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    The bulk of the Brussels electricity reform is in force in Spain without having avoided the price crisis.

    March 19, 2023 - CE Noticias Financieras


      The European Commission announced in September its proposal to reform the electricity market, after a year and a half of insistence by Spain. The objective was to reduce the dependence of gas prices on electricity in order to avoid a crisis like the current one in the future. The result was presented last week with a project that hardly introduces regulatory changes, but rather establishes recommendations and ideas whose implementation is left to the initiative of the Member States. So much so that most of the experts consulted agree that the core of the Brussels measures are already in force in Spain and their existence has not prevented the high prices of recent months, nor will they do so immediately when implemented.

      The main focus is to promote bilateral contracts between generator and consumer (the so-called PPAs, Power Purchase Agreement) by removing some barriers. This type of contract - of which Spain is the European leader, according to European Commission sources, but with a very low level of generation in relation to the total - has among its defects the risk for the buyer of ensuring that it will need a certain amount of energy for a long time (for example, 20 years). Brussels proposes that this risk be assumed by the State through public guarantees .

      Spain created the FERGEI fund in 2020, within the framework of the Statute of the Electro-intensive Industry endowed with 200 million euros per year up to a maximum of 600 million euros, to guarantee large energy consumers. But as confirmed by sources at the Ministry of Industry, Trade and Tourism, no guarantee has yet been formalized. "The context of volatility of energy prices experienced since the outbreak of Russia's war against Ukraine has prevented the setting of long-term prices for the signing of PPAs," they add from the ministry still headed by the candidate for mayor of Madrid, Reyes Maroto . Negotiations have begun to make use of the fund, such as that of the Association of Large Energy Consumers (AEGE), which has been planning for months a massive auction of renewables with these guarantees.

      Another key element is the promotion of auctions (the so-called Contracts for Difference in energy jargon, which establish a regulated price for a certain amount of energy and if the energy on the market exceeds that price the State keeps the difference, while if it is lower it is the State that has to compensate the promoter). Spain is one of the nine European countries with this system and there is even a timetable for bids up to 2025. In the last tender, held in the autumn of 2022, there was hardly any response, again due to the price crisis, because the companies with such high prices in the daily market (pool) are not compensated for agreeing low prices for the next 12 years and prefer to wait.

      Without touching the market

      "It is a very timid response and falls far short of what we consider necessary, which is to separate the electricity market from the gas market, to put an end to the rules for fixing the price of electricity with the most expensive source of generation and to establish it according to the average price," Portugal's Prime Minister Antonio Costa said at the Spanish-Portuguese summit. Spain, which followed that premise, reduced the volume of the daily market to the maximum by encouraging more renewable auctions and imposing them for older nuclear and hydro , but the European Commission rejected it, considering that it would scare off new investments.

      "How is it possible that power plants that were happy with an income of 50 euros per megawatt-hour - the average wholesale market price in recent years - can now receive an income of 100 euros, something doesn't add up," agrees Albert Banal-Estanol, professor of economics at Pompeu Fabra University. But Banal-Estanol believes that there are also "some positive things" such as the boost to "flexibility, demand response and storage" that will be "very important issues in terms of getting rid of gas" when there is a massive entry of renewables.

      AFRY senior consultant Javier Revuelta agrees on storage. So far the only tool to develop capacity payments (so that energy is available when needed) is to demonstrate that there is a market failure and now Brussels opens the door for the government to design mechanisms to attract storage if it detects that the capacity tools are not sufficient to integrate all renewables, in line with Spain's request to simplify the processes to avoid having to go through the procedure involving state aid.

      The details

      Fenie Energía's director of regulation, Javier Bescos, affirms that the European Commission transfers the price problem from the marginal market to the futures market (by maintaining the daily market as the main reference) and adds that the proposal even creates an additional conflict by forcing marketers "with more than 200,000 clients" to cover themselves and offer fixed price contracts for at least 12 months because "if the generator offers 300 euros you have to take it and it may not be a good price, just as in the daily market, we will lose the little negotiation flexibility we had". Regarding the possibility of having State guarantees -like the industry- he recognizes that "the European proposal is very generic and the same is a 10% guarantee, we have to see the details and the risk that will be transferred to the State".

      From the large industry, the general director of AEGE, Pedro González, believes that among the measures that most benefit them is the possibility of having more than one energy supplier - "until now I could not sign a PPA with Endesa if I have a contract with Iberdrola", he says - and"interprets" that the priority to PPAs in the auctions could indicate preferential access to the grid for renewables that have signed a long-term agreement with a consumer. "As this is a draft regulation, whose content is not definitive, everything will depend on how it is finalized and on the will of the States," explains the energy director of the auditing and consulting firm Mazars, Luis Deza.

      The negotiation

      Spain, very restrained in its reaction despite the fact that Brussels ruled out its proposal, has its sights set on the fact that there are still "many months of work" left in the negotiation, as the Secretary of State for Energy, Sara Aagesen , acknowledged on Friday. The day before, in a forum organized by El Economista, she urged the different agents of the sector to send any improvement to the Executive in order to present them at the next Energy Council on March 28. The intention -of Spain and Brussels- is that the reform be approved in the second half of 2023, before the European elections in mid-2024; which, a priori, limits the possibility of radical changes that (re)open major debates.


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