Windy changes in Spain
In May 2007, the Spanish government published a long-awaited decree that regulates renewable energy generation payments. Two issues have focused particular attention: the amount of, and caps to, renewable energy subsidies; the alleged retroactivity of the proposed regulation.
Renewable energy sources, and particularly wind energy, enjoy subsidies that can complement electricity market price (“Traditional hydro” is not considered to be renewable for these purposes). These subsidies represent a significant part of the energy cost in Spain, as shown in the figure below, based on data from CNE, the Spanish National Energy Commission.
Energy generation costs, and renewable energy sources (mostly wind) and combined heat plant subsidies are shown in red and salmon, respectively. Permanent costs (orange) mainly include subsidies to the Spanish archipelagos (Canary and Balearic islands) as well as payments because of past years’ deficits. Final electricity price is regulated by the government. In 2006 average final electricity price was 77.644 €/MW-h, slightly lower than average cost, 78.220 €/MW-h. For 2007, the forecasted figures are 88.810 €/MW-h and 101.244 €/MW-h. The deficit is forecasted to be 12.439 €/MW-h that makes a sizeable pink rectangle. Main reason is, on the one hand, greater fuel prices that have lead to increased production costs; and, on the other hand, the government reluctance to significantly raise final electricity price.
The previously mentioned figures are quite relevant for wind energy remuneration under the former regime: that of Royal Decree 436/2004 issued in March 12th, 2004. Wind generators could choose between being paid a regulated tariff or the wholesale market price plus a subsidy. The figures were given as percentages of a reference final electricity price, namely 90% of it in the case of regulated tariff, or 50% in the case of subsidy. The final reference price is similar to the average final electricity price, and wholesale price is closely related to production cost. The percentages above were established when electricity wholesale price was about 36 €/MW-h. As fuel prices have escalated, so electricity market price has done (from 28.74 €/MW-h in 2004 to 55.75 €/MW-h in 2006).
Wind generators have mostly chosen to be remunerated according the “market price plus subsidy” option. For instance, if we assume a reference price in 2004 equal to average final price (77,644 €/MW-h) and that wind generators sell at average 2004 market price (55.750 €/MW-h), they would be remunerated at 0.5*77.644 + 55.750 = 94.572 €/MW-h. Actual remuneration has been possibly lower, because reference price is not exactly average final price and periods of high wind generation are correlated with lower than usual electricity market prices. The new decree (Royal Decree 661/2007 issued in May 25th, 2007), as the former one, establishes that wind generators may choose between a fixed payment or the market price plus a subsidy. A key difference is that any wind generator that decides to go for the “market price plus subsidy” will have its income bounded.
Specifically, a cap and floor of the income have been established at 84.944 and 71.275 €/MW-h respectively. Note that the floor is quite close to the regulated tariff and, perhaps more significantly, that the width between floor and cap is relatively narrow. Besides, facilities operating prior to 2008 have the right to perpetually receive the more generous tariff of the previous decree, or the previous decree subsidies until 2012.
Another novelty is the provision of special subsidies for wind generators re-powering. The subsidies are capped to 7 €/MW-h, being granted by the government on a case-by-case basis. Only facilities operating prior to 2002 are eligible.
The above economic regime is intended to incentive wind power penetration. Therefore, new wind facilities will no longer be eligible once the national objectives are met. Specifically, the decree set this objective at 20,155 MW of installed capacity (presently, installed capacity is about 11,000 MW). The government initial draft significantly differs from the final decree. Generators argued that proposed changes in the regulation regarding existing plants were not only inconvenient, but possibly illegal under Spanish law. CNE was legally obliged to report on the proposed draft. As explained above, the final decree is somewhat closer to the position of generators and wind-generators makers that the initial proposal.
The remuneration based on market price plus subsidy has been justified on the basis of providing economic signals to efficiently operate wind generators. However, this scheme also remunerates wind investment according to market prices, whilst government objectives on renewable penetration are actually independent of whatever the market behaviour may be. The new decree provisions regarding caps and floors, and a maximum wind capacity to be subsidised possibly aim to balance these concerns. In the Spanish case, the combined value of these justifications seems to hover around 30 €/MW-h (the difference between a desired wind price of about 80 €/MW-h that regulation suggests, and an expected long-term electricity price of around 50 €/MW-h).
Check out my other articles on Power Generator
Source: EnergyPolicyBlog.com
In May 2007, the Spanish government published a long-awaited decree that regulates renewable energy generation payments. Two issues have focused particular attention: the amount of, and caps to, renewable energy subsidies; the alleged retroactivity of the proposed regulation.
Renewable energy sources, and particularly wind energy, enjoy subsidies that can complement electricity market price (“Traditional hydro” is not considered to be renewable for these purposes). These subsidies represent a significant part of the energy cost in Spain, as shown in the figure below, based on data from CNE, the Spanish National Energy Commission.
Energy generation costs, and renewable energy sources (mostly wind) and combined heat plant subsidies are shown in red and salmon, respectively. Permanent costs (orange) mainly include subsidies to the Spanish archipelagos (Canary and Balearic islands) as well as payments because of past years’ deficits. Final electricity price is regulated by the government. In 2006 average final electricity price was 77.644 €/MW-h, slightly lower than average cost, 78.220 €/MW-h. For 2007, the forecasted figures are 88.810 €/MW-h and 101.244 €/MW-h. The deficit is forecasted to be 12.439 €/MW-h that makes a sizeable pink rectangle. Main reason is, on the one hand, greater fuel prices that have lead to increased production costs; and, on the other hand, the government reluctance to significantly raise final electricity price.
The previously mentioned figures are quite relevant for wind energy remuneration under the former regime: that of Royal Decree 436/2004 issued in March 12th, 2004. Wind generators could choose between being paid a regulated tariff or the wholesale market price plus a subsidy. The figures were given as percentages of a reference final electricity price, namely 90% of it in the case of regulated tariff, or 50% in the case of subsidy. The final reference price is similar to the average final electricity price, and wholesale price is closely related to production cost. The percentages above were established when electricity wholesale price was about 36 €/MW-h. As fuel prices have escalated, so electricity market price has done (from 28.74 €/MW-h in 2004 to 55.75 €/MW-h in 2006).
Wind generators have mostly chosen to be remunerated according the “market price plus subsidy” option. For instance, if we assume a reference price in 2004 equal to average final price (77,644 €/MW-h) and that wind generators sell at average 2004 market price (55.750 €/MW-h), they would be remunerated at 0.5*77.644 + 55.750 = 94.572 €/MW-h. Actual remuneration has been possibly lower, because reference price is not exactly average final price and periods of high wind generation are correlated with lower than usual electricity market prices. The new decree (Royal Decree 661/2007 issued in May 25th, 2007), as the former one, establishes that wind generators may choose between a fixed payment or the market price plus a subsidy. A key difference is that any wind generator that decides to go for the “market price plus subsidy” will have its income bounded.
Specifically, a cap and floor of the income have been established at 84.944 and 71.275 €/MW-h respectively. Note that the floor is quite close to the regulated tariff and, perhaps more significantly, that the width between floor and cap is relatively narrow. Besides, facilities operating prior to 2008 have the right to perpetually receive the more generous tariff of the previous decree, or the previous decree subsidies until 2012.
Another novelty is the provision of special subsidies for wind generators re-powering. The subsidies are capped to 7 €/MW-h, being granted by the government on a case-by-case basis. Only facilities operating prior to 2002 are eligible.
The above economic regime is intended to incentive wind power penetration. Therefore, new wind facilities will no longer be eligible once the national objectives are met. Specifically, the decree set this objective at 20,155 MW of installed capacity (presently, installed capacity is about 11,000 MW). The government initial draft significantly differs from the final decree. Generators argued that proposed changes in the regulation regarding existing plants were not only inconvenient, but possibly illegal under Spanish law. CNE was legally obliged to report on the proposed draft. As explained above, the final decree is somewhat closer to the position of generators and wind-generators makers that the initial proposal.
The remuneration based on market price plus subsidy has been justified on the basis of providing economic signals to efficiently operate wind generators. However, this scheme also remunerates wind investment according to market prices, whilst government objectives on renewable penetration are actually independent of whatever the market behaviour may be. The new decree provisions regarding caps and floors, and a maximum wind capacity to be subsidised possibly aim to balance these concerns. In the Spanish case, the combined value of these justifications seems to hover around 30 €/MW-h (the difference between a desired wind price of about 80 €/MW-h that regulation suggests, and an expected long-term electricity price of around 50 €/MW-h).
Check out my other articles on Power Generator
Source: EnergyPolicyBlog.com
