New Regulatory Framework: RD 960/2020
On November 3rd, the Spanish Government approved the “Royal Decree 960/2020 on auctions to harness the full potential of renewable energies in economic reactivation”. This decree builds on the guidelines set by Royal Decree-Law 23/2020 in June and completes the regulatory framework for renewable auctions in Spain.
Key provisions of RD 960/2020 are related to:
A. Guidelines for renewable auctions to be organised between 2021 and 2030. Auctions will be organised around a pay-as-bid allocation method for energy or capacity. The specific characteristics of each auction (schedule, product auctioned, amounts, etc.) will be governed by future ministerial orders.
B. Establishment of the New Renewable Energy Economic Regime (REER) applicable to generation facilities awarded with auction products. The REER works as a contract-for-difference in which generators will receive or pay the difference between the fixed pay-as-bid price and market prices. The balance (deficit/surplus) will be calculated by OMIE (Market Operator) and allocated to each consumption unit participating in the organised wholesale spot market (day-ahead and intraday markets).
A. Guidelines for next RES auctions
B. Key elements of the Spanish Renewable Energy Economic Regime (REER)
C. Indicative auction calendar (2021-2025)
Minimum capacity volumes auctioned each year (2020 – 2025) MW
Cumulative (2020 – 2025)
(biogas, hydro, tidal, etc.)
Source: MITECO (pending for final approval)
MRC Vision on RES auctions
In the next 10 years, the Spanish power market will be mainly driven by the surge of renewable capacity after 7 years with almost no capacity additions (2012-2018). The Governmental official plan (National Energy and Climate Plan) envisages a big push in renewable capacity for the next decade.
Source: REE and PNIEC (NECP)
These expectations are aligned with market movements that show a big appetite for developing renewable projects in Spain.
Requests for connection and access permits may be considered as proxies of developers’ plans for renewable investment.
As of September 2020, access permits granted to new projects amount to 30.7 GW for wind and 90.5 GW for PV while wind installed capacity is 26.3 GW and there are 9.3 GW of PV in operation. On the other hand, connection requests amounting to more than 113 GW have already been denied by REE (17.3 GW of wind and 96.2 GW of PV).
Connection capacity requests do not have to be directly linked to feasible projects. Developers can ask for capacity in several nodes and some speculative practices related to connection permits have been detected. In any case, cumulative connection capacity requested in the last years (71 GW of wind and 216.5 GW of PV) is a valuable indicator of investors’ appetite for renewable capacity.
Status of Renewable (Wind and PV) connection and access permits: in operation, permits granted and permits denied.
The Spanish electricity system has experience with renewable auctions. In 2016, 200 MW of biomass and 500 MW of wind capacity were awarded. In 2017, two different auction sessions were organised awarding 3,000 MW and 5,037 MW respectively. This capacity was tendered to allocate the Specific Renewable Remuneration Regime among PV and wind projects.
During 2019, the pace of renewable installations increased considerable due to the expiration date for the commissioning of allocated capacity in 2017 auctions. According to the auctions’ regulation, all the participants had to pay a 60 €/kW guarantee that can be executed after the breach of any of the deadlines established. Three deadlines were set: first, identification of the projects; second, getting the administrative authorization to build; and third, registering the project in the RAIPEE (Administrative Register of Electric production facilities) meaning that the plant is already connected and dispatching. The noncompliance with any of these milestones leads to the partial execution of the guarantees.
According to the Government, around 2,800 MW were not commissioned on time and project owners will lose 103 Million € in executed guarantees. The reasons for noncompliance are diverse: while some developers claim that the schedule was too tight, others affirm that some promoters participated on the auction without carrying out all the preliminary actions required (due diligences, administrative work preparation, etc) to be ready for project development.
Despite the partial non-compliance with project development milestones (35% of awarded capacity was not commissioned on time) auctions held in 2017 boosted the development of renewable capacity in Spain after 6 years with the sector at a standstill,
The effects of the Great Recession affected the Spanish renewable sector but the drastic stop in renewable capacity commissioning was mainly due to an unstable regulatory framework. Between 2010 and2014 several electricity market reforms enabled the Spanish Government to decrease the regulated remuneration rate of renewable generation retroactively. Because of this remuneration cut, international investors litigated with the Spanish Government for a total of 7,600 million euros in different arbitration processes.
Nevertheless, in 2020, the situation on the Spanish renewable energy sector is entirely different.
A new regulatory framework revised upwards the remuneration rate granted to old renewable facilities (affected by the previous remuneration cuts) upon cancellation of arbitration procedures and waiving of compensations. Several renewable investors have already accepted the new remuneration scheme waiving the compensations related to arbitration sentences. In addition, some renewable capacity is currently being commissioned without any regulated remuneration (with 100% merchant risk).
It is clear that investors’ appetite for renewable generation assets in Spain is high in view of recent M&A and the amount of renewable capacity connection requests. Giving this market environment, the need for a regulated remuneration and auction scheme may be questionable.
Still, the ambitious renewable generation objectives set by the National Energy and Climate Plan (NECP or PNIEC in Spanish) can be difficult to reach without additional Government incentives.
The following graph presents NECP trajectory for wind and PV capacity compared with the tentative renewable auction calendar (with objectives on minimum capacity to be auctioned each year) published by the Government. We assumed a 2-year delay between the auction date and the commissioning of the generation capacity to enable the comparison with NECP targets.
The minimum capacity to be auctioned up to 2025 is enough to cover 48% of wind capacity additions required by the NECP and 54% of the PV objectives. To fully reach NECP objectives the remaining capacity shall be covered by either higher capacity auctioned or merchant generation without regulated revenues.
Source: PNIEC and renewable auction calendar (Government)
We understand the objectives pursued by the Spanish Government with the new Renewable Energy Economic Regime (REER): to schedule the deployment of renewable capacity in the next decade and to facilitate project financing with a guaranteed stable revenue.
In addition, energy prices resulting from similar renewable auctions (e.g. Portugal) are far below Spanish reference market prices. Spain Solar Futures (tradeable on OMIP) reference prices for the next decade range from 45-46 €/MWh for delivery in 2021 to 35-36 €/MWh for delivery in 2030. If we consider PV forward prices as a proxy, auctions may result in savings for the system decreasing wholesale prices paid by suppliers. Renewable developers may be willing to exchange lower prices for more stable revenues.
Therefore, the REER is expected to be a revenue for the Spanish Electricity System.
Understating the pros, we also see some deficiencies and eventual problems related to the application of the REER.
This REER re-establishes a specific economic regime for renewable generators, when the previous trend was to include them in the market and let them be market driven. Many distortions are already present, since a large part of the energy sold in the day-ahead market perceives additional revenues. This new regime exacerbates the difference since it only applies to new capacity. These new market distortions may eventually hinder the overall operation and efficiency of the Spanish electricity market.
The system is not technology-neutral, providing different figures for each technology and reserving specific quotas for technologies in the auctions. In the past, significant problems were created to Spanish power consumers for the development of expensive technologies. In our opinion, technology neutral auctions can result in cost reductions.
On the other hand, the system proposed acts as a control over price spikes: generators swap a variable revenue stream for a stable one, while suppliers increase their cost of energy in exchange of avoiding price spikes.
However, it has been limited to new capacity (hence, part of the market is not subject to this price control). It could be extended to the rest of the market if a reliability option mechanism is included, where all existing and new capacity are able to bid, which includes competition between existing and new capacity. Again, a two-market system will be in place, with distortions whose consequences are difficult to predict.
There are other specific drawbacks that need highlighting:
· The role of storage is disincentivized. Hybridisation with storage is not allowed if the unit buys energy in the market (i.e. recharges the battery).
· Units included in the REER are not allowed to close PPA for exceeding energy. We do not see a clear reason behind this measure, and it will affect the ability of both generators and suppliers to cover their positions.
· Units are required to become responsible for their balance and constitute offer units, limiting its portfolio bidding ability and significantly harming the role of market representatives as deviation optimizers.
· The cost of the REER will be paid by suppliers when auction prices are above market prices. The cost of this measure could be better included in the regulated part of tariffs (as was previously done with FIT incentives), to allow suppliers to know the cost in advance and not to distort forward markets, which will become less liquid.
Even though this system is expected to boost the development of new capacity in the system, the entry of this capacity under “pseudo-guaranteed” prices in the market will affect the composition of the supply curve in the Spanish system and thus increase the uncertainty and volatility the merchant players will find in the market. Despite the profits initially foreseen from merchant units, a comprehensive analysis of the implications these auctions will have on the electricity prices is key to make adequate and sound investment decisions. MRC with its proprietary expansion and dispatch models of the Spanish system enjoys a privileged position to provide market advisory services to investors in the market.
To get additional information on the Renewable Energy Regulatory Framework in Spain please contact with:
José María López
Jose Manuel Menéndez