Regulated destruction

“The regulatory environment in Spain has been challenging for some years,” Moody’s, the ratings agency, wrote in an end of April note on the country’s electricity sector. 

You can say that again. In fact, if you were to ask the many renewable producers taking Spain to the courts or the utilities operating in the country and helping to shoulder a €25 billion electricity tariff deficit, they might suggest Moody’s note is somewhat understated.

Put simply, successive Spanish governments have made questionable regulatory decisions on practically every area of the country’s power sector and are now trying to correct those decisions with more regulation.

SOUR SPOT

Take the country’s electricity sector, a historical sour spot. When the sector was public, customer tariffs were set too low and did not cover the generation and regulated costs of electricity. After it was fully liberalised in 2009, the government maintained a “last-resort tariff” that was applicable to certain – mainly domestic – types of users.

The end result, as Moody’s pointed out, is that even after 2009 “these deficits have occurred because revenues from regulated access tariffs are insufficient to cover all the regulated costs of electricity [,] past tariff deficit recovery,” and a plethora of other charges. To add to that, no Spanish government has yet been willing to pass through the necessary tariff increases to its citizens.

Concomitantly, another set of regulatory decisions was conspiring – together with the onset of the global financial crisis and a rise in fuel prices – to considerably widen that electricity deficit. Between the mid-1990s and 2008, Spain implemented several regulatory innovations that catapulted it to the forefront of the European renewables industry.

But that renewables policy – especially its generous ( some would say overgenerous) feed-in tariffs – started to contribute heavily to Spain’s electricity deficit, as green sources of energy began to weigh more heavily in the electricity generation mix.

Moody’s estimates that, this year alone, renewable subsidies, mostly driven by solar tariffs, are expected to cost a “total [of] €8.9 billion, or 42 percent of the fixed costs of the system (and therefore around 20 percent of the total electricity bill)”.

So how is Spain seeking to address its original regulatory sins? It’s doubling down on the regulation, with dozens of changes introduced over the last few years, including several major retroactive cuts to its renewables contracts.

The latter include 2010’s retroactive cap to the number of hours eligible for subsidies in the concentrated solar power (CSP), photovoltaic (PV), and wind sectors, as well as a special reduction of eligible hours for PV installations between 2011 and 2013; and this February’s law scrapping the premiums paid for renewable electricity generation and changing the inflation measure used to calculate sector tariffs, decoupling food and fuel price increases from the consumer price index.

In addition, a 7 percent retroactive tax was levied at the start of this year affecting all conventional and renewable electricity producers. Finally, in 2012, the Spanish government also introduced a moratorium on new renewable projects as of January, doing away with any sort of economic incentives for them.

The problem is that this regulatory onslaught – which last year alone netted the government €6.5 billion – hasn’t been enough to eliminate the electricity sector’s tariff deficit. It has, however, been very costly to utilities operating in the country and has had a devastating impact on its renewables sector – not to mention Spain’s international credibility.