On 10 June, Spain's Official State Journal published Royal Decree 413/2014, of 6 June, which regulates the production of electricity from renewable energy sources, cogeneration and waste (the "Royal Decree"), which entered into force on 11 June. The Royal Decree establishes a new legal and economic framework for these activities with the backdrop of the substantial reforms that have been implemented in recent years to improve the efficiency of Spain's electricity sector.
According to the Royal Decree's Statement of Purpose, it aims to bring about an in-depth review of the regulations governing the remuneration of the sector with the aim of covering the costs necessary to allow renewable energy, combined heat and power (cogeneration) and waste-to-energy generation technologies to compete on an equal footing with other technologies while obtaining a reasonable rate of return.
In this context, the Royal Decree proposes a new system of specific remuneration – on top of the remuneration received for the sale of energy valued at market rates – and establishes its calculation formulas and remunerative parameters for each category of standard plant, according to the classifications made in the Royal Decree, while also establishing a reasonable rate of return.
This newsletter contains a brief summary of the remunerative regime established by the Royal Decree.
1. Scope of aplication
The new regulations apply to all renewable energy, cogeneration or waste-to-energy plants independently of their power capacity.
In particular, article 2 of the Royal Decree classifies plants into three categories that, in turn, are divided into different groups and sub-groups. Hybrid plants using a combination of fuels and technologies are also provided for.
As we will explain below, the Royal Decree applies to both existing and new plants.
2. Specific remuneration
The Royal Decree establishes what it calls a "retribución específica" (specific remuneration) so that plants that generate electricity using renewable energy, cogeneration or waste-to-energy technologies can cover the costs necessary to compete on an equal footing with other technologies while obtaining a reasonable rate of return in reference to the standard plant applicable in each case.
For these purposes, a standard plant – to be determined by ministerial order – will be set as a reference and allocated to each plant according to its characteristics.
Reasonable rate of return is defined in the Royal Decree as a return before tax of around the average yield of 10-year Spanish Government Bonds on the secondary market during the 24 months preceding the month of May in the year prior to the start of the regulatory period, plus a differential.
The Royal Decree establishes a differential of 300 basis points for the first regulatory period (until 31 December 2019).
2.1 Total remuneration
The Royal Decree establishes a new remuneration framework in which certain plants are able to sign up to receive the specific remuneration to supplement the revenues that they obtain from selling energy on the market. The specific remuneration has two different components:
- an investment component; and
- an operation component.
Exceptionally, an investment subsidy may be awarded when it contributes to reducing the cost of producing electricity in non-peninsular Spanish territories.
2.2 Eligible plants
In particular, the specific remuneration applies to:
- Existing plants:
- To those plants that had already been awarded a premium-based remuneration when Royal Decree-Law 9/2013, of 12 July, which adopted urgent measures to guarantee the financial stability of the electricity system ("RDL 9/2013") entered into force, subject to the specific criteria established in the Royal Decree's additional and transitional provisions.
- To solar thermal plants that were awarded the remunerative regime established in Royal Decree 1565/2010, of 16 November, which regulates and modifies certain aspects of special-regime electricity production ("RD 1565/2010")1.
- New plants:In general, plants will be awarded the specific regime by competitive tender process.
The remunerative regime will apply, in particular, to:
- Electricity generation plants or modifications to those plants that have not achieved their output targets established in Royal Decree 661/2007 (technologies other than wind, solar thermal and photovoltaic). This remunerative regime will only be awarded to a maximum of 120 MW.
- New wind energy and photovoltaic plants, and modifications of existing wind energy and photovoltaic plants, connected to the power networks of non-peninsular territories, subject to the specific criteria established in the Royal Decree's fifth additional provision.
2.3 Composition of the specific remuneration regime
Plants may receive a specific remuneration throughout their regulatory useful life to supplement the income they receive from selling their power at market price. That specific regime will be composed of:
- An investment component measured according to the installed unit of capacity that covers the investment costs per standard plant that cannot be recovered by the sale of power on the market; this is called the return on investment.
- The return on investment has been established to compensate for the investment costs that cannot be recouped by determining the assets' net value and which will not be recoverable with the expected operating revenues generated throughout the plant's regulatory useful life.
- The following parameters, among others, will be taken into account when calculating the return on investment: the standard value of the initial investment resulting from the competitive tender arranged to award the specific regime for each plant.
- A plant's installed power capacity is used as the basis for calculating the return on investment.
- In order to calculate a plant's annual return on investment, the return on investment for the applicable standard plant will be multiplied by the power capacity entitled to the specific remuneration. In turn, the power capacity entitled to the specific remuneration will be determined according to the value of the power recorded – for an operational plant – for that purpose in the register of the specific remuneration system.
- An operation component, which covers the difference between the cost of operation and the revenues generated as a result of the plant's participation in the market, compared to the applicable standard plant. This is referred to as the return on operation.
- The return on operation will be calculated such that, added to the estimated operating revenues by unit of energy generated, it is equal to the operating costs by unit of energy generated by the standard plant in question.
- The values of the return on operation and classes of plant to which they apply will be approved by ministerial order, which may establish the maximum number of equivalent hours of operation for which the plant will be entitled to receive the return on operation.
- In order to calculate a specific plant's revenues generated by the return on operation, the return on operation for the standard plant in question will be multiplied by the energy sold on the generation market according to the fraction of power that is entitled to the specific remuneration.
- As in the case of the return on investment, the power capacity entitled to the specific remuneration will be determined according to the value of the power recorded – for an operational plant – for that purpose in the register of the specific remuneration system.
- In addition:
- Exceptionally, it is possible for the remunerative regime to include a subsidy for investment in non-peninsular power systems when the overall cost of electricity generation is reduced, as well as a subsidy for participation in what are known as system adjustment services.
- Plants that participate in system adjustment services will receive the remuneration established by applicable regulations.
2.4 Calculation of the specific remuneration
In order to calculate the specific remuneration, each plant will be allocated a standard reference plant on the basis of its characteristics. This will be established by ministerial order and is currently awaiting approval.
The following elements will be taken into account to calculate the remuneration applicable to a standard plant: the standard revenues from the sale of energy at market prices, the standard costs of operation necessary to perform the activity and the standard value of the initial investment. All of this shall be applied on the basis of an efficient and well-run company2.
A series of remuneration parameters will apply to each standard plant. These will add up to the specific remuneration that will apply to the plants associated with that standard plant.
These remunerative parameters for each standard plant will be established by ministerial order. The most significant parameters that the Royal Decree sets out to apply the specific remuneration system are:
- Return on investment by unit of power.
- Return on operation.
- Subsidy for investment as a result of the reduction of generation costs.
- Regulatory useful life.
- Minimum number of operating hours.
- Operation threshold.
- Maximum number of operating hours for the purposes of receiving the return on operation, if any.
- Upper and lower annual limits to the market price.
- Average annual price on the daily and intraday market.
In addition, the Royal Decree points out that all elements that are necessary to calculate the above parameters will constitute remunerative parameters themselves, the most important being:
- Standard value of the initial investment of a standard plant.
- Estimated price of the daily and intraday market.
- Number of operating hours of a standard plant.
- Estimate of the gross revenues generated by participation in the generation market.
- Other operating revenues defined in the Royal Decree.
- Estimate of the future cost of operation.
- Readjustment rate, the value of which will be the reasonable rate of return.
- Adjustment coefficient of a standard plant.
- Net value of the asset.
2.5 Remuneration of hybrid plants
The Royal Decree establishes that certain hybrid plants will be entitled to receive the specific remuneration.
Annual revenues with regard to the return on investment will be calculated according to the parameters and the criteria established by ministerial order. From the perspective of the return on operation, the Royal Decree establishes that revenues will be determined according to the percentage of primary energy produced by means of each one of the technologies and/or fuels used, on the basis of the formulas and criteria established in Annex IX of the Royal Decree.
2.6 Accrual and application period
The specific remuneration system will begin to accrue from the later of (i) the first day of the month following the date on which the plant receives its definitive authorisation to operate, or (ii) the first day of the month following the date on which the plant obtains pre-allocation registration in the specific remuneration system register.
Plants will no longer be entitled to the specific remuneration, which will be settled monthly, when they reach the end of their regulatory useful life (subject to the exceptions established by ministerial order). However, those plants may continue to operate and they will receive the remuneration from the sale of energy on the market at market prices.
2.7 Adjustment and limits
The Royal Decree establishes a series of adjustments and limits to the specific remuneration. The values of those adjustments and limits will be established by ministerial order.
- Adjustment of annual revenues from the specific remuneration as a result of the number of equivalent hours of operation
When a plant's number of equivalent hours of operation do not surpass the minimum number of equivalent hours of operation determined for its reference standard plant, its annual revenues under the specific remuneration system will be reduced according to the mechanism below; if the plant's number of equivalent hours of operation do not surpass the operation threshold, it will not receive any specific remuneration.
A plant's annual revenues received under the specific remuneration system will be adjusted on the basis of the number of equivalent hours of operation as follows:
- If a plant's equivalent hours of operation are higher than the minimum number of equivalent hours of operation established for its reference standard plant in that year, the plant's annual revenues will not be reduced.
- If a plant's equivalent hours of operation are between the operating threshold and the minimum number of equivalent hours of operation established for its reference standard plant in that year, the plant's annual revenues obtained under the specific remuneration system will be reduced proportionately.
- If a plant's equivalent hours of operation are lower than the operating threshold established for its reference standard plant in that year, the plant will forfeit the right to receive the specific remuneration in that year.
- Adjustment due to market price deviations
Two upper limits and two lower limits are established for each standard plant on the basis of the estimated market price that was used to calculate the remuneration parameters.
When the average annual daily and intraday market price falls outside those limits, a positive or negative balance will be generated over the year. This balance is called the adjustment due to market price deviations. This value will be calculated annually and will be set off throughout the remainder of the plant's useful life.
When each regulatory half-period ends and the remuneration parameters for each standard plant are reviewed for the next half-period, adjustments due to market price deviations carried over from previous years will be taken into account when calculating the net value of the assets of each standard plant.
At the end of a plant's regulatory useful life, positive and negative balances resulting from adjustments due to market price deviations that have not been settled will be set off and settled in the six following payments.
2.8 Review and update of remuneration parameters
The Royal Decree establishes consecutive regulatory periods of six years, each divided into two half-periods of three years.
The first regulatory period runs from 14 July 2013 to 31 December 2019.
- At the end of each six-year regulatory period, all remuneration parameters may be reviewed by ministerial order, including the reasonable rate of return (but does not include the regulatory useful life and the standard value of initial investment applicable to a standard plant).
If the review is not made, it shall be understood that the remuneration parameters are extended to the following regulatory period.
Finally, the reasonable rate of return may be reviewed in each regulatory period by modifying the differential applicable to each period.
To do so, the Spanish Ministry of Industry, Energy and Tourism will send a draft bill to the Council of Ministers before 1 January of the last year of each regulatory period proposing the value of the differential for the following regulatory period.
These reviews of the reasonable rate of return will apply to the remainder of the regulatory useful life of a standard plant.
- At the end of each regulatory half-period a ministerial order will review the estimated standard revenues generated by each standard plant as a result of the sale of energy at market price, as well as the remuneration parameters directly related to them.
- Furthermore, at least once per year the return on operation applicable to technologies whose operating costs essentially depend on the price of fuel will also be reviewed.
3. Correction of payments made according to RD 9/2013
The remunerative regime established in the Royal Decree will apply to existing plants from 14 July 2013.
As a result, it is necessary to correct the remuneration received from 14 July 2013 and the date on which the new remunerative regime enters into effect. The Royal Decree establishes that each one of the nine invoices following the seventh payment made in 2014 will contain one ninth of the total amount to be adjusted.
However, if the resulting adjustment triggers an obligation to repay a portion of the remuneration received, in no event may this exceed 50% of the specific remuneration to which the plant is entitled and the right to payment from the daily market in the month to which the settlement refers. If it is not possible to complete the readjustment within the nine payments referred to above, the remainder will be included in subsequent payments.