Last Friday, Spain's Council of Ministers approved Royal Decree-law 17/2019, of 22 November, which adopts urgent measures to adapt the remunerative parameters affecting the electricity system and which establishes measures to tackle the closure of thermal power plants (the "Royal Decree-law").

The Royal Decree-law, which was published in Spain's Official Journal (Boletn Oficial del Estado) on 23 November 2019 and entered into force on the following day, adopts highly significant measures affecting electricity generation facilities, especially renewable energy, cogeneration (combined heat and power) and waste-to-energy plants. Specifically:

1. New rate of reasonable return for renewable energy, cogeneration and waste-to-energy plants receiving specific remuneration

The Royal Decree-law establishes new rates of reasonable return for renewable energy, cogeneration and waste-to-energy plants. Specifically:

1.1 In the case of renewable energy, cogeneration and waste-to-energy plants that, when Royal Decree-law 9/2013, of 12 July, entered into force had been allocated subsidised remuneration, their current rate of reasonable return (7.389%) is extended (subject to the exceptions below) for the next two regulatory periods (from 1 January 2020 to 31 December 2031). That rate is not reviewable during that period1.

1.2 The extension will not apply to: (i) the plants included in paragraph 1.1 that waive it prior to 1 April 20202; (ii) the plants in respect of which "arbitral or judicial proceedings are opened or that have previously been opened" as a result of the modifications to the remunerative scheme made pursuant to Royal Decree 661/2007, of 25 May3, unless "evidence is provided to the Directorate General of Energy Policy and Mining before 30 September 2020 of the early end to the arbitral or judicial proceedings and a certified waiver is provided against restarting or continuing those proceedings, or a waiver is provided against receiving the indemnity or compensation awarded as a result of those proceedings". This latter provision is analysed in greater detail below in paragraph 6.

1.3 As for other plants, which are entitled to receive the specific remuneration pursuant to Royal Decreelaw 9/2013, of 12 July (as well as those included in paragraph 1.2) the rate of reasonable return for the second regulatory period 2020-2025 is set at 7.09% (compared to the current 7.503%)4.

2. Extension of the term for reviewing the remuneration parameters for renewable energy, cogeneration and waste-to-energy plants

The Royal Decree-law establishes that the remuneration parameters for cogeneration and waste-to-energy plants (which, according to article 14.4 of the Spanish Electricity Sector Law would normally take place before the start of the new regulatory period and, therefore, before 1 January 2020) may be reviewed up to 29 February 2020.

The review must take into account the new rate of reasonable return set by the Royal Decree-law. Equally, adjustments should also be made on the basis of fluctuations in the return on operation received by plants whose operating costs are essentially dependent on fuel prices; adjustments should also be made for return on investment fluctuations caused by market price deviations, in accordance with article 22 of Royal Decree 413/2014.5

The new parameters would enter into effect on 1 January 2020. However, until the Order that implements the changes is approved, plants will receive remuneration in the form of remuneration on account according to the rates applied to date. Subsequently, and after the new rates have been approved, any resulting payment obligations or rights to payment generated during that period shall be settled as applicable according to the new parameters.

3. Rate of financial return applicable to generation plants in non-peninsular systems

The rate of financial return applicable to electricity generation plants in non-peninsular electricity systems6 for regulatory period 2020-20257 is set at 5.58% (compared to the current 6.503%). It does however reiterate the provisions of article 28.2, in fine, of Royal Decree 738/2015, of 31 July, which regulates electricity production and the dispatch procedure in non-peninsular territories, indicating that "variations to the rate of financial return used between two consecutive years may be higher, in absolute value, than 50 basis points". As a result, the rate of return for 2020 shall be 6.003% and shall be 5.58% between 2021 and 2025.

4. Procedure for awarding access and connection right connected to coal-fired thermal power stations or thermonuclear power stations set for closure

The Royal Decree-law establishes that, "when coal-fired thermal power stations or thermonuclear power stations are set for closure, and in order to encourage a fair transition process, the Minister for Ecological Transition may, pursuant to a prior decision from the Delegated Government Commission for Economic Affairs, establish procedures and requirements for awarding all or part of the power export capacity at network nodes affected by the closures to new power plants that use renewable energy sources and which, as well as technical and economic requirements, also take into account environmental and social benefits"8.

5. Procedure for awarding water concessions extinguished as a result of the closure of coal-fired thermal power stations or thermonuclear power stations

The Royal Decree-law establishes that water concessions associated with coal-fired thermal power stations or thermonuclear power stations and that are extinguished as a result of the closure of those power stations may be awarded to new initiatives or projects in the same geographical area by means of procedures that take into account "economic, social and environmental criteria". It also establishes that the use of the water associated with those initiatives or projects "shall prevail over the order or preference established in river hydrological plans or, otherwise, in article 60 of the recast Water Law, with the exception of supplying water to population centres, which shall at all times have priority".

Analysis of the provision related to the reasonable rate of return applicable to plants in connection to which arbitral or judicial proceedings have been opened

As mentioned in the paragraph 1, the Royal Decree-law establishes, in principle, that when "arbitral or judicial proceedings are opened or that have previously been opened" in respect of a plant "on the basis of the modification to the remunerative scheme made pursuant to Royal Decree 661/2007, of 25 May", that plant shall be excluded from the extension of the 7.389% rate. Those plants would therefore be entitled to a rate of 7.09% for the period 2020-2025 and to the revised rate that may subsequently be established for the period 2026-2031.

From the literal wording of the Royal Decree-law:

1. The exclusion would apply, among other scenarios:

  • even when, after the proceedings have started, the claimants, direct or indirect owners of the plant, have transferred all or part of the plants to a third party, reserving the rights that may be awarded in the arbitral or judicial proceedings.
  • even when, if the plant has more than one direct or indirect owner, only one or some of the owners have filed the claim.
  • even when the proceedings have been brought by third parties (although they are not owners of the plant) as a result of "assignment, subrogation, procedural succession or any other analogous or equivalent legal process".
  • even if the proceedings have been brought by "whosoever wish to exercise their rights as a result of them holding an investment in relation to those plants on the terms of the respective Treaty".

2. The exclusion may only be avoided if "evidence is provided to the Directorate General of Energy Policy and Mining before 30 September 2020 of the early end to the arbitral or judicial proceedings and a certified waiver is provided against restarting or continuing those proceedings, or a waiver is provided against receiving the indemnity or compensation awarded as a result of those proceedings".

3. If it is found that a plant has received indemnity or compensation as a result of those proceedings, with effect from 1 October 2020 and on the terms established by regulations, the body responsible for settlements shall deduct from the remuneration due to the plant the difference between the remuneration that the plant has received according to the extended rate of 7.389% and the remuneration it would otherwise have received according to the updated rate of reasonable return for the corresponding regulatory period.