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The policy and regulatory framework

In the recent past, Spain undertook a radical systemic overhaul of the legal regime for the renewable energy sector by adopting the following pieces of legislation:

  1. Royal Decree-Law 9/2013, of 12 July 2013, adopting urgent measures to guarantee the financial stability of the electricity sector (RDL 9/2013);
  2. Law 24/2013, of 26 December 2013, on the Electricity Sector (Law 24/2013);
  3. Royal Decree 413/2014, of 6 June 2014, governing the generation of power through renewable energies, generation and waste (RD 413/2014), and establishing the Specific Remuneration Regime (see Section III.i);
  4. Ministerial Order IET/1045/2014, of 16 June 2014, establishing the remuneration parameters for installations for the generation of power through renewable energies, cogeneration and waste (Order 1045/2014); and
  5. Ministerial Order IET/1459/2014, of 1 August 2014, approving the remuneration parameters and establishing the award mechanism for the Specific Remuneration Regime for new wind and PV solar installations in the Spanish non-peninsular territories (i.e., the Balearic Islands, Canary Islands, Ceuta and Melilla).

Notwithstanding the consequences of these radical reforms, and the prospect of the above-noted changes likely to be pursued by the new government, operators in the sector have adjusted to the new regulatory framework, and the renewable energy industry is now experiencing significant development following publication of the government's plans to achieve 42 per cent of electricity consumption from renewable sources by 2030.

i The Specific Remuneration RegimeReplacement of the feed-in tariff scheme by the Specific Remuneration Regime

Pursuant to RDL 9/2013 and RD 413/2014, the former feed-in tariff (FIT) scheme in place under the special regime applicable to electricity produced from renewable energy sources (the Special Regime) was replaced by the Specific Remuneration Regime, which introduced a remuneration complement called the 'specific remuneration', to be paid on top of the electricity market price. The following are the main differences between the FIT and the specific remuneration:

  1. While the FIT was applied to the entire electricity production of a renewable energy plant without any limitation – the higher the production, the higher the revenues – the specific remuneration is paid on the basis of the installed power capacity of the PV plant and, as detailed below, is limited to the amount necessary to cover the 'costs required to compete on the market on an equal footing with other technologies, as well as to obtain a reasonable rate of return'.
  2. The FIT was fixed (subject only to periodic adjustments in relation to the consumer price index) and remained stable for 25 or 30 years from the commercial operation date, depending whether the renewable energy plant was governed by RD 661/2007 or RD 1578/2008 (in the case of PV solar installations). In contrast, the specific remuneration is subject to periodic revisions every three and six years following the procedures detailed below, with the next regulatory review due in December 2019.
  3. Finally, the FIT was determined by the technology and the commercial operation date of each particular installation, while the specific remuneration is calculated in relation to a hypothetical determination of the parameters of each installation according to different categories of 'standard facility' – a concept that plays an essential role in the calculation of the specific remuneration (see below).
Components of the specific remuneration

In exchange for electricity generated from renewable sources, renewable energy installations now receive the market price (payable by the Spanish electricity network upon receipt of the power produced from the plant) plus the specific remuneration, consisting of:

  1. a return on investment (RI), which is calculated in relation to the installed power capacity of the plant plus enough to cover, if necessary, the investment costs of a standard facility (as detailed below), provided that those costs are non-recoverable through the sale of electricity at market price; and
  2. a return on operation (RO), which will cover the difference, if any, between the operating costs of the standard facility and the revenues of the standard facility from the sale of electricity at market price.

The calculation of the specific remuneration is made for the entire regulatory life term of the installation (pursuant to Order 1045/2014).

Reasonable rate of return

The reasonable rate of return is the cornerstone of the Specific Remuneration Regime. To this end the specific remuneration shall not exceed the minimum level necessary to cover the costs, thus enabling the undertakings or sponsors of renewable energy plants to compete on equal terms with undertakings using other technologies; and this reasonable return is to be calculated in relation to a standard facility.

The reasonable rate of return shall be calculated, before taxes, on the interest rate yielded by 10-year Spanish government bonds plus a given spread. As explained above, the new CNMC methodology bases the calculation of the reasonable rate of return on the WACC.

The role of the standard facility

The specific remuneration is not calculated on a case-by-case basis but by reference to a standard facility, which will apply to one or many installations with standard, uniform or similar characteristics.

The different categories of standard facility (referred to as IT categories) and the applicable economic parameters are detailed in Order 1045/2014. These parameters will vary according to the technology, the power capacity, the commercial operation date and other relevant features of the installation.

The specific remuneration applicable to a particular installation will depend on the economic parameters corresponding to the relevant IT category.

Temporary character of the specific remuneration: regulatory periods

The specific remuneration is calculated for a regulatory period of six years, divided into two three-year regulatory half periods. The first period runs from 14 July 2013 to 31 December 2019.

During each regulatory half period and regulatory period, the specific remuneration is subject to corrections and adjustments linked to different factors, such as the number of operating hours in a given year or the electricity market price. Furthermore, the economic parameters of the specific remuneration (always corresponding to an IT category and thus to a standard facility) might be adjusted annually by the regulator (i.e., the CNMC) and reviewed by the government at the end of a regulatory period or regulatory half period (i.e., every six or three years, as the case may be).

Economic parameters of the specific remuneration

The economic parameters of the specific remuneration are as follows:

  1. the RI: calculated per power unit (€/MWh);
  2. the RO: applicable to those technologies with estimated operation costs per power unit higher than the average market price;
  3. the regulatory life term: the specific remuneration shall be paid during the regulatory life term of the standard facility (as determined in the corresponding IT category). The installation might be still generating power after the expiry of the regulatory life term, but this will only be remunerated at market price (i.e., it will no longer have any right to the specific remuneration incentive);
  4. the net value of the asset: equal to the value of investment of the standard facility per power unit at the initial regulatory half-period life term, and calculated according to the methodology included in Annex VI of RD 413/2014; the formula for the calculation of the net asset value includes the standard value of the initial investment.

Order 1045/2014 establishes the value of the initial investment for each IT category, and this value remains unaltered throughout the regulatory life term of the installation. Note that, pursuant to Article 13 of RD 413/2014, the calculation of the net asset value does not take into account any costs arising from applicable regulations or administrative decisions issued by relevant regions or municipalities but not throughout the whole territory of the Kingdom of Spain; for instance, compensation payable to municipalities for the use of land protected from urban development, and provided for in regional town and country planning laws, would not be included as a cost for the purposes of calculating the net asset value.

Specific remuneration correction and update mechanisms

The first regulatory period fell between the entry into force of RDL 9/2013 (14 July 2013) and 31 December 2019. Therefore, the first regulatory half period ran from 14 July 2013 to 31 December 2016.

The specific remuneration shall be reviewed after each regulatory period and each regulatory half period. In this context, note that all the economic parameters set out by Order 1045/2014 for each IT category can be modified, with the sole exception of the regulatory life term and the standard value of the initial investment. Note that the reasonable rate of return, although not an economic parameter, is also subject to periodic revision at the end of every regulatory period. The applicable spread may also be modified by means of a law.

The adjustment mechanisms of the specific remuneration are as follows:

  1. adjustment of the specific remuneration (i.e., the revenues obtained by the relevant plant) as a result of the number of equivalent operating hours; and
  2. adjustment because of market price deviations.

The periodic review and update mechanisms of the specific remuneration parameters established in RD 413/2014 are as follows:

  1. review of the differential applicable for the determination of the reasonable rate of return;
  2. review of remuneration parameters; and
  3. review of the standard income from the sale of electricity.

In summary, the adjustments made annually to the specific remuneration reflect factual matters that occur during the year, namely the number of equivalent operating hours of the standard facility during the year (e.g., whether the number of hours is lower or higher than originally expected because of climate conditions) and the market price deviations (e.g., if there is an increase in the market price because of a higher demand for power, the specific remuneration should 'complement' the price paid for the electricity and not increase it, therefore the specific remuneration might be lowered if the price of the electricity increased during the year).

In contrast, the periodic reviews are aimed at revisiting the parameters of the specific remuneration in light of other criteria (irrespective of factual matters regarding energy production), such as the overall evolution of the Spanish economy. As the reviews imply a more in-depth analysis of the applicable specific remuneration overall, their frequency is limited to three to six years (depending on whether the relevant parameter is to be reviewed each regulatory half period or each regulatory period).

ii Policy background

See the preceding section for details of the policy background.

iii Regulatory framework

The general regulation of renewable energy (and particularly the economic regime) is the responsibility of the Spanish Parliament and is developed by the central government through royal decrees, and by the Ministry of Energy and Industry through ministerial orders and resolutions. The Spanish autonomous regions are entitled to regulate the development of renewable energy projects and may introduce additional requirements in relation to projects to be developed in the relevant territories.

As provided for in Law 3/2013 of 4 June 2013, the independent regulator, the CNMC, plays a significant role in the development of renewable energy projects. To this end, the CNMC has, inter alia, the following authority:

  1. to establish, by means of circulars, the toll calculation methodology;
  2. to supervise the management and allocation of connecting capacity, the time spent by transmission and distribution companies in carrying out connections and repairs, and the mechanisms designed to ease congestion in network capacity;
  3. to supervise the conditions and charges for connection applicable to new producers of electricity;
  4. to manage the system for guaranteeing the origin of electricity from renewable sources and from high-efficiency cogeneration;
  5. to publish the end prices of the electricity market, based on information from the market operator and system operator;
  6. to issue reports in applications for authorisation, amendment or closure of facilities, in the process of energy planning, and in applications for approval or authorisation of economic or remuneration regimes;
  7. in relation to legislation on energy, to issue circulars to implement and enforce rules contained in royal decrees and in orders of the Ministry of Industry, Energy and Tourism, which authorises the CNMC for that purpose; and
  8. to perform any other functions that may be conferred on it by act or royal decree.
iv Procedural requirements

The development of renewable energy projects requires fulfilment of the following steps.

Access and connection to transmission and distribution networks

To obtain access to and connection permits for transmission and distribution networks, the following conditions apply:

  1. Prior to any request for access to the grid, a grid bond should be deposited with the central government or with the autonomous region (as applicable) for an amount of €10/kW. This grid bond shall be cancelled upon obtaining the relevant authorisation for commissioning.
  2. Access and connection permits shall last for five years. If the relevant installation ceases to pump electricity into the grid for more than three years (other than as a result of temporary closure of the facility), the relevant permits shall expire.
Substantive administrative permits

The following administrative permits are required for the construction and commissioning of renewable energy plants:

  1. preliminary administrative permit: this permit is managed together with the environmental impact assessment and allows the construction of a specific installation under specific conditions, and establishes the time frame for the request of the approval of the relevant project;
  2. administrative authorisation for construction: allows the construction of the relevant installation. The developer should submit a construction project together with a responsible declaration evidencing compliance with the applicable rules. It is possible to manage and obtain the administrative authorisation for construction and the preliminary administrative permit simultaneously. Note that the environmental impact assessment should be granted prior to the administrative authorisation for construction; and
  3. authorisation for exploitation: once the project is executed this authorisation permits installations to be connected to the grid and commercial exploitation to commence.

The authority to grant these authorisations lies with the General Directorate of Energy Policy and Mines (DGPEM) in relation to installations with a capacity over 50MW or when they exceed the territorial limits of one autonomous region. In other cases, the authority to grant the authorisation lies with the relevant autonomous regions. The term for the grant of the relevant authorisations is one year for those granted by DGPEM and six months in other cases. If no permit is granted within this term, it shall be deemed that the request has been denied.

Contracts with grid operators

The developers of renewable energy plants ought to enter into a contract to regulate the technical relationship between them and the relevant distribution company. The contract should regulate at least: (1) connection and measurement points; (2) quantity and quality features of the energy supplied (capacity, forecast of production); (3) grounds for termination or amendment of the contract; and (4) conditions for the exploitation of the connection.

Specific Remuneration Regime Registry

A necessary condition of eligibility for the Specific Remuneration Regime is that the installations are registered with the Specific Remuneration Regime Registry. This registration has two phases: pre-assignment status and exploitation status. The authority to approve the Specific Remuneration Regime registration lies with DGPEM. Following the most recent auctions, the registration procedure has been as follows:

  1. Specific Remuneration Regime registration with pre-assignment status: once the result of the auction has been published, the relevant projects should be registered with the Specific Remuneration Regime provided that the relevant developers have deposited the corresponding guarantee (€60/kW). DGPEM then has three months to formulate and issue the resolution to register the projected installations with pre-assignment status. This term may vary in each auction. The developer then has 12 months to submit the construction authorisation to DGPEM.
  2. Specific Remuneration Regime registration with exploitation status: once the plants concerned have been built within the term established by DGPEM, the developers should request Specific Remuneration Regime registration with exploitation status within one month of completion of construction.
Administrative Registry for Production Installations under the Special Regime

All installations for the production of electric energy (whether receiving the specific remuneration or not) should be registered with the Administrative Registry for Production Installations under the Special Regime (RAIPRE). The procedure for RAIPRE registration consists of two phases: preliminary (once the authorisation for provisional exploitation for testing is obtained and the technical contract with the grid has been entered into) and final registration (once the authorisation for final exploitation has been obtained). Both the preliminary and the final registration shall be agreed within one month of the registration request.

The authority for approval of the registration lies with the same authority that is competent for the granting of the administrative authorisation (i.e., DGPEM or the relevant body in the applicable autonomous region).

In addition to the above requirements, it is necessary to obtain the relevant environmental authorisations and licences to be granted by the relevant autonomous region, as well as municipal licences for works and operation. Depending on the location of the relevant plant, certain additional licences may also be required (e.g., use of public waters, rights of way or passage, easements).