I OVERVIEW

The energy sector in Spain is highly regulated. Its strategic and technical importance requires a strong regulatory framework that ensures a constant supply of energy at the lowest possible cost and that meets all local and European environmental requirements.

This regulatory framework has undergone significant changes in the past decade, mainly imposed by European legislation, with the introduction of the directives for the internal electricity market in 1996 and 20092 and for the internal natural gas market in 1998 and 2009.3 During 2013, however, the Spanish government accomplished a structural reform of the energy industry to establish a new regulatory framework to reduce and control one of the main problems within the Spanish energy sector, the 'tariff deficit' – the negative correlation between electricity costs and the income obtained from regulated electricity activities.

The reform started with the enactment of Royal Decree-Law 9/2013 of 12 July (RDL 9/2013), whereby certain urgent measures were taken to ensure the financial stability of Spain's electrical system. The aim of the main changes introduced by this regulation was to provide the industry with a uniform, transparent and stable regulatory framework, to give economic and financial sustainability to the electricity system, and to avoid the generation of a tariff deficit. Furthermore, on 27 December 2013, the Electricity Sector Act 24/2013 of 26 December (the Electricity Act 24/2013) was published in the Official State Gazette. It contained, among other things, the main principles set out in RDL 9/2013 in respect of the remuneration of renewable energy generators. The reform was completed with a number of royal decrees, including the following in late 2013 and further regulations approved during 2014:

  1. Royal Decree 1047/2013 (RD 1047/2013) of 27 December, which established the methodology for calculating the remuneration for electricity transmission; and
  2. Royal Decree 1048/2013 (RD 1048/2013) of 27 December, which established the methodology for calculating the remuneration for electricity distribution.

The remuneration scheme established by the Spanish government through the structural reform of the energy industry that started in July 2013 and continued in 2014 deserves particular mention. On 11 June 2014, the regulation on renewable energy electricity generation activity was passed by means of Royal Decree 413/2014 (RD 413/2014), which regulates electricity generation activity using renewable energy sources, cogeneration and waste. Ministerial Order IET/1045/2014 (MO IET/1045/2014), passed on 16 June 2014, approved the remuneration parameters for standard facilities applicable to certain electricity production facilities based on renewable energy sources, cogeneration and waste. These regulations established a new remuneration system for facilities producing electricity from renewable energy sources, cogeneration and waste, and replaced the former remuneration regime.

The gas market has also undergone several changes, specifically with regard to the remuneration framework for regulated gas activities (distribution, transmission, regasification and storage activities) that was approved by the Spanish government by means of Royal Decree-Law 8/2014 of 4 July (RDL 8/2014), which approved urgent measures to encourage growth, competitiveness and efficiency. This regulation was incorporated definitively into the Spanish legal system through the enactment of Act 18/2014 of 15 October (Act 18/2014), which included commercial deregulation measures and established an energy efficiency system in line with EU directives.

Several new regulations were passed by the government during 2015. On 16 January, a draft bill was approved, which modifies the Act 34/1998 of 7 October on the Hydrocarbons Sector (the Hydrocarbons Act), by means of which an organised market will be created to encourage competition in the gas sector, allowing other suppliers to enter into restricted markets such as the gas market. This regulation was finally approved on 21 May 2015 through the enactment of Law 8/2015, which amends Act 34/1998 of 7 October, on the Hydrocarbons Sector and establishes certain tax and non-tax measures in respect of the exploration, research and exploitation of hydrocarbons.

Royal Decree 738/2015, passed on 31 July 2015 (RD 738/2015), regulates the production of electricity and the procedure for distributing power in non-mainland territories' electricity systems.

The most important regulation passed by the government during 2015 was Royal Decree 900/2015 of 9 October (RD 900/2015), which regulates the administrative, technical and economic requirements for the methods of supplying and generating electricity for self-consumption.

On 28 November 2015, the Official State Gazette published two main regulations: Royal Decree 1073/2015 (RD 1073/2015) and RD 1074/2015, both of 27 November. The first of these modifies certain provisions in the royal decrees on the remuneration of electricity networks, specifically RD 1047/2013 for transmission and RD 1048/2013 for distribution, referred to above. Among other aspects, RD 1073/2015 eliminates the yearly update of unitary values based on the consumer price index, in accordance with Law 2/2015 of 30 March on de-indexing the economy. RD 1074/2015, modifies certain regulations in the electricity industry to ensure they are in line with the Spanish government's most recent electricity reforms.

During 2016, the reform of electricity distribution remuneration was concluded. Ministerial Order IET/980/2016 (MO IET/980/2016) of 10 June established the remuneration of the different distribution companies in accordance with the new legal framework created by the Electricity Act 24/2013. MO IET/980/2016 was partially repealed by several judgments of the Spanish Supreme Court (among others, those of 30 October 2018, 21 December 2018 and 8 January 2019).

One of the main amendments passed in 2016 was Royal Decree-Law 7/2016 of 23 December on financing the cost of the social tariff and protective measures for vulnerable electricity consumers (RDL 7/2016), which amended the Electricity Act 24/2013. The new financing mechanism allocates social tariff costs to company sectors based on the number of customers of their retail subsidiaries, and creates the possibility for highly vulnerable consumers to avoid the interruption of their electricity supply.

The Energy Efficiency Directive 2012/27/EU of the European Parliament and Council (Directive 2012/27/EU) was partially transposed in Spain by Royal Decree 56/2016 of 12 February (RD 56/2016) in terms of energy audits, accreditation schemes for energy services providers and energy auditors, and promoting energy efficiency in production processes.

During 2017, the most relevant regulations were Ministerial Order ETU/120/2017 of 1 February, which determines how information is communicated by the autonomous communities and local entities regarding their saving and energy efficiency programmes; Ministerial Order ETU/130/2017 of 17 February (MO ETU/130/2017), which updated the remuneration parameters of the renewable energy installations for the regulatory period between 1 January 2017 and 31 December 2019; and Royal Decree 897/2017 of 6 October, which regulates discounts for vulnerable consumers, social tariffs and other protective measures for domestic consumers.

In addition, at the end of 2016 and in 2017, three competitive procedures were carried out for the allocation of a specific remuneration regime to electricity producers from renewable energy sources.

Furthermore, Royal Decree-Law 13/2014 of 3 October (RDL 13/2014), through which urgent measures in relation to the gas system were adopted, was partially repealed by judgment 54/2017 of 21 December of the Constitutional Court, in particular with regard to the Castor underground natural gas storage facility.

During 2018, the most relevant regulations were:

  1. Royal Decree 335/2018 of 25 May, amending various royal decrees regulating the natural gas sector;
  2. Ministerial Order TEC/1172/2018 of 5 November, which redefines electrical systems isolated from the non-peninsular territory of the Balearic islands and modifies the methodology for calculating the weekly purchase and selling prices of energy in the production office of the non-peninsular territories;
  3. Ministerial Order TEC/1174/2018 of 8 November, establishing the remuneration parameters for standard installations applicable to slurry treatment and reduction installations approved by MO IET/1045/2014 of 16 June, and updated for the period 2017–2019;
  4. Ministerial Order ETU/360/2018 of 6 April, establishing the values of remuneration for operations corresponding to the first half of 2018, approving a standard installation and establishing its corresponding remuneration parameters, applicable to certain installations producing electrical energy from renewable energy sources, cogeneration and waste; and
  5. Ministerial Order ETU/361/2018 of 6 April, amending the application forms for the electricity social bonus.

During 2019, multiple regulations were passed by the Spanish government, including:

  1. Royal Decree-Law 1/2019 of 11 January, on urgent measures to adapt the powers of the National Commission for Markets and Competition (CNMC) to the requirements of EU law in relation to Directive 2009/72/EC and Directive 2009/73/EC of the European Parliament and of the Council, both of 13 July 2009, on common rules for the internal markets in electricity and natural gas (RDL 1/2019).
  2. Royal Decree 17/2019 of 22 November, adopting urgent measures for the necessary adaptation of remuneration parameters affecting the electricity system and responding to the process of cessation of activity of power plants.
  3. Royal Decree-Law 244/2019 of 5 April, regulating the administrative, technical and economic conditions for the self-consumption of energy.
  4. Ministerial Order TEC/1260/2019 of 26 December, establishing the technical and economic parameters to be used in calculating the remuneration of electricity production activity in non-peninsular territories with an additional remuneration system during the 2020–2025 regulatory period, and reviewing other technical issues.
  5. Ministerial Order TEC/1366/2018 of 20 December, establishing electricity access tolls for 2019.
  6. Ministerial Order TEC/1258/2019 of 20 December, establishing various regulated costs of the electricity system for the year 2020 and extending the tolls for access to electricity from 1 January 2020.
  7. Ministerial Order TED/171/2020 of 24 February, updating the remuneration parameters of standard installations applicable to certain installations producing electricity from renewable energy sources, cogeneration and waste, for the purposes of their application to the regulatory period starting on 1 January 2020.
  8. Circular 2/2019 of the CNMC, which establishes the methodology for calculating the financial remuneration rates for electricity transmission and distribution activities, and the regasification, transmission and distribution of natural gas.
  9. Circular 3/2019 of the CNMC, which establishes the methodology for the operation of the wholesale electricity production market and the management of systems operations.
  10. Circular 4/2019 of the CNMC, establishing the methodology for the remuneration of the electricity system operator.
  11. Circular 5/2019 of the CNMC, establishing the methodology for calculating the remuneration of electricity transmission activities.
  12. Circular 6/2019 of the CNMC, establishing the methodology for calculating the remuneration of electricity distribution activities.

RDL 1/2019 grants the CNMC new powers in the energy and gas sector. In this context, the following circulars have been published to date in 2020:

  1. Circular 1/2020 of the CNMC, establishing the methodology for the remuneration of the technical gas system manager.
  2. Circular 2/2020 of the CNMC, establishing the rules for balancing natural gas.
  3. Circular 3/2020 of the CNMC, establishing the methodology for the calculation of electricity transmission and distribution tolls.

II REGULATION

i The regulators

The framework for power distribution between the state and the autonomous regions is directly established in Section 149(1), Paragraphs 22 and 25 of the Spanish Constitution. Paragraph 22 reserves the 'authorisation of electrical installations when their use affects another region or the transport of energy out of its territorial scope' to the state's exclusive jurisdiction. Paragraph 25 provides that the state has jurisdiction over establishing the basis of the energy regime. The legal bases of the energy sector have developed within this framework, and facilities within each region are also authorised.

The state's broad jurisdiction in this area is reflected in the basic state legislation, which establishes the sector's regulatory framework: the Electricity Act 24/2013 replaced and repealed the Electricity Act 54/1997 and amended the Hydrocarbons Act. Since these two laws (as enacted and as amended) are very comprehensive and wide-ranging, in practice there is little space for the autonomous regions to regulate.

The Electricity Act 24/2013 consists of 80 articles and is divided into 10 titles, 20 additional provisions, 16 transitional provisions, a repealing provision and six final provisions, and it introduced, among others, the following legislation:

  1. The principles of economic and financial sustainability of the electricity system.
  2. Article 14 regulates the remuneration of the different activities involved in the supply of electricity. The remuneration system is financed by means of the income obtained from regulated activities and is based on objective, transparent and non-discriminatory criteria. Additionally, Section 7 determines that the Spanish government may establish a specific remuneration for the promotion of production from renewable sources, cogeneration and waste. This Article has been modified by Royal Decree 1/2019, which provides that the rates of financial remuneration for transport and distribution activities will be fixed, for each regulatory period, by the CNMC.
  3. With regard to generation activity, the Electricity Act 24/2013 eliminated the former distinction between an ordinary and a special regime, establishing different economic regimes in accordance with the technology and the capacity of the generation facilities.
  4. Specific rules on the Voluntary Price for the Small Consumer (PVPC) mechanism are set out in the Electricity Act 24/2013. As this reform seeks to guarantee the supply of electricity at the lowest possible price, the PVPC is the highest price that the major electricity retailers may charge certain consumers.

In addition to the above, Act 3/2013 of 4 June created the CNMC, a regulatory body that encompasses different supervisory authorities in different sectors, including the former National Energy Commission and the National Competition Commission.

Within energy matters, Act 3/2013 transferred certain functions, originally developed by the former National Energy Commission, to the Ministry of Industry, Energy and Tourism, such as inspecting, initiating and conducting certain penalty proceedings, responding to claims made by consumers and informing them of their rights and dispute resolution methods, among other things.

Furthermore, RDL 1/2019 modifies the Electricity Act 24/2013 and grants the CNMC powers to approve the remuneration and the corresponding methodology of the electricity systems operator and the technical manager of the gas system.

ii Regulated activities

The main activities involved in the supply of energy are generation, transportation, distribution and supply (or commercialisation). As natural monopolies, transportation and distribution are considered regulated activities, whereas generation and supply operate in a free-market system.

Royal Decree 1955/2000 of 1 December (RD 1955/2000), as amended by the Electricity Act 24/2013, regulates the regime applicable to transportation, distribution, commercialisation and supply activities. The management of transportation, as a regulated activity, is entrusted to Red Eléctrica de España, which is also the system operator.

Additionally, RD 1955/2000 states that the construction, expansion, modification and operation of production facilities, as well as transportation and distribution, require certain permissions. That Royal Decree has been modified by the following later royal decrees:

  1. Royal Decree 1074/2015 (RD 1074/2015) in relation to the guarantees that must be provided in the authorisation process for production facilities;
  2. RD 56/2016, which establishes new authorisation criteria for thermal power stations whose thermal power to generate electricity is greater than 20MW, and for their substantial renewal, including the obligation of the administrative authorisation applicant to submit a cost–benefit analysis to adapt the planned facility to high-efficiency cogeneration; and
  3. Royal Decree 897/2017, adding the regulation of the suspension of supply to consumers (natural persons) in their usual home with contracted power equal to or less than 10kW.

Administrative authorisation is needed for the draft technical installation document to be processed in conjunction with the environmental study. An application must be filed with the Directorate General for Energy Policy and Mining, which is then forwarded with the required documentation to the Ministry of Industry, which makes the decision. If the application is approved, the Ministry will indicate the time within which the application must be submitted for project-implementation approval, which – once approved – allows the owner to construct or establish the installation. The application must be submitted to the industry and energy sub-office where the facility is located. A decision must be arrived at within three months by the Directorate General for Energy Policy and Mining, specifying a deadline for construction of the facility.

Once a project is duly implemented, an operating authorisation allows energy to be transmitted to the facilities for commercial exploitation. The application to operate must be submitted to the industry and energy sub-office and should be accompanied by the final certificate of work.

Some autonomous regions have specific regulations for electrical installations, but they follow basically the same administrative procedure as established by the foregoing state regulations.

iii Ownership and market access restrictions

Electricity network operation (transmission and distribution) is subject to significant economies of scale, which gives them an element of natural monopoly, as it is inefficient to introduce competition into these activities. The Electricity Act 24/2013 (which replaces Law 54/1997 of 27 November to, among other concerns, ensure the financial stability of the Spanish electricity industry) establishes an obligation to separate legal and accounting matters within regulated electrical activities (transportation and distribution) that are provided under a financial regime. Deregulated activities (generation and supply) are carried out by operators in a free market and their remuneration is governed by the laws of supply and demand.

Directive 2009/72/CE and its subsequent incorporation into Spanish law go into greater detail on this aspect and impose an obligation on vertically integrated groups to functionally separate their activities to ensure the autonomy of management and decisions of those responsible for the transportation and distribution networks. In addition, it purports to preserve the confidentiality of commercially sensitive information available to those responsible so as not to compromise competition in deregulated activities.

The former Electricity Act 54/1997, the current Electricity Act 24/2013 and subsequent legislative developments establish and define the role of the different participants in the electricity sector:

  1. Power producers are individuals or legal entities that have the function of generating electricity, as well as building, operating and maintaining generating plants. The distinction between ordinary producers and special-regime producers has been eliminated. The Electricity Act 24/2013 established a unified regulation for the ordinary regime and for the production of electricity from renewable sources, cogeneration and waste. Additionally, producers are entitled to temporarily close their production facilities, subject to an administrative authorisation regime, this being one of the main legislative innovations of the Electricity Act 24/2013.
  2. Electricity transporters are companies that have the function of transporting electricity and construction, maintenance and transportation of transformer facilities. As stated above, the management of transport activity is entrusted to Red Eléctrica de España, which is also the system operator.
  3. Distributors are those companies that have the function of distributing power, and also building, maintaining and operating distribution facilities designed to establish energy consumption points.
  4. Sellers are legal persons who, by accessing transportation or distribution, have the function of selling electricity to consumers. Among them are 'last-resort sellers', appointed by the regulator, which are functionally and legally separate from other companies operating in the sector, and which are responsible for providing energy to consumers benefiting from the 'tariff of last resort' set by the government. As noted above, the updated regulation sets out new and specific rules on the PVPC.
  5. Consumers are individuals or corporations who buy energy for their own consumption. Consumers who purchase energy directly in the production market are referred to as 'direct market consumers'.
  6. The market operator (OMI-Polo Español SA, or OMIE) assumes the management of the bids for and sale of electricity in the daily and intraday power market in exchange for a regulated fixed fee within the territory of the Iberian peninsula (Spain and Portugal). OMIE is regulated by the Santiago International Agreement, regarding the implementation of an Iberian electricity market (MIBEL) between the Kingdom of Spain and the Republic of Portugal, and subject to the rules and regulations governing Spain's electricity sector. Half of OMIE's stock is owned by the Spanish company OMEL, and the other half is held by the Portuguese company OMIP SGPS, SA.
  7. The main function of the system operator (Red Eléctrica de España) is to perform activities associated with the technical operation of the electricity system, ensuring the continuity and security of the electricity supply and proper coordination of production and transportation systems.

On 10 October 2015, the Official State Gazette published RD 900/2015, which regulates the administrative, technical and economic requirements for supplying and generating electricity for self-consumption, establishing a regulatory framework that guarantees the economic sustainability of the system and adequate distribution of system costs. The majority of this royal decree was repealed and replaced by Royal Decree 244/2019 of 5 April, which regulates the administrative, technical and economic conditions for the self-consumption of electrical energy.

The repealed royal decree also stipulated the tolls and charges payable for self-consumption, in accordance with the Electricity Act 24/2013, which already established that self-consumption must contribute to financing the costs and services of the system to the same extent as other consumers (the criticised 'tax on the sun'). Specifically, RD 900/2015 imposed the aforementioned tolls and charges on self-producers, both at a fixed cost according to installed power capacity and at a variable cost according to the electricity self-consumed. The regulation also considers a specific surcharge for those who use batteries to store some of the electricity produced by their solar panels. There are two exceptions to this rule whereby consumers are exempt from paying costs:

  1. consumers on islands; and
  2. small consumers with a contracted capacity of no more than 10kW.

However, Royal Decree 244/2019, in order to encourage self-consumption with renewable distributed generation, establishes that self-consumed energy of renewable origin, cogeneration or waste, will be exempt from all types of charges and tolls.

Royal Decree 244/2019 also amended Article 9 of the Electricity Act 24/2013 in respect of self-consumption, as follows:

  1. A new definition of self-consumption, stating that it shall be understood as the consumption by one or more consumers of electrical energy from generation facilities close to those of consumption and associated with them.
  2. A new definition of the modalities of self-consumption, reducing them to only two: 'self-consumption without surpluses', which at no time may carry out energy discharges to the network, and 'self-consumption with surpluses', in which discharges to the distribution and transmission networks may be made.
  3. Installations for self-consumption without surpluses, for which the associated consumer already has a permit for access and connection for consumption, are exempted from the need to obtain permits for access and connection of generation installations.
  4. It allows for the development of regulatory mechanisms to compensate for the deficit and surplus of consumers benefiting from self-consumption with surpluses for installations of up to 100kW.
  5. With regard to the register, the option is to have a register of self-consumption, but it is very simplified. This state-wide register will be used for statistical purposes to assess whether the desired implementation is being achieved, to analyse the effects on the system and to be able to compute the effects of renewable generation on integrated energy and climate plans.

The Spanish Supreme Court issued Ruling No. 1542/2017 dated 13 October 2017, by means of which it is stated that self-consumers shall also contribute to the electrical system costs provided that they are connected to the grid. Self-consumers demanded that the obligation imposed by Royal Decree 900/2014 was a kind of 'levy on the sun', but the Supreme Court rejected their petitions.

(RDL 7/2016), published in the Official State Gazette on 24 December 2016, amended Electricity Act 24/2013 in relation to the financing mechanism for the cost of the social tariff. It allocates social tariff costs to company sectors on the basis of the number of customers of their retail subsidiaries. The social tariff covers the difference between the PVPC and a base value that may vary depending on the established categories of vulnerable consumers.

In addition, it creates another group – namely, severely vulnerable consumers – whose supply cannot be interrupted, and whose invoices are co-financed by the relevant administration and by the obligated companies within the sector.

Royal Decree 897/2017, which further developed (RDL 7/2016), was published in the Official State Gazette on 7 October 2017. Royal Decree 897/2017 defines the figure of the vulnerable consumer, associating it, as a general rule, with certain thresholds of income referred to the Public Indicator of Income of Multiple Effects, based on the number of members that make up the family unit. The thresholds can be increased if special circumstances are proven for one of the members of the family unit.

Royal Decree 897/2017 was further modified by Royal Decree 15/2018 regarding urgent measures for energy transition and consumer protection.

Additionally, selected groups are recognised as being eligible for the social bonus regardless of their level of income. Within groupings of vulnerable consumers, a higher social bonus is established for severely vulnerable consumers, which are defined by reference to lower income thresholds than those indicated in general terms. It also creates a differentiated category of severely vulnerable consumers – namely, consumers at risk of social exclusion – who are those being served by the social services of an autonomous or local administration. This allows for inter-administrative cooperation, which constitutes an additional mechanism to protect consumers in situations of energy poverty and vulnerability. The three categories defined above receive the following benefits:

  1. vulnerable customers: 25 per cent discount;
  2. severely vulnerable customers: 40 per cent discount;
  3. severely vulnerable customers at risk of social exclusion: 100 per cent discount; and
  4. customers accredited by the social services as paying at least 50 per cent of their bills.

iv Transfers of control and assignments

RD 1955/2000 also establishes the authorisation process for the transfer of installations. The request for authorisation for facilities transfer must be sent to the Directorate General for Energy Policy and Mining, enclosing supporting documentation about the applicants. A decision must be rendered by this department within three months (failure to respond positively within three months means the application is deemed rejected), prior to the report of the CNMC. The applicant then has six months to confirm the transfer, following which, provided that it is not formalised, the authorisation will expire. As mentioned before, RD 1074/2015 amended RD 1955/2000 in relation to the guarantees that must be provided in the authorisation process of production facilities.

III TRANSMISSION/TRANSPORTATION AND DISTRIBUTION SERVICES

i Vertical integration and unbundling

Energy (electricity or natural gas) is transported from the point where it is generated to the point of consumption by large industrial consumers that are directly connected to the transmission system and to the point of intersection with the distribution networks (substations) through which power is carried to the remaining consumers.

The electricity transmission network is made up of lines of voltage equal to or greater than 220kV, international connection lines regardless of voltage, transformers of 400/220kV, transformer compounds of voltage equal to or greater than 220kV, and other elements of voltage equal to or greater than 220kV. There are also international interconnection facilities connecting Spain with other Spanish territories, which have a voltage transport function lower than 220kV.

Transport networks are developed when new investment is periodically approved by the Ministry of Industry. The construction of network sections included in this planning is regulated, and remuneration is calculated by the regulator in accordance with the approved methodology contained in the regulations, defined in RD 1047/2013. Further, Circular 2/2019 of the CNMC establishes the methodology for calculating the financial remuneration rate for activities associated with electricity transmission and distribution, and the regasification, transmission and distribution of natural gas, and Circular 5/2019 of the CNMC establishes the methodology for calculating remuneration for electricity transmission activity for the period 2020–2025. The latter Circular establishes the methodology for determining the amount to be paid to the companies that own electricity transmission facilities for their construction, operation and maintenance, with homogeneous criteria throughout the state and at the lowest possible cost to the system. The proposed methodology is consistent with that established in RD 1047/2013 for the previous regulatory period but contains several improvements that clarify the rules and promote the efficiency of the transmission companies, both in the construction of the infrastructures and in their operation and maintenance.

Law 17/2007 established the single-carrier model, with Red Eléctrica de España as the owner of the entire transportation network. As the system operator, it must comply with the relevant instructions by filing investment plans for future years.

ii Transmission/transportation and distribution access

Power distribution brings the energy from the output of transport networks (electricity or gas) to the final consumer. Electrical distribution facilities comprise voltage lines of less than 220kV, which are not considered part of the transport network.

Prior to June 2009, distribution companies were also responsible for servicing a regulated tariff supply to consumers. Since then, regulated supply has disappeared, creating a 'last-resort supply' (TUR), which will be managed by 'suppliers of last resort', who must supply electricity at a price no higher than that fixed by the government. At present, specific rules on the current PVPC are set out in the Electricity Act 24/2013. This Act restricted the tariffs to two groups of consumers: (1) consumers considered vulnerable; and (2) consumers who temporarily do not have a supply contract with a free-market retailer and are not entitled to the application of the PVPC. Therefore, the Spanish government will establish by regulations the provisions required to determine the PVPC and last-resort supply, with these being configured as regulated tariffs. Also, the electricity supply will be carried out in accordance with Royal Decree 216/2014 of 28 March, which set out the method for calculating voluntary prices for the small consumer of electrical energy and the legal framework for contracting. Accordingly, the prices introduced by Royal Decree 216/2014, which entered into effect retroactively as of 1 April 2014, apply only to those consumers whose contracted power capacity does not exceed 10 kilowatts. Finally, Ministerial Order ETU/1948/2016 of 22 December, which further develops Royal Decree 216/2014, fixed certain values of the commercialisation costs for referral suppliers to be included in the PVPC for the period 2014–2018.

Distributors must build, maintain and operate power grids linking transport to consumption centres. For the proper development of these functions, distributors are obliged to expand distribution facilities when needed to meet new demands for electricity, at all times ensuring an adequate service quality level, and differentiating by type of consumption and area. Furthermore, distributors are responsible for supply measurement, applying consumer tolls or access fees.

Distributors are required to keep a points-of-supply database, always maintaining confidentiality. They must send the required customer information to the Supplier Switching Office and provide reports to the transporter about their network incidence and maintenance plans to ensure certainty of supply.

Finally, distribution companies must also provide information to clients, the Ministry of Industry, Tourism and Trade, autonomous communities, the Supplier Switching Office and the system operator. They must also submit their investment plans annually. Distribution companies, in the exercise of their activities, are entitled to payment by the administration.

Notwithstanding the foregoing, prior to the approval of Royal Decree 222/2008, laying down the emoluments of electricity distribution activity, electricity distributors with fewer than 100,000 customers were covered by a special regulation (established in Transitional Provision 11 of the former Electricity Act 54/1997) with a different financial and regulatory regime from other distributors. Approval of Royal Decree 222/2008 meant that all distribution companies were subject to the same remuneration and policy, therefore removing the previous size differentiation. Royal Decree 222/2008 was subsequently repealed by RD 1048/2013, which established the methodology for calculating the remuneration of distribution activities.

Furthermore, Circular 2/2019 issued by CNMC establishes the methodology for calculating the financial remuneration rate for electricity transmission and distribution activities, and the regasification, transmission and distribution of natural gas, and Circular 6/2019 of the CNMC establishes the methodology for calculating the remuneration of the activity of electricity distribution. Circular 6/2019 further establishes the methodology for determining the amount to be paid to companies that carry out electricity distribution activities in order to guarantee the adequate provision of the service. This methodology is consistent with that established for the last regulatory period by RD 1048/2013. The new model increases companies' flexibility in making decisions and it will be applied to all those commercial companies or consumer and user cooperatives that carry out distribution activities. It also includes several improvements that simplify the remuneration and information sent by companies to the CNMC for appropriate regulatory supervision.

iii Terminalling, processing and treatment

The Hydrocarbons Act laid the foundations for a reorganisation of the gas system, far removed from the monopoly in which Gas Natural SDG group performed all the activities within the natural gas industry. This Act introduced (1) separation of regulated activities and competition activities, (2) free access for third parties to gas infrastructure, (3) the establishment of regulated access charges, (4) progressive full-trade wholesale and retail liberalisation, and (5) regulation of minimum security and strategy.

The Hydrocarbons Act was amended in 2007 by Law 12/2007 of 2 July, which transposed the major changes to the rules of European Union Directive 2003/55/EC (subsequently repealed by Directive 2009/73/CE), to promote the creation of a competitive internal energy market:

  1. rearrangement of the powers of the different regulatory authorities;
  2. development of the rules governing access to networks;
  3. the functional separation of regulated activities;
  4. regulating the activity supply of last resort;
  5. creation of the Supplier Switching Office; and
  6. establishing a schedule of tariff system adaptation and natural gas supply for the supply of last resort.

The aim of Directive 2009/73/CE concerning common rules for the internal natural gas market is to make a definite contribution to the creation of an internal energy market through the following principles:

  1. effective separation of network activities from supply and production activities;
  2. increase of the powers and independence of the national regulators, who must cooperate across a network of energy regulators, but who have the capacity to make binding decisions and impose sanctions;
  3. the creation of supranational transmission system operators by achieving EU-wide market integration; and
  4. improvement of the functioning of the gas market and, specifically, greater transparency and access to free storage facilities and liquefied natural gas terminals.

Furthermore, the Hydrocarbons Act was amended by Act 11/2013 of 26 July concerning measures to support entrepreneurship and to stimulate growth and job creation. This regulation introduced several amendments by virtue of which distribution agreements are more strictly regulated. Therefore, sale agreements within the sector 'cannot contain exclusivity clauses which . . . set, recommend or affect, directly or indirectly, the retail price of fuel' and clauses that 'determine the sale price of fuel with reference to a particular fixed, maximum or recommended price, or any others that contribute to indirect fixing of the sale price' shall be void and deemed deleted. Additionally, the Electricity Act 24/2013 repealed Article 83 bis of the Hydrocarbons Act.

As stated above, RDL 8/2014 and Act 18/2014 introduced several measures aimed at ensuring sustainability and accessibility to the hydrocarbons sector through the establishment of a new remuneration framework for gas distribution, transmission, regasification and storage activities. The purpose of the reform was to ensure the principle of financial and economic sustainability, so that the revenues generated by the gas market are used to finance system costs. Consequently, the revenues must be sufficient to cover all system costs; otherwise, measures should be adopted to increase or reduce the equivalent revenues to maintain the balance between costs and revenues. Additionally, regulatory periods of six years were established, but subject to revision every three years (sub-regulatory periods of three plus three years).

For gas distribution, remuneration for the aggregate of the distributor's facilities is linked to the number of customers connected and to the volume of gas supplied.

For gas transmission, regasification and storage activities, this remuneration system established a common methodology for all facilities of the core network, based on the annual net value of the assets, removing any value update or adjustments made during the regulatory period. The remuneration is composed of the following elements:

  1. a fixed component for the facility's availability, which includes annual operating and maintenance costs, depreciation and a financial return; and
  2. a variable component of continuity of supply, which enables the adjustment of imbalances resulting from fluctuations in demand.

Law 8/2015, published on 22 May, amends the previous Hydrocarbons Act to bring it more into line with the current situation, to increase competition and transparency in the hydrocarbons sector, reduce fraud, ensure greater consumer protection, reduce costs for the consumer, and adapt the rules on infringements and penalties.

With respect to natural gas, Law 8/2015 seeks to create an organised natural market that offers consumers more competitive and transparent prices, and allows the entry of new suppliers to increase competition. In this regard, the measures introduced by Law 8/2015 can be summarised as follows: a market operator for the organised gas market will also be appointed; any authorised natural gas installer may carry out inspections (this was previously the responsibility of distributors); the entry of new suppliers is encouraged through the mutual recognition of licences to supply natural gas to other EU Member States where there is an existing agreement; and certain measures have been adopted regarding minimum security inventories, giving suppliers greater flexibility at lower cost, without impairing the security of supply, and enabling the Corporation for Strategic Oil Reserves to maintain strategic natural gas inventories.

With regard to the development of fracking, Law 8/2015 introduces a tax on the value of the extraction of gas, oil and condensates, which establishes a levy of between 1 per cent and 4 per cent on the production of unconventional gas. It also sets a fee of €125,000 to be paid for each inland exploration survey and production well. The Law provides with particular force that the revenue collected from both the tax and the fee shall revert to the autonomous regions and municipalities where the wells are located. Moreover, the companies that hold exploitation concessions must pay 1 per cent of the value of the production to the owners of the land around the wells, even if these areas are intended for an activity other than hydrocarbon extraction.

Royal Decree 984/2015 (RD 984/2015) of 30 October regulates the organised gas market and third-party access to natural gas system installations. It contains the basic regulations for the operation of this new organised gas market, and other measures, such as the inspection procedures for gas installations. In compliance with Article 32 of RD 984/2015, the Organised Gas Market Agents Committee was established on 28 January 2016. This Article regulates the organised gas market and third-party access to natural gas system facilities. The Agents Committee is formed by representatives of the agents, the CNMC, the transmission system operator, the market operator and the party responsible for the settlement services.

To sum up, Law 8/2015 provides for the creation of an organised gas market on the Iberian peninsula and nominates MIBGAS SA as its operator. This mandate is statutorily developed in RD 984/2015, which regulates the organised gas market and third-party access to natural gas system facilities; in the Resolution of 4 December 2015, issued by the Secretary of State for Energy, which approves the market's rules, the adhesion contract and the decisions of the organised gas market; and in Circular 2/2015 of 22 July, issued by the CNMC, which lays down the balancing rules for the gas-system transmission network. The MIBGAS trading platform is used for the purchase and sale of natural gas with physical delivery at the virtual balancing point for within-day, day-ahead, balance-of-month and month-ahead products.

Additionally, the ruling of 21 December 2017 issued by the Spanish Constitutional Court declares the unconstitutionality of Articles 2.2, 4, 5 and 6, the first additional provision and the first transitory provision of Royal Decree-Law 13/2014, which adopts urgent measures in relation to the gas system and the ownership of nuclear power plants. Thus, the Spanish Constitutional Court has annulled the compensation procedure for the promoters of the Castor underground gas storage facility, owing to the lack of 'urgent need' that would justify approving a Royal Decree-Law in this regard.

In addition, in the context of the energy transition at both European and national levesl, it was necessary to adopt a clear, stable and predictable regulatory and institutional framework that would provide legal certainty for all natural and legal persons involved in the energy sector. Thus, in connection with the foregoing, it should be noted that the European Commission initiated an ex officio investigation into the transposition of Directive 2009/72/EC and Directive 2009/73/EC into Spanish law, to assess the possible lack of conformity with EU legislation and concluded that the incorrect transposition of the internal market directives had led to significant litigation before the Supreme Court between the national regulator and the government, which was detrimental to the general interest and entailed legal uncertainty and institutional instability for all the agents involved in the sector.

Therefore, Royal Decree 1/2019 puts an end to this situation, implementing a distribution of competences that respects the Community framework, providing the CNMC with the necessary independence for the exercise of its functions.

iv Rates

Remuneration for transportation and distribution are administratively established in response to investment costs, operation and maintenance, and network management, according to a calculation model defined by the regulator by royal decree and in accordance with provisions established in Electricity Law 54/1997 and the current Electricity Act 24/2013 (Article 14.8) and Royal Decree 1/2019. Thus, the remuneration is established by reference to the costs required to build, operate and maintain the facilities complying with the principle of covering the electricity supply at the lowest cost. Accordingly, Royal Decrees 1047/2013 and 1048/2013 establishing the methodologies for calculating the remuneration for transportation and distribution activities have been implemented.

This remuneration methodology is based on the following principles:

  1. the accrual and collection of the remuneration generated by transmission and distribution facilities placed into service in year 'n' will start from 1 January of year 'n+2';
  2. the remuneration for investment will consist of assets in operation that have not been depreciated. The basis for their financial return will be the net value of the assets;
  3. the financial rate of return on the assets eligible for remuneration out of the electricity system for transportation and distribution companies will be linked to the yield on 10-year government debt securities on the secondary market plus a suitable spread; and
  4. the remuneration is determined for each regulatory period (of six years) but the remuneration parameters can be reviewed before the start of each regulatory period.

The remuneration methodology of transportation activity should comprise economic incentives for improvement of the availability of the facilities and any other goal. In the case of distribution, the remuneration methodology must include the formula for remunerating other regulated functions performed by distribution companies, as well as any incentives that may be appropriate for the improvement of the supply's quality, reduction of losses, combating fraud, innovating technology and any other goals.

Reference should be also made to:

  1. Circular 2/2019 of CNMC, establishing the methodology for calculating the financial remuneration rate for electricity transmission and distribution activities, and regasification, transmission and distribution of natural gas;
  2. Circular 3/2019 of CNMC, establishing the methodology for the operation of the wholesale electricity production market and the management of systems operation;
  3. Circular 4/2019 of CNMC, establishing the methodology for the remuneration of the electricity system operator;
  4. Circular 5/2019 of CNMC, establishing the methodology for the calculation of the remuneration of the activity of electricity transmission;
  5. Circular 6/2019 of CNMC, establishing the methodology for calculating the remuneration of the activity of electricity distribution;
  6. Circular 7/2019 of the CNMC, which approves the standard installations and the unitary reference values for operation and maintenance by fixed asset element to be used in the calculation of the remuneration of the companies that own electricity transmission installations;
  7. Circular 8/2019 of CNMC, establishing the methodology and conditions for access and allocation of capacity in the natural gas system; and
  8. Circular 9/2019 of CNMC, establishing the methodology for determining the remuneration of natural gas transportation facilities and liquefied natural gas plants.

v Security and technology restrictions

Security in relation to transportation facilities for electrical energy is relevant from the perspectives of both industrial safety and security of supply.

Industrial safety is dealt with by Law 21/1992 of 16 July and the Electricity Act 24/2013, and is understood as safety aimed at risk prevention and control, as well as protection against accidents and disasters capable of causing harm to the population or damage to flora, fauna, property or the environment. Security of supply is dealt with under sector-specific regulations. The Electricity Act 24/2013 states in this regard that the 'few basic technical rules needed will be established to ensure the reliability of electricity supply and installations of transport networks'.

IV ENERGY MARKETS

i Development of energy markets

According to the Electricity Act 24/2013, electricity production takes place in the electrical power production market in a free-competition regime. The electricity production market is composed of all energy purchase and sale business transactions and other services relating to the supply of electricity. It includes forward markets, a daily market, an intraday market, the resolution of system technical constraints, ancillary services and the management of deviations.

The Spanish electricity market has historically offered competitive prices for end users compared with other European markets. The Iberian Electricity Market was established in 2007, and the results of integration in the market have been obvious: whereas in the second half of 2007 the average price differential between the Portuguese and Spanish electricity systems was €10 per MWh, this fell to €0.3 per MWh by 2010, with identical rates on both sides of the border for the majority of that time.

The operation of the wholesale market at any given time is determined by the mix of generation structure, import capacity, the imperfect meshing of the network, the inelasticity of demand and the system reserve margin. The market-design rules can make this operation more or less efficient, but cannot make up for significant deviations in these factors.

From the opening to competition of the generation market in January 1998 until 2005, almost all the transactions in wholesale energy were carried out in the pool. Forward markets and bilateral contracts have been developed gradually with the evolution of the regulations. Thus, in recent years, the energy involved in the daily market run by OMIE has ranged between 45 and 55 per cent of demand, with the remainder opting for bilateral transactions.

Despite the reduction in the quantities traded in the daily market, the price still represents the main visible energy price reference and the underlying settlement of bilateral contracts, the over-the-counter (OTC) market and forward markets organised by OMIP.

In this context the significant increase in OTC negotiations on the financial market should also be noted. The volume of energy traded in this market rose from 6 per cent of domestic demand in 2007 to 10 per cent in 2010.

The low prices in the Spanish wholesale market compared with its European counterparts have reflected the influence of generation technology's price takers. As an illustrative example, in the period from December 2009 to March 2010, the market price showed a very substantial fall even below fuel price, reaching an average of €19.6 per MWh in March 2010, reflecting, inter alia, prices of zero euros per MWh for almost 300 hours. One of the main causes of this was a 1.91 per cent reduction in demand, and growth in wind production coinciding with intense rainfall.

ii Energy market rules and regulation

Since 1998, the Spanish electricity sector has undergone a major transformation as a result of regulation changes resulting from the adoption of Directive 96/92/EC, the main objective of which was to create an internal market for electricity in the European Union by liberalising electricity generation and sale.

The electricity markets are regulated by:

  1. a market operator, responsible for the preparation of the daily operation of the system, matching offers and demands, supervised by a committee of representatives of producers, distributors, traders and qualified consumers;
  2. a system operator (Red Eléctrica de España) to ensure continuity and security of supply;
  3. the Electricity System Commission, which protects consumer interests and ensures the transparency of the whole system;
  4. the Industry and Energy Ministry must supervise the correct operation of production activities and consumption of electricity;
  5. autonomous communities, which also have direct responsibilities for regulating their electrical systems; and
  6. the European Union, which establishes the general framework of the electrical system in all Member States through directives and legal regulations.

Royal Decree 949/2001 (amended by RD 984/2015 on organised gas market and third-party access and by Royal Decree 335/2018, which modifies several royal decrees regarding the natural gas sector), which regulates third-party access to gas infrastructure and establishes an integrated economic system of natural gas for regulated activities paid under rates, tolls and regulated fees, as amended, also sets out the basic criteria for remuneration of regulated activities, setting tariffs and fees to be paid by individuals for the use of gas installations.

Further regulation is established by the following:

  1. Ministerial Order ETU/1977/2016 of 23 December, on the tolls and fees associated with third-party access to natural gas facilities, and the payments in respect of regulated activities for 2017;
  2. Ministerial Order ETU/1283/2017 of 22 December, on the tolls and fees associated with third-party access to natural gas facilities, and payments in respect of regulated activities for 2018;
  3. Ministerial Order ETU/1367/2018 of 20 December, on the tolls and fees associated with third-party access to gas facilities, and the remuneration of regulated activities for 2019; and
  4. Ministerial Order TEC/1259/2019 of 20 December, on the remuneration of storage activity and the tolls and fees associated with third-party access to gas facilities for the year 2020.

iii Contracts for sale of energy

Participants in the energy market may freely agree the terms of contracts for the sale of electricity to subscribe, subject to the terms and minimum content, under the Electricity Act 24/2013 and its implementing regulations. MIBEL consists of the forward markets managed by OMIP and the daily market and intraday markets managed by OMIE.

Electricity traded through daily and intraday markets is remunerated on the basis of the prices resulting from the balance between supply and demand of electricity offered. In other words, it is a marginal pricing market in which the price and the trading volume in each hour are set according to the point of equilibrium between supply and demand. Electricity traded through bilateral contracts or the physical or term market is remunerated on the basis of the price of the firm's contracted operations in those markets.

iv Market developments

Historically, the energy market has functioned properly, but in recent years a technology-driven influx of price takers has distorted its proper functioning. This has caused a reduction in the wholesale market price, which, together with a reduction in the thermal gap, is not sending the right economic signals to garner investment in new capacity.

This situation will only deteriorate in the future, as the progressive decarbonisation production mix forecasts a greater presence of non-renewables, relegating thermal technologies to the role of providing back-up power, with only a residual role as a contributor of energy, and jeopardising the recovery of investment. Incentives for investment and the availability of service, established in Order ITC/3127/2011 of 17 November (modified by Ministerial Order ETU/1133/2017 of 21 November, Ministerial Order ETU/971/2017 of 17 October, Ministerial Order TEC/1366/2018 and Ministerial Order TEC 1258/2019), have not generated sufficient economic signals to encourage investment in new back-up power in the region of 500 hours per year, which highlights the need to revise that target.

In particular, a procedure to assist in the security of supply was introduced in 2011 with the aim of ensuring a level of domestic coal consumption according to the provisions of the National Coal Plan (which justifies the operation of these plants for security of supply and capacity for each state to give priority to indigenous sources for up to 15 per cent of production). This regulatory change involves the generation of coal that is bought (10 plants totalling 4,700MW) at a regulated price, while production in the process of withdrawal of the balance between production and demand (imported coal and combined cycle) does not receive any compensation. Nevertheless, according to the Framework Agreement for Coal Industry and Mining Districts for the period 2013–2018, the incentivising mechanisms expired at the end of 2014. The Spanish government proposed renewing the incentives granted to power plants that burned national coal. For that purpose, on 31 March 2015, the government presented a draft Proposal of Order regulating an incentive for investment in the improvement of environmental performance for electricity generating facilities from indigenous coal to the Commission on the Monitoring of the Coal Plan for the period 2013–2018. The draft Proposal of Order was subject to prior review by the CNMC and notification to the European Commission. The CNMC issued its report on 30 September 2015, stating that the measures established in the draft Proposal of Order were not justified with regard to the necessity and proportionality of the objective, and expressly pointed out that those measures could fall within the scope of the definition of state aid under European law and thus be duly notified to the European Union pursuant to Articles 107(1) and 108(3) of the Treaty on the Functioning of the European Union. The European Commission responded negatively to the draft Proposal of Order in February 2016.

V RENEWABLE ENERGY AND CONSERVATION

i Development of renewable energy

The Electricity Act 24/2013 eliminated the former distinction between ordinary and special-regime installations and replaced them with a remuneration system based on the technology and capacity of the generation facilities. Under the former remuneration system, special-regime installations, which include renewable energy sources, were not subsidised in the state budget. Instead, they were included in electricity rates, causing a tariff deficit; however, it was not only renewable energy premiums that generated a tariff deficit, so did other items, such as regulated tariff billing. In fact, the special-regime premiums caused only one-third of the tariff deficit.

Royal Decree 6/2009 of 30 April had previously attempted to limit the increase of the aforementioned general tariff deficit; however, it was not sufficient. Only a year later, further steps needed to be taken by the government and Royal Decree-Law 14/2010 was passed for this purpose. In this context, the purpose of Royal Decree-Law 1/2012 was to limit the impact of renewable premiums in the tariff deficit, thus reducing costs; in similar terms, the aim of Royal Decree-Law 2/2013 was to mitigate the tariff deficit by modifying the remuneration system of regulated activities and the remuneration formula for special-regime facilities.

In addition, there were several regulatory changes during 2012 and especially during 2013 in relation to energy production from renewable sources, cogeneration and waste.

As stated above, the Spanish government has accomplished a structural reform of the Spanish energy sector, starting with the enactment of RDL 9/2013. This regulation focused on addressing 'the pressing need to immediately adopt a series of urgent measures that will ensure the financial stability of the national electrical grid and, likewise, the advisability of overhauling the regulatory framework so that it can adapt to the events and situations that define the electricity sector at any given period, with the objective of maintaining the sustainability of the electrical system'.

RDL 9/2013 abolished the former remuneration system based on a regulated tariff (the only one in existence since Royal Decree-Law 2/2013 was enacted), even for generation facilities in operation at the time this regulation entered into force. It replaced the previous regime with a system in which power plants producing electricity from renewable energy sources, cogeneration and residual waste receive 'a specific remuneration that is composed of an amount per installed power unit/facility (which covers, where applicable, the investment costs for a standard plant that cannot be recovered from the sale of electrical power), in addition to an amount for the operation itself (which covers, where applicable, the difference between operating costs and the revenue obtained from the market by said standard power plant)'.

This specific remuneration is calculated on the basis of a 'standard power plant, over the useful regulatory life thereof and based on the business activity that would be carried out by an efficient and well-managed company'. Thus, production facilities receive a 'reasonable profitability' based on standardised costs and revenues for a standard power plant.

The provisions contained in RDL 9/2013 relating to the remuneration system for producers of energy from renewable sources, cogeneration and waste were essentially carried into the Electricity Act 24/2013.

Accordingly, Section 5 of Article 14 of the Electricity Act (modified by Royal Decree 1/2019) determines that the remuneration for generation activities includes the following concepts:

  1. correspondent remuneration for participation in the daily and intraday market for generation;
  2. the system adjustment services required to guarantee a suitable supply to the consumer;
  3. when applicable, remuneration through the capacity remuneration mechanism;
  4. when applicable, additional remuneration for generation activities carried on in the electricity systems of non-peninsular territories; and
  5. when applicable, specific remuneration for the generation of electricity using renewable energy sources, cogeneration and waste.

RD 413/2014 specifically regulates the remuneration system for facilities generating electricity from renewable energy sources, cogeneration and waste. Thus, power plants producing electricity by these methods may also receive a specific remuneration, in addition to the electricity market price, composed of the following elements:

  1. remuneration according to the investment, which is an amount relative to the installed power unit or facility, and covers, where applicable, the investment costs for a standard plant that cannot be recovered from the sale of electrical power; and
  2. remuneration according to the operation, which is an amount relative to the operation itself, and covers, where applicable, the difference between operating costs and the revenue obtained from the market by the standard power plant.

This specific remuneration, which allows power plants producing electricity from renewable energy sources, cogeneration and waste to achieve a reasonable rate of return, is calculated on the basis of a 'standard power plant, over the useful regulatory life thereof and based on the business activity that would be carried out by an efficient and well-managed company'.

RD 413/2014 defines the concept of 'reasonable rate of return' by referencing the pre-tax return on the secondary market average yield on 10-year government bonds for the 24 months prior to May of the previous year as of the beginning of the regulatory period, increased by a differential. Each regulatory period will last for six years, with the first running from 14 July 2013 until 31 December 2019.

Notwithstanding the above, those facilities that benefited from a feed-in tariff regime as of 14 July 2013 will receive a reasonable rate of return based on the pre-tax return on the secondary market average yield in the 10 years prior to the entry into force of RDL 9/2013 government bonds, plus 300 basis points. The specific remuneration will be granted to new power plants producing electricity from renewable energy sources, cogeneration and waste, by means of a competitive tendering process respecting transparency, non-discrimination and objectivity principles. Once power plants producing electricity from renewable energy sources, cogeneration and waste have completed their useful regulatory life, they would not be entitled to receive any specific remuneration and would merely obtain the income associated with participation in the electricity market. Last, the remuneration parameters based on standardised costs and revenues for a standard power plant are set forth in MO IET/1045/2014. MO ETU/130/2017 updates the retributive parameters of the standard installations applicable to certain electricity production facilities from renewable energy sources, cogeneration and waste for the period between 1 January 2017 and 31 December 2019. Specifically, the following were revised:

  1. the plotting of real prices against estimations for the first half-period that elapsed (2014–2016). This reveals a deviation collection entitlement for the price included in the regulation of the years 2014–2016, which will be offset over the remaining useful life of the assets;
  2. an update to the plotting of prices for the second half-period (2017–2019) and an update to the remuneration parameters for standard installations, applicable from 1 January 2017; and
  3. an update to the technological indication coefficients, with figures from the previous three years.

In addition, Ministerial Order TED/171/2020 of 24 February updates the remuneration parameters of standard installations applicable to certain facilities producing electricity from renewable energy sources, cogeneration and waste, for the purposes of their application to the regulatory period starting on 1 January 2020.

As stated above, the Spanish government has carried out three competitive procedures (renewable auctions) for the allocation of the referred specific remuneration regime to electricity producers from renewable energy sources, cogeneration and waste:

  1. First renewable auction: Royal Decree 947/2015 of 16 February set the first call for the provision of the specific remuneration regime to new biomass and wind installations and Ministerial Order IET/2212/2015 of 23 October regulated the procedure for the provision of that specific remuneration regime. Finally, by virtue of a resolution dated 18 January 2016, the General Directorate of Energy Policy and Mining awarded 500MW of wind power capacity and 200MW of biomass capacity.
  2. Second renewable auction: Royal Decree 359/2017 of 31 March established a call for up to 3,000MW of installed power for the granting of the specific remuneration regime to new installations for the production of electricity from renewable energies in the peninsular electrical system. Ministerial Order ETU/315/2017 of 6 April approved the procedure for assigning the specific remuneration regime in the call for new installations for the production of electrical energy from renewable energy sources. By a resolution dated 19 May 2017, the General Directorate of Energy Policy and Mining awarded the 3,000MW to mainly renewable energy producers of wind and photovoltaic power.
  3. Third renewable auction: the third call for the additional provision of 3,000MW of installed capacity has been regulated through Royal Decree 650/2017 of 16 June and Ministerial Order ETU/615/2017 of 27 June, which aimed to introduce the necessary modifications to Ministerial Order ETU/315/2017 to allow its full application to the new auction. By a resolution dated 27 July 2017, the General Directorate of Energy Policy and Mining awarded the relevant capacity.

After the three auctions were held, all megawatts of power with available installed capacity were awarded. These results show that the new facilities for the generation of electrical energy from renewable energy sources are configured as a pillar for the achievement of the objectives established in Directive 2009/28/EC,4 which promotes the use of energy from renewable sources by 2020, from both an environmental and an economic point of view.

On 1 August 2015, the Official State Gazette published RD 738/2015, which mainly regulates electricity production activity and the dispatch procedure in non-mainland electricity systems. RD 738/2015 establishes a scheme similar to the previous system, with remuneration for fixed costs (which include fixed investment and fixed operation and maintenance costs) and for variable costs (including fuel and variable operation and maintenance costs), and takes into account, within the costs of these systems, the taxes arising from Law 15/2012 on fiscal measures for energy sustainability. Certain aspects of the methodology have been changed to improve the efficiency of the system. RD 738/2015 also implements matters already contained in Law 17/2013 of 29 October 2013 to guarantee supply and increase competition in these systems.

RD 738/2015 entered into effect on 1 September 2015 and includes, for certain measures, a transitional period that started on 1 January 2012. In accordance with additional Provision 11, the full and final effectiveness of RD 738/2015 is subject to the European Commission not raising any objections with regard to its compatibility with EU law.

On 13 February 2016, RD 56/2016 was published in the Official State Gazette partially transposing Energy Efficiency Directive 2012/27/EU. RD 56/2016 sets forth the obligation for large-scale enterprises and groups of companies to carry out energy audits as a measure for organisations to know their situation regarding energy use, and to contribute to the saving and efficiency of energy that is consumed.

It imposes the obligation to carry out energy audits for large-scale companies that:

  1. employ more than 250 workers; or
  2. have a turnover of more than €50 million and a balance sheet exceeding €43 million.

The obligation also applies to groups of companies as defined in the provisions of the Spanish Commercial Code that fulfil the applicable above-mentioned requirements. Small and medium-sized companies are exempt from this obligation.

The energy audits must be performed by qualified energy auditors and the obligation is subject to inspection by the competent authorities in matters of energy efficiency. The audits must cover at least 85 per cent of the total energy consumption of the obliged company's facilities located in Spain that are involved in the industrial, commercial and service activities. These audits must be performed at least every four years from the date of the previous energy audit.

The sanctions for non-compliance include fines of up to €60,000 according to Law 18/2014 approving urgent measures for growth, competitiveness and efficiency.

The Administrative Energy Audit Register was created in 2016 through RD 56/2016 by the Ministry of Energy, Tourism and the Digital Agenda (now the Ministry for Ecological Transition and the Demographic Challenge).

It is also interesting to mention Ministerial Order ETU/360/2018 of 6 April, establishing the values of remuneration for operations corresponding to the first natural semester of 2018 and approving a standard installation, and establishing its corresponding remuneration parameters, applicable to certain installations for the production of electrical energy from renewable energy sources, cogeneration and waste, and Ministerial Order TED/171/2020 of 24 February, updating the remuneration parameters of standard installations applicable to certain installations producing electricity from renewable energy sources, cogeneration and waste, for the purposes of their application to the regulatory period starting on 1 January 2020.

Royal Decree-Law 17/2019, published in the Official State Gazette in November 2019, adopts urgent measures for the necessary adaptation of remuneration parameters affecting the electricity system.

ii Energy efficiency and conservation

Objectives and actions on energy efficiency in Spain are part of the policy objectives and progress set by the regions' institutions. Also, in addition to the objectives approved in the European Council in spring 2007 of reducing greenhouse gas emissions and increasing renewable energy, a target was included for improving energy efficiency by 20 per cent in 2020 within the European Union compared with the baseline situation (the target block is commonly called 20-20-20 targets). Unlike the target for 20 per cent renewables and 20 per cent reduction of carbon dioxide emissions, the efficiency target is not binding and has been distributed by Member States.

In line with European objectives set forth in Directive 2009/28/EC,5 the only public reference in a Spanish context has been the 20 per cent target of improving energy efficiency in the government's 'Strategy for a Sustainable Economy' in December 2009, which included a target of a 20 per cent reduction in energy use by 2020 compared with 2009.

At a national level, the main energy efficiency measures are based on the Spanish Energy Efficiency Strategy (E4) for the period 2004–2012, which has developed in several plans: 2005–2007 Action Plan, 2008–2012 Action Plan and 2011–2020 Action Plan.

The 2008–2012 Action Plan includes a significant number of structured activities and strategic sectors. The measures carried out are divided into the following categories:

  1. legislative actions, generally far-reaching and representing a complex set of recommendations, regulations, rules of functioning, constraints and generally binding rules;
  2. incentive measures for carrying out audits and analysis of consumption of the technologies used, and promoting investment in equipment to increase energy efficiency; and
  3. training in good practices, knowledge of available technology, advances and new techniques of management demand, consumption and, in general, the correct use of energy.

Alongside this Action Plan, some of the key energy efficiency measures stated in the 2011–2020 Action Plan include those in the transportation, building, utilities and cogeneration sectors.

iii Technological developments

One of the main goals within the European Union is to fully achieve energy interconnection and, for that purpose, the European Commission passed the Third Energy Package, which came into force in March 2011. The Third Energy Package sought to accelerate investments in energy infrastructure, to enhance cross-border transactions and provide access to diversified sources of energy.

The European Commission considers the connection of 'energy islands', that is, Spain and Portugal on the Iberian peninsula and Estonia, Latvia and Lithuania in the Baltic Sea region, along with the rest of the internal market, as a high priority goal.

A recent example of electricity interconnection as a technological development is the new interconnection grid established between Spain and France. A €700 million project of common interest that doubles the electrical connection capacity between the two countries has been completed. It was co-financed by both countries through the incorporation of the company INELFE (half of which is owned by Red Eléctrica de España and half by Réseau de Transport d'Électricité).

VI THE YEAR IN REVIEW

As described above, the Spanish energy sector has undergone a broad reform as a consequence of the government's attempts to reduce the tariff deficit and to re-establish a positive correlation between electricity costs and the income obtained from regulated electricity activities. The main reforms during 2019 are summarised as follows:

  1. January 2019: urgent measures were adopted to bring the powers of the CNMC into line with the requirements arising from EU law in relation to Directives 2009/72/EC and 2009/73/EC concerning common rules for the internal markets in electricity and natural gas.
  2. April 2019: administrative, technical and economic conditions of the self-consumption of electrical energy were updated.
  3. November 2019: urgent measures were adopted for the necessary adaptation of remuneration parameters that affect the electricity system and which respond to the process of ceasing the activity of thermal generation plants.
  4. The CNMC approved several circulars in the energy and gas sectors for the regulatory periods 2020–2025 and 2026–2031.

VII CONCLUSIONS AND OUTLOOK

Spain depends heavily on foreign energy and needs all available resources. Its energy system is still in a state of revision, in both the electricity and the gas sectors, which creates uncertainty for international investors, who demand safe, predictable and transparent markets. Additionally, the retrospective effect of certain measures adopted since 2013 (i.e., RDL 9/2013) concerning renewable energy incentives, along with tax relief, have brought uncertainty to potential investors. The main objectives for the Spanish government in the short term are to shore up the markets and counter this uncertainty, but it is also important to outline definitively the energy mix required during the next 20 years; once defined, this plan should remain in place for that length of time.


Footnotes

1 Antonio Morales is a partner at Baker McKenzie.

2 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity.

3 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas.

4 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC.

5 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources.