Spain plans tariff deficit reforms

Utilities in Spain are keen to find out how the government is planning to fill the electricity sector’s €24 billion financial hole. Siân Crampsie reports from Madrid.

Spain’s electricity sector will find out in late June how the country’s government plans to tackle the tariff deficit.

The government says it will unveil a range of reforms to the electricity sector designed to eliminate the €24 billion deficit and boost investor confidence during the fiscal crisis.

The reforms will include financial measures such as taxes, and the energy industry has been lobbying to make sure the legislation proposed goes in its favour.

Utilities are keen to see tariff changes and integration of renewable energy into the energy system. The renewable energy sector, meanwhile, is concerned that efforts to reduce the tariff will harm the long-term growth of renewables.

Renewable energy already faces a difficult year in Spain after the government decided in January to temporarily suspend feed-in tariffs (Fits) for new renewable energy projects. Spain’s rapid growth in renewable energy and its generous Fit scheme have largely been blamed for the tariff deficit.

“It is a complex problem and blame is going around, but renewables have nothing to do with this,” says Tomas Diaz, external relations manager at Spanish photovoltaic industry association ASIF. “There has always been a deficit, even when there were few renewables.”

Diaz points out that Spain’s tariff deficit in 2002, when renewable energy capacity was low, was €1,110 million. It rose to about €4,000 million in 2005 and €5,000 million in 2008. “The real cause [of the deficit] is the control of tariffs by the government,” he says.

Electricity tariffs in Spain have two elements – a generation tariff that is set by market prices and an access tariff that is set by the government to cover the fixed costs of the system. The access tariff includes the costs of operating transmission and distribution networks as well as other costs such as Fits, capacity payments and premiums paid to cogeneration plant.

Too low to cover costs

The tariff deficit has arisen because access tariffs have not been set at a level high enough to cover costs. “The problem has been made worse because of renewables,” says Fernando Urquiza, head of regulatory issues at Unesa, the Spanish electricity association. “Five or six years ago the premium for the special regime [for renewables and cogeneration] was €1,000 million. Now it is €7,000 million. In the past four years Spain has added about 4,000MW of photovoltaic (PV) capacity and that has doubled the premiums.”

Spain’s government expects the country’s main utilities to shoulder the difference between costs and income. In May, rating agency Standard & Poor’s cut Iberdrola’s credit ratings and said the firm’s financial risk profile was “significant”, partly because of the tariff deficit. Enel, Endesa’s parent company, said in April that measures to reduce the tariff deficit would affect its financial performance.

“The deficit at the end of 2011 was €24 billion, but a big part of this has been sold to financial companies and the utilities are now financing only about half,” says Urquiza. “The situation has improved but the reality is that funds for investment are harder to find if you have to finance the tariff deficit. It makes their financial situation more difficult.”

The government’s target is to cut the deficit to €1.5 billion in 2012, and in March it passed legislation to boost system revenues by €1.4 billion and cut costs by €1.7 billion. The increase in revenues will come from an average increase in access tariffs of 6.3 per cent, and measures to reduce costs include a cut in capacity payments, a change in the way the system operator is remunerated and a cut in subsidies to coal-fired generators.

Supreme court ruling

Urquiza estimates that to eliminate the tariff deficit in 2013, in line with a ruling from Spain’s supreme court, access tariffs will have to rise by 30-35 per cent. Díaz agrees that tariffs in Spain must increase but says a continued moratorium on Fits would not improve the tariff deficit. “The cost of new PV plants in 2012 was just €70 million,” he says.

Díaz and Urquiza also point out that a moratorium on Fits is unlikely to have a major impact on the tariff deficit because energy firms are not planning major investment in renewable energy and because of the legacy of existing renewable energy plants that are receiving Fit payments.

“Facilities in operation will receive Fits for another 20-25 years,” says Urquiza. “The government could rethink this but it will be difficult.”

Siân Crampsie is a freelance journalist

This article first appeared in Utility Week’s print edition of 15 June 2012.

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