By Benedict De Meulemeester on 22/08/2013
By Alejandro de Roca Jordà
Everyone knows that the goal of the Government through its Ministry of Energy is to come up with the ultimate solution to the financial imbalances of the Spanish electricity system. For that purpose, on Saturday July 13, they issued the new Royal Decree (9/2013) as unique derogatory provision and therefore new regulatory framework for the power sector.
The agenda has established a period of only 10 days for market players affected by government measures to issue comments. Given the depth and complexity of this issue every one considers this as an outrageously short period.
Measures, on the other hand, aim to put an end to persistent imbalances in the electrical system. Despite the measures already taken in 2012, the imbalance on the budget for 2013 will reach 4,500 million euros. So, as a Solomonic solution and as the main measure for correction, the government will be cutting the amount of 2,700 million euros to transport, distribution and renewable electricity system costs, another additional 900 million euros will be assigned to the State’s general budget and grid fees will be increased to raise another 900 million euros.
But, is it just increases to the regulated part of the energy bill or will these proposals for changes affect the current market price? Let’s analyze each of the points of the Decree:
This avalanche of measures affects all players in the Spanish electricity market (generation, transport, distribution, commercialization, consumption). The derogatory nature and, in some cases, the retro-activeness of the measures represents a clear threat to the legal security of the country. Affected companies could submit claims and requests for European arbitrage to avoid the deployment of the measures. We are at the beginning of a period of general uncertainty that could last 3 to 6 months.
As the measures are directly related to the regulated part of the power market, in principle, they should not have any direct effect on the wholesale market. However, the possibility exists that companies that have suffered the worst part of the adjustment and that currently manage over 60% of energy production, might consider balancing the losses on distribution activities to get more margin in Generation (market). This is something that is under the watchful eye of all agents. Additionally, this practice will become more and more difficult as the control mechanisms put in place seem to work properly and this type of action would be penalized with several million fines.
In addition, technologies that historically participate at zero price in the wholesale market (subsidized Renewables) now can participate in the market like any other technology. Apparently this might be the only measure that would have an effect on the wholesale market as soon as more details will be known. But in any case renewable energy will remain in the wholesale market at zero (variable) cost anyhow. Therefore, it shouldn’t have too much effect on wholesale prices. The situation is somewhat different for cogeneration, where an end of (over-)subsidization might reduce the amount of electricity being put on the grid, pushing up the marginal cost.
The measures, on the other hand, should be beneficial to bring stability to the Spanish electric system. For example: giving a blow to the continued growth of the deficit, limiting the continuous escalation of uncontrolled subsidy costs of and establishing a new market control entity.
Thus, the uncertainty over the measures bode a difficult autumn for the electricity market that remains at the mercy of what is going to happen the coming months. Will the devil be in the details?