Stormy skies ahead for Spanish electricity sector


From pv magazine Spain

Hardly a day passes without Spanish energy company Iberdrola announcing the development, completion, or purchase of a new renewable project somewhere in the world. However, this may soon stop occurring in the company's home market, as numerous national media outlets have reported that the multinational utility has decided to stop bidding for goods and services associated with the construction of new renewable projects in Spain.

Iberdrola said this to suppliers involved in bidding processes for renewables in Spain. The situation will continue until the economic viability of these projects is evaluated in detail, after the application of Royal Decree‑Law 17/2021 on urgent measures to mitigate the escalation of energy prices, which was introduced on Sept. 14. The new provisions reduce the revenues of non‑emitting plants and establish that the excess remuneration will be determined on a monthly basis from the average price of gas in the Iberian market.

Iberdrola has not provided comment to pv magazine on the halting of the bidding process. But it has not only announced the suspension of investments in new renewables projects. Together with Enel's Endesa unit, it plans to renegotiate long-term supply contracts with large clients, as new provisions introduced by Royal Decree‑Law 17/2021 make these deals unviable. Meanwhile, the price of electricity has reached a new record at €216 ($250)/MWh, the highest in the European Union, and above €200 for the first time.

Global electricity and gas prices are skyrocketing and the tipping point of this unprecedented trend is not yet in sight. This situation is putting the entire global economy under severe pressure and could also cause financial problems for many energy-intensive companies in the short term.

The governments of Spain and France have asked the European Commission to modify the operating rules of the union's wholesale electricity markets to stop the price escalation, as prices are now at record highs in all countries. However, European regulators do not look favorably on market reforms.

Frans Timmermans, vice president of the European Commission for climate change, told a group of Spanish journalists in Strasbourg that “the redesign of the market” can be “discussed, but not with a quick decision … I will do everything in my power to help the Spanish government to ensure that Spanish citizens are not unduly affected by market fluctuations, because what is happening is just that, fluctuations.”

The Electrification Alliance, a group of associations supporting the electrification of the European Union's energy system, addressed a letter to the European Commission in September in which it offers “answers and recommendations” in the face of the “worrying situation that Europe is experiencing due to the increase in wholesale electricity prices.”

To overcome this situation, the Alliance for Electrification recommends structurally reducing taxes on electricity bills, fully applying the provisions of the Clean Energy Package to ensure flexible consumption for all and accelerate the clean energy transition to protect citizens and enterprises from volatility in fossil fuel prices. “Europe must reduce its dependence on imported gas and its exposure to volatility in world gas prices,” the letter reads. “The EU Green Deal and climate neutral ambition clearly point in this direction.”

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Iberdrola, Endesa, EDP Spain, Aelec, Eurelectric, Wind Europe, Solar Power Europe and Portuguese electricity association Elecpor have decided to raise their complaints with the vice-presidents of the European Commission, Frans Timmermans and Margrethe Vestager. They have also contacted Energy Commissioner Kadri Simson in a protest letter supported by the Global Infrastructure Investors Association (GIIA), a global network of advisory firms, banks, law firms and investment funds that includes KKR, Oaktree, Antin, Infracapital, Ardian, JPMorgan, OPTrust, Aimco, Allianz, Brookfield, UBS, PwC, Morgan Stanley, EY, Deloitte. They have called for the measures introduced by Royal Decree‑Law 17/2021 to be reversed.

The letter, which pv magazine has seen, affirms that the government's measures do not take into account that 100% of baseload production, including hydroelectric, nuclear and renewables for 2021 and more than 75% of it of 2022 has already been sold by generators for months at the forward prices then in force, which are much lower than the current spot market prices.

They claimed that this “will jeopardize the objectives of the Green Deal and Fit for 55 package, break the confidence and rights of investors and have a huge impact on the necessary investment in renewable energy.” RDL 17/2021 will also undermine the functioning of the EU's internal market, and “could spread to the other member states, creating fractures in the internal energy market and in European energy policy … We fully support the need to protect vulnerable citizens from spikes in energy prices and we strongly believe that the European regulation provides the framework for a range of different and legal solutions, as other member states have shown … (RDL 17/2021) creates massive distortions, uncertainty and damage.”

Iberdrola has since published statements by Ignacio Galán, its CEO, in which he states that “it is essential to preserve legal stability and the rules of the game, not to question the European model and not lose confidence investors.”

The credit rating agency Standard & Poor’s (S&P) published a report this past week in which it attributes the measures of RDL 17/2021 to “political motivations.”

Although the actions of the government will mean savings of 22% on electricity bills for households, according to S&P, gas prices will not be regulated until 2023. It also said the design of the regulated bill is “unconventional,” because “price hikes in the market are immediately transferred to household bills.”

According to their calculations, the reduction in gas will reduce Iberdrola's Ebitda by 12% (€1.2 billion), Endesa's by 22% (€900 million), and Naturgy‘s by 7% (€280 million) and 2% that of EDP (80 million). The total is €2.6 billion. In addition to calculating the decrease in income for energy companies at €3.20, they warn that the measures adopted by the government could have consequences on investment.

“We believe that the regulatory uncertainty derived from the Government's measures could lead companies to review their investments in Spain,” they stated, noting that, in the long term, the energy reform “could undermine investor confidence and capital allocation, which are critical to the success of Spain's ambitious national energy and climate plan.”

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