities from charging consumers the true costs of electricity. In other words, the final price paid by both large and small electricity buyers has been kept artificially low, in an arguably misguided attempt to contain inflation, protect consumers, and maintain the competitiveness of Spanish industry.

This put the entire Spanish electricity system on a collision course with economic reality, and made a growing tariff deficit all-but-inevitable.

This can be seen by looking at the trajectory of electricity prices that took place after Spain began liberalizing — or deregulating, in American parlance — its electricity market in 1997. 

Ironically, the liberalization of the electricity market (i.e. allowing generators to compete with one another) led to a greater political desire to control electricity rates, allegedly to protect consumers from unpredictable market gyrations.

In response, the government created a mechanism akin to a deferral account that allowed utilities to recover shortfalls in any individual year from revenues generated in subsequent years.

This created a deficit, or shortfall, in utilities’ financial statements which, taken collectively, generated a growing electricity system deficit. 

The government had always planned to recover this shortfall from within the electricity system itself — what was never clearly articulated by Spanish officials was how that would take place.

Viva la liberalización

The process of liberalization of the electricity market in Spain, like in many other areas of the world, aimed to move certain components of the electricity system (namely, generation and marketing) toward competition, while other aspects would remain regulated, such as transmission, and distribution. 

It is important to note that the majority of wind power (in contrast to solar for instance) transacted in Spain (~95%) is sold directly on the spot market; and instead of increasing costs to ratepayers, the roughly 40 TWh of wind power sold every year on the open market have actually helped lower spot market prices.

The size of these cost savings were calculated at approximately 0.5 cents/kWh in 2009, saving Spanish ratepayers €766 Million according to CNE, the national energy regulator.

Renewable Energy: Onward and Upward

Renewable energy only began entering the Spanish electricity market in a significant way after 1998 with the growth in the wind industry, while other renewables like solar photovoltaics (solar PV) only began to be developed in earnest after Spain’s 2004 reforms. For biomass and biogas technologies, it took the 2007 reforms to generate any interest.

The figure below shows the annual additions in renewable energy capacity in recent years:

Building on this picture, the subsequent graph shows how this capacity translates into actual electricity generation, and how it relates to the total generation of the electricity system (TWh).

The following graph shows a projection of the share of each renewable energy source as a percentage of total generation for 2013, alongside the total premium payments that will be received by that technology in that year. This shows that while wind power will remain the largest source of RE generation (65%), it will represent less than a third of total premiums paid (30%). In contrast, both solar PV and concentrating solar power (CSP) have a larger proportional share of the total RE payments. 

El Deficit

The root cause of the electricity system deficit, and in turn of the suspension, is that revenues from electricity sales are insufficient to pay for the cost of the electricity system.

In order to cover this gap, utilities in Spain started auctioning off the debt; however, in 2009, the Spanish government was forced to step in and provide sovereign backing for this debt. Predictably, this has generated two further problems for the government: first, assuming responsibility for the deficit effectively increases its net debt; and second, these debt auctions directly compete with Spain’s own bond issuance.

Of Deficits and Downgrades

Compared to many of its European compatriots such as Italy and Greece, which have debt-to-GDP ratios of over 120%, Spain’s ratio has only recently surpassed 60%. And despite the considerable size of the electricity system deficit, it only represents 3% of Spain’s GDP.


Moreover, it is noteworthy that in their recent downgrades of Spain’s sovereign debt, none of the three major ratings agencies cited the country’s electricity system deficit as a concern. The major factors cited included the negative outlook for the Euro region, increasing deficits by Spain’s regional governments, as well as growing concerns over the ability of the private sector to obtain external financing.

This suggests that it is hyperbole at best, and misleading at worse, to suggest that Spain’s renewable energy sector, let alone its feed-in tariff, have brought the country to its knees. The electricity deficit is merely one component of the broader fiscal and economic challenges that Spain is facing, all of which are compounded by the ongoing instability in Greece.

Shedding Light?

As many commentators have pointed out, the primary proportional contributor to the system deficit among renewable energy sources has been solar PV.

However, the most recent solar auction held in Spain demonstrates just how rapidly PV costs have fallen in recent years: the last solar auction held in the fourth quarter of 2011 saw prices drop to €0.124/kWh, bringing it well below the residential retail price paid by most households in Spain (a price that remains strictly regulated, and stood at €0.142/kWh in 2011). This is what is called the “tariff of last resort” available to customers with a connection capacity under 10kW, representing the price paid by 93% of residential customers in 2011.

This suggests that while solar remains the largest proportional contributor to the deficit, the majority of this cost burden is due to the contracts signed between 2004-2008, locked in at a previous stage of technological development when costs were significantly higher. In fact, contracts signed during those years ranged from €0.23-0.44/kWh, or two to three-and-a-half times higher than contracts in Q4:2011. Based on this most recent auction, solar PV is currently cheaper than the residential electricity price.


In response to the mounting deficit and pressures from rating agencies, the Spanish government has discussed a variety of ways of dealing with it: at this stage, the tentative plan is that the deficit will be financed from a combination of three different sources:

  1. the government itself (i.e. taxpayers), which would socialize a portion of it;
  2. ratepayers, which would cover another portion through rate increases;
  3. and the utilities, which would be called upon to write off a portion of the debt in exchange for greater future certainty and stability.

In the maelstrom that followed 2009’s abrupt changes, the government considered a levy on large hydro and nuclear generation, a petroleum tax, as well as an increase to the grid access fees. Some other candidates that have been proposed include cutting the subsidies to domestic coal production, which continues to receive approximately €0.6 Billion per year.

Leading industry bodies such as the association of small power producers (APPA) have proposed measures such as a penny tax on all petroleum products; drawing on carbon auction revenues; and reducing the number of electricity customers eligible for the ‘tariff of last resort’, by reducing the eligibility threshold from 10kW to 3kW.

With all of these measures and proposals competing with one another, only one thing is certain: regardless of the government’s decision, the outcome is unlikely to please everyone. 


In a recent article, a columnist at El Paìs, a leading national newspaper, noted that the Spanish government has been practicing “surgery without anesthetics” on the Spanish energy market, arguing that with this most recent decision to suspend future renewable energy contracts, it has once again touched a nerve.

And so it has been since the fall of 2008.

However, some in the renewables industry have openly welcomed the temporary suspension, arguing that it should stabilize the electricity market, and help the government finally devise a sustainable strategy to deal with the deficit. And regardless of political stripe, there is a consensus that the sooner the government addresses the deficit, the sooner the entire electricity system can begin to move forward on a more stable foundation.

With any luck, this temporary suspension will result in a stronger, more robust electricity system, and re-introduce stability into a market that has become all-too-familiar with unexpected change. 

Market Update

On March 30 2012, the Spanish government approved a set of measures to deal with the deficit. This includes savings of approximately 1.7 Billion EUR, and revenue increases of 1.4 Billion EUR:

  • 7% increase to retail electricity prices, 4.1% for small and medium sized businesses, and 0.91% for large industrial customers (which is expected to raise 1.38 Billion);
  • 668 Million (12.5%) in savings from the transportation and distribution of electricity;
  • 60 Million in reductions in the budget of the national energy regulator (CNE);
  • 20 Million in payments to the grid operator (REE) will be shifted to utilities;
  • 60 Million (or 10%) in cuts to annual subsidies to the coal industry;
  • 10% cut in subsidies to the nuclear industry;
  • 613 Million in revenues from the IDAE, the institute responsible for = efficiency investments and energy sector diversification;
  • Also being considered, though not yet implemented, is a tax on large hydro and nuclear plants.

Note: This is an abridged version. For a full length PDF version, click here

This article was also published on

Image: Pedro Salaverría via Shutterstock

Previous articlecollaboration and funding
Next articlePV Powers the World Cup in Brazil
Toby Couture is Founder and Director of E3 Analytics, a leading energy consultancy based in Berlin. He works on a wide range of topics in renewable energy, including policy and regulatory support, energy strategy, market research, and economic and financial analysis. He is the lead author of a number of influential reports on renewable energy and has worked extensively around the world, having advised regulators and policymakers in over two-dozen countries on renewable energy policy, strategy and finance. Toby is a recipient of the Fulbright Scholarship, has a Master’s degree in Environmental Policy from the University of Moncton in Canada, as well as an MSc. in Financial and Commercial Regulation from the London School of Economics in the UK.

No posts to display