The Renewable Energy Law Review: Spain
Since 2018, the Spanish renewable energy market has been gaining momentum. After several years defined by regulatory instability, a moratorium on renewable energy investments, and complicated administrative barriers that hindered investment in new capacity, the capacity auctions launched in 2016, 2017 and 2021 followed by changes in legislation and new environmental and renewable energy targets for 2030 have defined a new landscape for the renewable energy sector.
The auctions launched in 2016 and 2017 for 8.7 gigawatts (GW) of additional capacity in renewable energy were fully subscribed, resulting in significant investment between 2018 and 2020, mainly in wind and photovoltaic (PV) technologies. A re-definition of self-consumption and the removal of administrative barriers and significant costs also created a new framework that incentivised investment in PV distributed generation in 2019 and 2020.
The Integrated National Energy and Climate Plan 2021–2030 (the 2021–2030 Plan) and the Climate Change and Energy Transition Act (the CCET Act)2 set stringent targets for 2030 that will require the deployment of about 60GW of renewable electricity capacity and €200 billion in investment in renewable power plants and storage between 2021 and 2030. The CCET Act defines a stable and predictable fixed feed-in tariff (FIT) per megawatt-hour (MWh) over a long period that will provide the necessary stability to the regulatory framework to attract investment and facilitate the achievement of the goals set for 2030. Under this framework, in January 2021 Spain celebrated a new competitive bid process for the construction of about 3GW of additional renewable capacity, made up of 2GW of PV capacity and 1GW of wind.
The year in review
Spain provides long-term financial support to renewable energy projects in recognition of the benefits that renewable energy investments offer to the environment, the diversity and security of energy supplies and to the economy. European governments knew that they would have to provide financial support to meet the renewable targets established under different European Directives.3 The European Union (EU) encouraged Member States to provide financial support and, in Spain, an independent review concluded that the benefits of renewable generation justified financial incentives.4 Renewable plants need financial support because, in most cases, electricity market prices alone are not high enough to compensate for all the costs involved.
European member states combine different types of incentives to promote renewable deployments in the electricity system. The two most common market-based approaches are: (1) price-based mechanisms, where renewable producers receive a minimum guaranteed price for the electricity produced, the FIT5 or the capacity installed; and (2) quantity-based mechanisms where regulatory authorities fix the quantity of renewable electricity to be installed and allocate it through a competitive process, or where the energy produced receives green-certificates. Price-based mechanisms and quantity-based mechanisms in the form of competitive process currently coexist in Spain under the current regulatory framework for renewable electricity generation.
In 2018 and 2019, renewable sources together – wind, small hydro, PV, biomass and concentrated solar power – contributed around 36 per cent of total electricity generation in Spain. The percentage of the total remained stable for two consecutive years largely because of a reduction in hydro generation in 2019 as a result of dry conditions; non-conventional renewable electricity capacity increased by 20 per cent between 2018 and 2019, and generation by 11 per cent.6
Preliminary data published by the Spanish system operator, Red Eléctrica de España, SA (REE), indicate that in 2020, Spain's renewable electricity generation would contribute around 43 per cent of total electricity generation. Three facts explain this sharp increase with respect to the 2019 figures. First, there has been a 7 per cent increase in non-conventional renewable energy capacity through the deployment of about 2.7GW of new wind and PV capacity. Second, there has been disconnection of about 3.5GW of thermal plants, mainly coal-burning. Third, there has been a reduction of around 5 per cent in demand and production mainly because of a slowdown of the economy as a result of covid-19.
In 2020, Spain published the 2021–2030 Plan that sets Spain's climate change and renewable energy goals for 2030. In particular, the plan requires (1) a 42 per cent share of final energy consumption, with 74 per cent of electricity generation from renewable sources (the 2030 Target); (2) a reduction in emissions by at least 23 per cent compared to 1990; and (3) improved energy efficiency by reducing primary energy consumption by at least 39.5 per cent.
To meet the 2030 Target, Spain aims for an increase of electricity generation from renewable sources of more than 60GW by 2030. Reaching this goal will require investments above €200 billion in renewable power plants and storage between 2021 and 2030. Additional closures of coal-fired plants in the coming years and of around 50 per cent of nuclear reactors between 2025 and 2030 will facilitate and incentivise the necessary deployment of additional renewable capacity to achieve these goals.
In May 2020, the Spanish Council of Ministers approved a Draft CCET Act and initiated the procedures for its approval in the Spanish parliament. The aim of the CCET Act, which was approved in May 2021, is to establish the foundations and mechanisms to achieve the targets set in the 2021–2030 Plan. Deployment of renewable energy facilities and electrification of the economy, in particular for the transport sector, are among the main pillars supporting the energy transition.
Spain justifies the new regulatory framework and the significant investment in renewable energy as the means to reach the more ambitious climate change targets and to transit towards a decarbonised economy. The new regulatory framework is aimed at (1) boosting the economic recovery efforts following the covid-19 crisis; (2) advancing towards electrification; and (3) reaching renewable deployment targets.
Among other issues, the new framework relies on the use of competitive mechanisms to assign new renewable capacity, based on the recognition of a stable and predictable FIT per MWh. According to Spain, the new regulatory framework for future auctions will (1) make new renewable projects bankable by providing greater certainty in respect of their future revenues;7 (2) compensate for the relative illiquidity of Spanish electricity forward markets; and (3) foster the pass-through of lower costs for renewables to final consumers.8
The steep drop in costs for renewable technologies, combined with Spain's new ambitious climate targets and abundant wind and solar resources, mean that Spain has become again one of the hottest markets globally.9
The policy and regulatory framework
i The policy background
Until July 2013, the most common instrument for providing financial support to existing renewable projects in Spain was that of FITs in the form of financial support per MWh of electricity generated. In July 2013, Spain began an electricity market reform, with the aim of ensuring the financial sustainability of the Spanish Electricity System.10 Parliament passed a new Electricity Act in December 2013,11 which was followed by secondary legislation passed between June 2014 and February 2020 (the Specific Remuneration Regime).12
Whereas new investments in certain renewable technologies, mainly PV and wind located in favourable climate conditions, may no longer need support to compete with fossil fuels, renewable projects in less favourable climate conditions, as well as PV and wind projects developed previously, still require support to pay off their investment commitments.
Price-based mechanism: switch from FITs per MWh to capacity payments per MW installed
The Specific Remuneration Regime establishes an incentive mechanism that aims to allow an efficient plant to cover its costs and obtain a reasonable return. This new rate of return regulation applies to both existing and new renewable installations, thus abolishing the previously existing FITs per MWh generated.
Under the Specific Remuneration Regime, the bulk of remuneration comes from a fixed 'investment incentive' per megawatt (MW) of installed capacity calculated by reference to a pre-tax target rate of return to the estimated investment costs of a 'standard installation'. Spain also offers an 'operating incentive' per MWh produced to compensate for the standard operating costs that an 'efficient, well-managed company' could not recover on the market. Spain reviews and may update the estimates of produced hours and operating costs for standard installations and the Spanish electricity prices forecast every three years, the 'semi-regulatory period',13 and the target return on investment every six years, the 'regulatory period'.
The first six-year regulatory period ended in 2019. In November 2019, Spain announced a reduction of the pre-tax target return level from 7.398 per cent14 to 7.09 per cent for the second regulatory period starting in January 2020. The 7.09 per cent target return applies to renewable installations under the Specific Remuneration Regime and to renewable installations developed under previous regulatory regimes that have initiated legal proceedings against Spain because of the 2013/2014 regulatory reform and have decided not to waive them. The 7.398 per cent will continue to apply for the next two regulatory periods, until 2031, to all remaining investors under previous regulatory regimes. On 28 February 2020, Spain also published the new remuneration parameters for the third semi-regulatory period from 2020 to 2022.15
Capacity-based mechanism: auctions to promote deployment of new facilities
The 2013 Spanish Electricity Act envisaged the possibility of launching competitive concurrence mechanisms to provide financial support for new renewable installations.16 Due largely to the renewable generation moratorium initiated in 2012,17 starting around 2014 Spain started missing the interim annual targets to reach the long-term target of providing 20 per cent of final energy consumption from renewable energy sources by 2020.
In 2016, before the existing deficit of renewable capacity, Spain decided to end the moratorium. Pursuant to the provision in the 2013 Spanish Electricity Act, in 2016 and 2017 Spain launched auctions for 8.7GW of additional renewable capacity to foster a rapid deployment of renewable facilities, mainly wind and PV.
According to the auction's regulations, projects bid a discount on the financial incentives in the form of capacity payments under the Specific Remuneration Regime. Depending on certain characteristics, the winning bidders of the competitive bid process launched in 2016 and 2017 were requested to come online by either December 2019 or March 2020. For the 2016 and 2017 auctions, all winning bidders proposed the maximum discount available of 100 per cent: they will therefore not obtain any financial support on top of the market price.18
Since June 2020, to reach the 2030 Target, Spain has approved new regulation for the promotion of new renewable energy, including new auction rules.19 The new auction design overhauls the previous auction design based on a discount on the capacity payment (per MW installed) and replaces it with a traditional FIT per MWh. By applying a pay-per-bid mechanism,20 under the new auction design, winning renewable bidders are now entitled to a Fixed FIT per MWh generated.21 The awarded price will not be modified during the term of a regulatory period, set between 10 and 15 years.22 The awarded facilities will be allocated two thresholds: (1) a 'minimum number of equivalent hours of operation' to be reached within the regulatory period, and (2) a 'maximum number of equivalent hours of operation'.23 Any generation sold beyond the 'maximum' threshold will not be entitled to receive financial support on top of the market price. Penalties may be imposed on winning facilities that do not reach the 'minimum' threshold. The awarded facilities may also face penalties if, for instance, they suffer construction delays or opt out of the scheme. The new auction rules apply to both new renewable facilities and repowering of existing renewable facilities.
The first auction under the new regulation was designed in 2020, setting a regulatory period for the energy at auction of 12 years.24 On 26 January 2021, the results were published. Spain awarded about 2GW of PV capacity required to come online before 28 February 2023, and 1GW of wind capacity required to come online before 29 February 2024. The average price was €24.47/MWh for PV and €25.31/MWh for wind.25
To promote transparency and predictability of the foreseeable auctions and reach the 2030 Target and its intermediate milestones, the CCET Act introduces a commitment to publish an annual forecast for the auctions planned in the five years ahead, indicating approximate time frames, frequency of the auctions, expected capacity and planned technologies, if applicable.
Other legislative measures
In 2020, Spain introduced regulatory changes with regard to the access and connection rights affecting new renewable facilities with the aim of slowing down the recent surge in grid access requests and clamping down potential 'speculative transactions'.26
The 2020 legislation establishes four main regulatory changes and innovations:
- First, it establishes more stringent conditions to maintain the right of access and connection to the electricity grid. Attention will mainly focus on technical viability reasons and the soundness and maturity of the projects through the fulfillment of administrative milestones.27 Failure to comply with these conditions may lead to the revocation of the access permits and, where appropriate, the connection permits granted. It may further lead to Spain executing the financial guarantees provided by investors.
- Second, it imposes a moratorium of new access requests until the government approves new regulation.
- Third, it imposes the condition for the granting of access and connection permits that the facility must be the same in terms of:
- generation technology;
- access capacity; and
- geographical location as the one for which the application for access and connection was requested. If this condition is not met, a new request for access and connection will be necessary.
- And fourth, it adjusts the regulation for electricity storage, hybridisation, independent aggregators, renewable energy communities, or recharging infrastructures, to accommodate the recent development of these activities.28
ii The regulatory framework
The Secretary of State for Energy within the Ministry for Ecological Transition is the ministerial department responsible for the regulation and implementation of the economic regime governing renewable energy. Autonomous regions have competences to regulate the deployment of renewable projects and may introduce additional requirements in their territory.
The independent regulator, the National Commission for Markets and Competition (CNMC) has authority:
- to supervise the management, allocation and charges for connection capacity;
- to monitor the origin of electricity from renewable energy sources and high-efficiency cogeneration;
- to issue reports in relation to authorisations, amendments or closure of facilities and in application for approval or authorisation of economic or remuneration regimes; and
- to implement and enforce rules contained in certain secondary regulation published by the Ministry for Ecological Transition, inter alia.
Renewable energy project development
i Project finance is still the norm
Plants operating under the 2007 FIT regime relied heavily on large amounts of financing from financial institutions, with leverage ratios between 80 per cent and 90 per cent being standard. The financial institutions responded favourably to the stability and predictability of the FIT regime, offering large amounts of non-recourse loans (or limited recourse basis) with fixed interest rates.29 The majority of commercial bank loans include several lenders ('club' loans) or have been syndicated.
Non-recourse project financing has continued to be the most common way of financing renewable projects in recent years, including merchant projects with no financial support. However, new renewable projects under the prevailing Specific Remuneration Regime are now facing more difficulties accessing loan financing. Currently, banks and other financial institutions are less willing to lend funds on a non-recourse (or limited recourse) project financing basis. Corporate debt and projects bonds are playing an increasing role and it is unusual to see leverage ratios for new projects above 60 per cent.
ii Merchant projects, PPAs and investment grade buyers
The costs for new renewable energy facilities have fallen to the point that plants located in optimal climate conditions can now compete with conventional forms of electricity generation without much large financial support (if any). In this context, the use of sophisticated long-term power purchase agreements (PPAs) is spreading in the Spanish market, especially as investment funds and utilities are gaining relevance. Most fixed-price PPAs apply to PV facilities with a term ranging from 8 to 12 years.
Large financial institutions, such as Banco Sabadell, Bankia, Banco Santander, CaixaBank, Triodos and Bankinter, have been among the most active in financing renewable projects through project financing structures in recent years. While financing merchant projects with no financial subsidies is already possible in Spain, terms and financing conditions can be improved by long-term PPAs, including interest rates, amortisation periods and banking fees. Banco Sabadell and Bankia are offering project financing to merchant projects in the absence of long-term PPAs, or involving PPA off-takers without investment grade. However, the majority of project finance lenders clearly prefer a long-term fixed price PPA that ensures a relatively stable and predictable revenue stream and investment grade buyers.
Distributed and residential renewable energy
With respect to distributed renewable energy, by the end of 2018, Spain was lagging behind other European countries in capacity installed. For instance, despite the higher solar irradiation, rooftop PV capacity for residential use was around one third the per capita capacity installed in the United Kingdom or Italy, and one fifth the per capita capacity in Germany or the Netherlands.
The 2013 Spanish Electricity Act had defined self consumption of electricity in a very restrictive manner and had imposed significant costs and administrative burdens to potential users.30 After several amendments to the 2013 Spanish Electricity Act, self consumption was redefined in 2018 as consumption of electricity by one or several consumers from facilities near or associated to the site of consumption.
The aim of the amendments introduced, mainly by RDL 15/2018, was to favour the deployment of distributed generation and, in particular, renewable energy by applying a less restrictive definition of self-consumption, introducing economic incentives, removing toll payments to self-consumption facilities and reducing the administrative burden to customers interested in installing self-consumption capacity. In particular, RDL 15/2018:
- updates the framework for the connection and energy supply to the electricity grid, and the economic compensations attached to different schemes;
- authorises self-consumption for a group of customers (beyond single owners);
- eases the regulatory process for small-scale producers; and
- simplifies the registry of self-consumption, that will have only statistical purposes.31
By the end of 2018, distributed PV capacity amounted to around 235MW. Since 2018, the growth of installed capacity has started accelerating. Additional installed capacity in 2019 amounted to 459MW and preliminary figures presented by the Spanish PV association (UNEF) indicate that additional capacity in 2020 amounted to around 596MW, with almost 20 per cent corresponding to the residential sector.
Conclusions and outlook
After the recent legislative and regulatory reforms introduced in Spain, especially the return to a stable and predictable Fixed FIT per MWh over a long period, and the approval of new targets and commitments for 2030, the Spanish renewable market is gaining momentum and is expected to provide attractive opportunities in the next decade. The most recent auction in January 2021 and the growing investment in distributed renewable electricity, mainly PV, will lead to significant expected investments in 2021 and 2022. Publication of a calendar with the planned capacity auctions for the years ahead will facilitate planning new investment in future years.
The approval of the new CCET Act provides a more stable regulatory environment for the next decade, facilitating new investment and corporate transactions.
1 Authors: José Antonio García, Pedro L Marín and Jack Stirzaker are principals at The Brattle Group.
2 The Lower House of the Spanish Parliament approved the CCET Act on 14 May 2021.
3 Directive 2001/77/EC of 27 September 2001 of the European Parliament and of the Council on the Promotion of Electricity Produced from Renewable Energy Sources in the Internal Electricity Market, OJ L 283/33 and Directive 2009/28/EC of 23 April 2009 of the European Parliament and of the Council on the Promotion of the Use of Energy from Renewable Sources and Amending and Subsequently Repealing Directives 2001/77/EC and 2003/30/EC; OJ L 140/16.
4 Institute for the Diversification and Energy Savings (IDAE), Renewable Energy Plan in Spain 2005–2010, August 2005, pp. 8, 15, 23 to 25; and IDAE, National Action Plan for the Renewable Sector in Spain (PANER) 2011–2020, 30 June 2010, p. 9.
5 Typically, the power station receives a 'tariff', which refers to financial support either in the form of a fixed payment per MWh for the sale of electricity that would substitute the market price (the Fixed FIT) or a premium per MWh in addition to the market price of electricity (the Premium FIT).
6 In 2019, renewable installed capacity in Spain increased by about 6.5GW. About 5.9GW of the new renewable installed capacity came from the auctions launched in 2016 and 2017. The remaining 0.6GW of additional renewable capacity was installed from 'merchant projects' with no financial support from the sale of its electricity.
7 The Preamble of Royal Decree (RD) 23/2020, 23 June 2020 refers to the urgency of the measures to development new renewable capacity before the lack of a regulatory framework that provides security and certainty to the necessary investments.
8 The Preamble of Royal Decree-Law (RDL) 23/2020, 23 June 2020; and Preamble of RD 96/2020, of 3 November 2020.
9 Recent data from REE concludes that, as of 31 March 2020, it is processing applications for renewable projects for more than 162GW, about 110GW coming from PV and the remaining 52GW from wind. Out of the 162GW, about 145GW have already obtained the access permits: about 102GW from PV and 43GW from wind.
10 For additional details, see RDL 9/2013 of July 2013.
11 Law 24/2013 of 26 December 2013 (the 2013 Spanish Electricity Act).
12 The five main secondary legislations include (1) RD 413/2014 of 6 June 2014; (2) Ministerial Order (MO) IET/1045/2014 of 16 June 2014 (the June 2014 MO); (3) the MO ETU/130/2017 of 17 February 2017 (the February 2017 MO); (4) RDL 17/2019 of 22 November 2019; and (5) MO RED/171/2020 of 24 February 2020 (the February 2020 MO).
13 February 2017 MO with the adjusted remuneration parameters for the second semi-regulatory period from 2017 to 2019.
14 In July 2013, Spain set the target return by reference to the average yields on the ten-year Spanish government bond calculated over the 10 years leading up to July 2013, 4.398 per cent, plus a 300 basis points risk premium, which resulted in a 7.398 per cent. See RD 413/2014 and subsequent June 2014 MO.
15 February 2020 MO with the adjusted remuneration parameters for the third semi-regulatory period from 2020 to 2022.
16 2013 Spanish Electricity Act, Article 14.7. The 2013 Spanish Electricity Act did not specify the 'competitive concurrence mechanism'. MO IET 2212/2015, of 23 October 2015 clarifies that 'the allocation of the specific remuneration regime . . . or will be undertaken through an auction procedure' (Article 3.1).
17 See RDL 1/2012 of 27 January 2012.
18 MINETUR, Resolution of 18 January 2016; METDA, Resolution of 19 May 2017; and METDA, Resolution of 27 July 2017.
19 Including, among others, RDL 23/2020, of 23 June 2020; RD 960/2020, of 3 November 2020; MO TED/1161/2020, of 4 December 2020; Resolution of 10 December 2020; and Resolution of 26 January 2021.
20 Pay-per-bid means that the price awarded coincides with the bid price.
21 The product to be auctioned will be the electricity produced, the installed power capacity, or a combination of both. However, irrespective of whether the auctioned product is capacity (MW) or energy (MWh), the winning facility will receive the same awarding price, in terms of €/MWh, multiplied by the energy sold in the wholesale markets, including day-ahead, intraday, adjustment services or balance markets. The new auction design clarifies that energy auctioned cannot be in physical bilateral agreements.
22 Exceptionally, the regulatory period will be set at 20 years, and only for (1) installations with high initial capital investments or (2) immature technologies facing significant technological risk.
23 If the auctioned product is energy, rather than capacity, both amounts will be the same.
24 RDL 23/2020, of 23 June 2020; RD 960/2020, of 3 November 2020.
25 The lowest winning tariff under the auction was determined as 14.89 €/MWh for solar PV projects with the maximum for this technology going up to 28.90 €/MWh. For wind projects, the minimum and maximum winning tariffs ranged between 20.00 €/MWh to 28.89 €/MWh. These FITs are significantly lower than the current average pool prices in Spain. Reasons that investors may be willing to accept FITs below the pool price include increased certainty of cash flows, increasing bankability, and easier access to grid connections compared to merchant operators.
26 See, for instance, Preamble of RDL 23/2020, of 23 June 2020.
27 Different milestones and deadlines include: (1) Admission of the application for Prior Administrative Authorisation (from 18 to 22 months); (2) Obtaining the Environmental Impact Statement (from 18 to 22 months); (3) Obtaining the Prior Administrative Authorisation (from 21to 25 months); (4) Obtaining the Administrative Construction Authorisation (from 24 to 28 months); and (5) Obtaining the Start-Up Authorisation (60 months). For additional details, see RDL 23/2020, of 23 June 2020.
28 For additional details see RDL 23/2020, of 23 June 2020.
29 'Limited recourse' describes financial arrangements in which equity investors issue guarantees to cover specific risks, typically for a limited period such as the construction period or the first months of operation. The loan becomes 'non-recourse' once the project has demonstrated its viability.
30 2013 Spanish Electricity Act, Article 9. Amended by RDL 9/2015, Law 1/2018 and RDL 15/2018.
31 Subsequent to this amendment, RD 244/2019 regulated the administrative, technical and economic conditions of self-consumption of electric energy, in particular, renewable energy.