On 10 June 2014, Royal Decree 413/2014 of 6 June which regulates the generation of electricity through renewable energy sources, cogeneration and waste ( “Royal Decree 413/2014”), was published in the Spanish Official Gazette (Boletín Oficial del Estado). Royal Decree entered into force on 11 June.

I. Introduction

As described in the Royal Decree’s Explanatory Memorandum, the targets for the implementation of electricity production technologies using renewable energy sources, cogeneration and waste have been quickly and continually surpassed. As a result, successive reviews of the regulatory framework of such technologies have taken place between 2008 and 2013 (Royal Decree 1578/2008, Royal Decree‑Law 6/2009, Royal Decrees 1003/2010, 1565/2010 and 1614/2010, Royal Decree‑Laws 6/2010, 14/2010, 1/2012, 13/2012, 20/2012 y 29/2012, Laws 15/2012 and 17/2012 and Royal Decree‑Law 2/2013). The aim of these reviews was to achieve the strict adherence to the principle of “reasonable profitability” and ensure the financial sustainability of the electricity system.

Royal Decree‑Law 9/2013, of 12 July, on Urgent Measures to guarantee the Financial Stability of the Electricity System, was approved for the same purpose. It served as an initial piece of a general reform to the energy system and establishes, among others, the principles of a new legal and economic regime for production technologies which use renewable energy sources, cogeneration and waste (this Royal Decree‑Law entered into force on 14 July 2013).

The principles contained in Royal Decree‑Law 9/2013 have been reflected in a new law: Law 24/2013, of 26 December, of the Electric Sector.

According to the provisions set out in such regulations, Royal Decree 413/2014, establishes a new legal and economic regime for electricity production facilities using renewable energy sources, cogeneration and waste.

II. New economic framework

Below, we briefly highlight some key aspects of the new economic framework:

  1. The facilities will be classified in different “standard facilities” given certain classifications, by virtue of a Ministerial Order, depending on their technology, power, age, etc.

These “standard facilities” will receive remuneration for the sales of energy valued at market price and, if applicable, an additional remuneration for investment (RI, Remuneration on the Investment) and operation costs (RO, Remuneration on the Operation) which are not covered by the market price.

The criteria used to calculate such remuneration for each “standard facility” apply throughout its regulatory lifetime . They are equivalent to those related to the activity of an efficient and well‑managed company, and take into consideration the standard energy sales revenues at market price as well as the investment and standard operating costs – providing that these costs correspond to the electricity production activity, and that they arise from administrative rules or acts applicable throughout Spanish territory.

Likewise, other parameters that will be applied specifically to calculate such remuneration include: the remuneration on the investment, the remuneration on the operation, the regulatory lifetime , the operating threshold, the number of minimum and maximum operating hours (with annual and quarterly corrections), the average market price, other operating incomes (i.e. for cogeneration, those revenues coming from the production of useful heat), the net value of the asset, an adjusting coefficient, etc.

  1. The “reasonable profitability” of the facilities will be calculated, before taxes, using the average return in the secondary market of 10‑year benchmark government bonds, plus a relevant financial spread. For pre‑existing facilities, it will be calculated (also before taxes) on the average return in the secondary market of the 10 years prior to 14 July 2013, of 10‑year benchmark government bonds plus 300 basis points (7.398%).
  2. The following reviews to the economic framework are to be undertaken on a regular basis: (i) the remuneration values in relation to the operation of the facility. These will be reviewed annually for technologies whose operating costs essentially depend on the price of fuel; (ii) the estimates of standard energy sales revenues at market price for standard facilities, as well as the remuneration parameters directly related to them. These are to be reviewed every three years; (iii) all the remuneration parameters may be reviewed (except for the regulatory lifetime and the standard value of the initial investment), as well as the value for the definition of the reasonable profitability amount, every six years.

The first regulatory period (six years) goes from 14 July 2013 to 31 December 2019. Within this, the first semi‑period (three years) goes from 14 July 2013 to 31 December 2016.

  1. In order to establish the specific remuneration regime for new facilities, competitive tendering procedures shall be used (these shall be regulated by Royal Decree), and specific remuneration parameters shall be set out by means of a Ministerial Order.
  2. New remuneration parameters for existing facilities (each standard facility by virtue of technology, power, age and any other segmentation that may be necessary), and the corresponding new remuneration (applicable from 14 July 2013) will be determined by means of a Ministerial Order pending approval.

III. Reorganisation of the administrative proceedings

This reorganisation includes the following:

  1. Renewable, cogeneration and waste facilities are no longer included in the so‑called “special regime”. Additionally, the relevant entry within the administrative registry of electric energy production facilities under the special regime  ‑ “Raipre” ‑ and their registration with the remuneration pre‑allocation administrative registry – “Prefo” ‑ are both removed.
  2. The mandatory registration with the electric energy production facilities registry (both state‑run and regional) is to be maintained, differentiating between a previous and a definitive registration.
  3. A specific remuneration regime registry has been established (under the competence of the Directorate General for Energy Policy and Mines), which registers facilities’ at pre‑allocation status (subject to the lodging of a security) and at operating status.

Pre‑existing facilities will automatically be registered within this specific remuneration regime registry (in accordance with the information of the settlement system or of the remuneration pre‑allocation administrative registry). Furthermore, there is the possibility of requesting the amendment of any inaccuracies which could be contained within said registry after automatic registration.

IV. Other relevant issues

Among other provisions, the following issues are of note:

  1. There is a new definition of “installed power” (although, for pre‑existing facilities it will remain as the nominal power, for specific remuneration regime purposes).
  2. A new obligation of adscription to a generation control centre is contemplated (5 MW and 0.5 MW in non‑mainland territories) as well as an obligation regarding the power‑factor control, with a transitional period lasting until 31 May 2015.
  3. A new “sum of powers” rule is established, pursuant to the joint consideration of the facilities, for remuneration purposes (this will apply to pre‑existing facilities).
  4. A new regime, which relates to the modifications of facilities, is regulated for remuneration purposes.
  5. A new obligation has been imposed, by virtue of which the modality of representation must be unique for the purposes of the generation market settlements and for the purposes of the specific remuneration. Moreover, the representative must be the same before the electricity market operator (OMIE) and those referred to the specific remuneration (CNMC). There is a transitional period of three months to comply with this obligation.
  6. It is envisaged that a new specific remuneration regime could be established under certain conditions for a total maximum power of 120 MW, except for solar thermal, photovoltaic and wind technology.
  7. It is also envisaged that a specific remuneration regime could be established for new wind and photovoltaic facilities, as well as for modifications to pre‑existing wind facilities in non‑mainland territories.
  8. Certain specificities apply in respect of settlements made since 14 July 2013 (with the possibility of compensating them with the price received in the electricity pool). Specific features shall also be mentioned regarding settlements of energy attributable to the use of fuel in connection with facilities using non‑consumable renewable energy as primary energy.
  9. Finally, Royal Decree 413/2014 also regulates: (i) the rights and obligations of facilities producing electricity from renewable energy sources, cogeneration and waste; (ii) the market participation regime and the adjustment services system, as well as the technical standards for access and connection to the grid.

The regulatory changes contained in Royal Decree 413/2014, as well as in the Ministerial Order to be passed, are likely to have a significant negative impact on many owners of affected facilities (this may be compounded by changes resulting from other rules contained in the energy reform, as is the case of the application of a coverage ratio on monthly settlements, the obligation to cover the tariff deficit and the interruptibility service costs as well as costs which arise from the power availability and hibernation auctions).

Contentious‑administrative appeals can be filed before the Supreme Court against these regulatory changes. Additionally, actions for financial liability against the State as well as arbitration proceedings under the Energy Charter Treaty may also be brought. There are numerous arguments supporting such legal actions, which will seek to obtain a declaration that these regulatory changes are invalid and compensation for damages.