On 12 July 2013 the Spanish Council of Ministers approved a reform of the Spanish energy sector. The reform will contain a series of measures2, which will include the approval of a Royal Decree to regulate electricity production from renewable sources, combined heat and power (CHP) and waste.

The proposed Royal Decree ("Proposed RD") was sent to the Spanish Energy Commission ("CNE") on 16 July 2013 for the energy regulator to issue its mandatory report within the statutory 15-day window.

As expressed in the stated purpose of the Proposed RD, it aims to review the basis of the legal and remunerative regime applicable to power plants that produce electricity from renewable sources, CHP and waste (the "Plants"), the rights and obligations applicable to them, and related administrative processes and procedures.

In this note we offer a brief analysis of some of the standout features of the Proposed RD, which should not be construed as a legal opinion on the new provisions.

1. Purpose sought

As expressed in the stated purpose, the Proposed RD introduces a series of measures, including:

  • The reorganisation of the administrative procedures related to the Plants.
  • A specific remunerative regime.
  • Other rules – transitional regime.

2. The reorganisation of the administrative procedures related to the Plants

The Proposed RD aims to reorganise administrative procedures on the basis of a two-pronged regulation applicable to the Plants: on the one hand, the administrative regime covering the authorisations and permits required to build, operate, close etc, the Plants and, on the other, another regime covering the remuneration of power generation.

The new legislation confers powers on the Spanish Ministry of Industry, Energy and Tourism ("MINETUR") and creates a series of administrative procedures and registers.

2.1. Powers conferred on the MINETUR

According to the Proposed RD, the general Spanish administration, through the Directorate General of Energy and Mining Policy ("DGPEM") of the MINETUR, has authority over:

  • The awarding of administrative authorisations for the construction, operation, substantial modification, transfer, temporary closure and definitive closure of the following kinds of Plants:
    • Plants in mainland Spain – including their feed-off lines – with an installed power capacity exceeding 50 MW.
    • Plants – including their feed-off lines – that have a territorial scope encompassing at least two autonomous regions.
    • Plants located in Spanish territorial waters.
    • Plants with an installed power capacity exceeding 50 MW located in non-mainland Spanish territories, when their electricity systems are effectively integrated with the Spanish peninsular systems.
  • The registration of Plants that are subject to authorisation from the MINETUR in the Register of electricity production facilities (Registro administrativo de instalaciones de producción de energía eléctrica) ("RAIPEE") and the notification of that registration to the respective settlement entity, the system operator and the market operator.
  • The awarding of a specific remunerative regime, monitoring compliance by Plant titleholders of the terms and conditions imposed on them and the revocation of the regime, if and when appropriate.
  • The registration of Plants in the Register of the specific remunerative regime (Registro de régimen retributivo específico) ("RRRE"), and the modification and cancellation of any registrations.

2.2. Creation of a series of administrative registers

2.2.1. The Register of electricity production facilities (the RAIPEE)

The Proposed RD creates a register called the RAIPEE, which is dependent on the MINETUR, in which all Plants must be registered.

The registration process is divided into two stages: a pre-registration or preliminary registration phase, and a subsequent definitive registration.

Pre-registration

An application for pre-registration will be submitted by the Plant titleholder or its representative to the relevant entity of the autonomous region in question or, if appropriate, to the DGPEM. The Plant titleholder or representative include the owner, lessee, water concession holder or the holder of any other right linking it to the operation of a Plant.

A decision on the application must be made within one month.

The application for registration will include at least:

  • A provisional operation authorisation to conduct tests.
  • The technical contract entered into with the distributor or, as appropriate, technical contract to access the transmission network.
  • Documentation providing information on the Plant, activity, power generated, volume of fuel used, etc.
  • A certificate issued by a metering entity, proof of compliance with the unified regulation on the electricity system's metering points.
  • A report issued by the system operator, or the distribution network manager, as appropriate, which confirms that connection and access procedures have been completed properly and that the informative, technical and operational requirements established in the operating procedures have been met.

As for Plants that are subject to the authorisation of the autonomous regions, within one month of a Plant having been registered in the regional register the autonomous region in question must notify the DGPEM electronically thereof so that it can be pre-registered in the RAIPEE.

When a Plant has achieved formal pre-registration, the DGPEM will allocate a registration number. This number will be notified to the settlement entity and to the autonomous region for the latter to notify the party in question. The DGPEM will make this notification in the case of Plants subject to authorisation from the MINETUR.

The pre-registration of a Plant will be cancelled if the applicant fails to apply for definitive registration within three months of receipt of the pre-registration notice. However, the pre-registration will not be cancelled if the administration understands that there are justified grounds for not doing so.

Any electrical power fed into the network as a result of testing carried out before definitive operational authorisation is awarded will be remunerated at market prices.

Definitive registration

The application for definitive registration will be submitted to the relevant entity of the autonomous region in question or, if appropriate, to the DGPEM. The application will include evidence that the Plant has met the requirements to be an power generation market member and of the results of net power testing.

If the Plant's titleholder is represented by a representative acting on its own behalf, the representative must submit the evidence.

The application for definitive registration can be submitted at the same time as the application for the Plant's definitive operation authorisation.

If an autonomous region is responsible for deciding on the application, it should within one month send an electronic notification of the Plant's registration in the regional register, for subsequent acknowledgement of the definitive registration in the RAIPEE.

When the DGPEM is responsible for deciding on the definitive registration application, it must issue its decision within one month.

The DGPEM will send a notification that the definitive registration has been completed, including the registration number in the RAIPEE, to the market operator, the system operator, the settlement entity and the respective autonomous region.

The authorising body will notify the applicant and the distributor of the Plant's definitive registration. However, the notification will be made by the DGPEM when Plants are subject to the authorisation of the MINETUR.

The definitive registration will be cancelled in the following cases:

  • The Plant stops operating.
  • The relevant entity revokes the Plant's authorisation.

When a Plant is subject to regional authorisation, the regional administration will notify the applicant and the DGPEM of the cancellation or revocation and any incident related to the definitive registration, so that it can be recorded in the RAIPEE.

The DGPEM will then notify the distributor, market operator, system operator, settlement entity and the relevant autonomous region, acknowledging the cancellation.

In the case of Plants subject to authorisation from the MINETUR, the DGPEM will notify the applicant, the distributor, market operator, system operator, settlement entity and relevant autonomous region of the cancellation.

2.2.2. Territorial registers

The Proposed RD provides that the autonomous regions may also create and operate their own territorial registers.

In this regard, the MINETUR will establish an online process for notifying the data sent by the autonomous regions so that they can be recorded in the MINETUR's register. The DGPEM will also promote the use of that electronic process to send registrations that affect its territorial area of influence, as well as to the settlement entity, system operator and market operator.

2.2.3. Register of the Specific Remunerative Regime (the RRRE)

According to the Proposed RD, the aim of the RRRE is to award and monitor the remunerative regimes applicable to the different Plants.

Registration in the RRRE is a two-stage process, where Plants are either registered for remuneration pre-allocation (preasignación) or as operational (explotación).

The Plant must first be registered for pre-allocation, at which point the specific remunerative regime applicable to that Plant will be determined. The Plant's right to receive the specific remunerative regime will then materialise when certain conditions have been met and it has been registered as operational.

In other words, a Plant must be registered as operational in the RRRE to receive the specific remunerative regime applicable to it; in turn, the Plant cannot be registered as operational until it has first been registered for pre-allocation.

The DGPEM will be responsible for the registration in the RRRE.

Pre-allocation registration in the RRRE

An application to register the Plant for pre-allocation in the RRRE will be sent to the DGPEM attaching a receipt from the General Depository as evidence that the monetary guarantee3 and documentation required by the ministerial order has been furnished.

The receipt from the General Depository will not be required where Plants have been completed when applying for pre-allocation registration in the RRRE.

The DGPEM will notify the applicant of the decision taken with regards to its registration in the RRRE. The notification will include a pre-allocation registration number, which must thereafter be used in any communications.

If a titleholder fails to apply to register its Plant as operational for the entire power entitled to the pre-allocated specific remunerative regime, the DGPEM could start a process to cancel the registration for breach of its pre-allocation registration in the RRRE.

Cancellation processes may also be started when operational registration applications are either inadmissible or denied.

Cancellation of the pre-allocation registration in the RRRE will trigger the loss of any rights associated to that registration and the enforcement of the guarantee. The DGPEM will notify the applicant that the registration has been cancelled due to breach.

Operational registration in the RRRE

The following requirements must be met to register a plant as operational in the RRRE:

  • The Plant must have been completed by the deadline4. It is understood that a Plant has been completed if it has all the elements, equipment and infrastructure necessary to generate energy and feed it into the electricity grid.
  • The Plant must meet all the conditions and contain all the features established in the ministerial order issued in that regard.

However, the power capacity of the Plant or the sum of the power capacities of the Plants could differ from the figures established in the Plant's or Plants' pre-allocation registration, which will trigger the effects established in the Proposed RD.

In turn, an application for operational registration in the RRRE must be sent to the DGPEM before one month has elapsed of the deadline4.

That application must include, among other things, the assigned RRRE pre-allocation number, the Plant's CIl code and the RAIPEE definitive registration number.

If the application is accepted, the DGPEM will register the Plant as operational in the RRRE, cancelling the pre-allocation registration. It will also order the cancellation of the guarantee and notify the applicant of its decision.

A Plant must be registered as operational in the RRRE to receive the specific remunerative regime allocated. The allocated specific remunerative regime will take effect on the first day of the month following the Plant's definitive operation authorisation.

Finally, the Proposed RD lists the reasons for cancelling operational registrations at the RRRE5.

If a Plant's operational registration in the RRRE is cancelled it will forego its specific remunerative regime and, when properly justified, it will be forced to return any undue amounts received. This shall not preclude any applicable sanctions that may be imposed.

Modification of the Plants entitled to receive a specific remunerative regime

The titleholders of the Plants registered as operational in the RRRE must notify the DGPEM of any changes made to the features or characteristics that the Plant had when applying for the operational registration of the Plant in the RRRE, or any modification to the fuels used compared to those that were notified initially.

When a definitive authorisation for the modification must be obtained from the relevant authority, the date of the authorisation shall constitute the date of the change. When that authorisation is not mandatory, the date on which the change was fully completed shall be taken as the date on which the change entered into effect.

The notification must be sent irrespective of any other mandatory authorisations/notifications under applicable regulations.

If, the Plant's details in its operational registration in the RRRE need to be modified as a result of the notification, the DGPEM will decide on the modification after meeting with the applicant in question.

The details recorded in the Plant's operational registration in the RRRE shall be used for remuneration purposes. Therefore, only those modifications that will be taken into account when calculating the Plant's remuneration will be included.

If, after modifications are made to a Plant, the details in the RAIPEE and in the RRRE are inconsistent, the information contained in the RRRE will be used for the purpose of calculating the remuneration applicable to that Plant.

3. Specific remunerative regime

Royal Decree Law 9/2013, of 13 July, derogated the previous provisions that set out the remunerative regime applicable to "special regime" electricity generation. The new Royal Decree Law also establishes a broad outline of the new remunerative regime that will apply to the Plants, leaving it to the Royal Decree to further develop and implement those provisions.

The aim of the Proposed RD is to define the new remunerative regime and to enable the Spanish government to establish specific remunerative regimes to boost electricity generation from renewable sources, high efficiency CHP and waste, when an obligation exists to meet the energy targets set by European Directive or when it will reduce the cost of power and dependence on foreign energy.

3.1. Specific remunerative regime

When Plants have been awarded a specific remunerative regime on top of the income received from their participation on the electricity production market, they will receive an annual remuneration calculated according to the formula established in the Proposed RD and that takes into account:

  • the investment-based remuneration obtained by a standard facility;
  • the Plant's nominal power capacity;
  • the technology-based remuneration obtained by a standard facility;
  • the net power generated by the Plant.

This specific remuneration is calculated to ensure that the rate of return obtained for a standard facility obeys the reasonable rate of return principle. According to the Proposed RD, during the initial period in which the regulation will apply the reasonable rate of return before tax will be understood as the average yield of Spanish 10-year Government bonds – this being the average figure on the secondary market during the 24 months prior to the month of June of the year preceding the start of the regulatory period6 – plus 300 basis points.

The investment-based remuneration component (retribución a la inversión) will be received during the regulatory useful life of the standard facility, and the technology-based remuneration component (retribución a la operación) will apply only to those technologies that have an estimated per unit operating cost higher than the estimated average price on the market, excluding capacity payments.

Finally, the Plant must be composed of new and previously unused primary equipment in order to receive the specific remunerative regime, notwithstanding any statutory upgrade programmes that may be established from time to time.

3.2. Remuneration parameters applicable to each kind of Plant

The MINETUR will issue orders to establish the parameters necessary to implement the specific remunerative regime for each kind of standard facility, including:

  • per power unit investment-based remuneration;
  • adjustment coefficient;
  • technology-based remuneration;
  • investment bonus for reducing generation costs;
  • regulatory useful life;
  • minimum equivalent operating hours;
  • market price floors and ceilings.

The order may even establish different parameters on the basis, for example, of technology, power output, age, the power system, or any others that it considers necessary.

In order to calculate those parameters the following will be taken into account for a standard facility: the standard income for the sale of generated power valued at production market prices; standard operating costs; and the value of standard initial investment. Those parameters may be reviewed at the end of each regulatory period.

The Proposed RD does not indicate that it will take into account costs or investments established by rules or administrative acts that do not apply throughout Spanish territory. In turn, only those costs and investments exclusively connected to electrical power production will be taken into account.

3.3. Market price limits

Plants that are allocated a specific remunerative regime will, every year, receive additional income on top of the income received from their participation in the electricity production market. However, ministerial orders may establish floors and ceilings to the estimated market price used to calculate remuneration parameters.

Over the course of the year, the average annual price on the daily power market may exceed the floor or ceiling. If so, this will generate a right to receive payment or an obligation to pay, calculated for the year overall. This is referred to as the "adjustment for market price deviations". The floor and ceiling may be reviewed in each regulatory semi-period.

3.4. Investment bonus for reducing generation costs

On top of the specific remunerative regime, technologies that can be installed in the independent electricity systems of non-mainland Spanish territories will receive an investment bonus for reducing generation costs if they meet certain conditions7.

3.5. Public funding

Irrespective of the specific remunerative regime, ministerial orders may launch tenders for Plants to bid for public funding. If public funding is awarded, the specific remuneration allocated may be reduced by up to 90% of the funding received.

3.6. Hybrid plants

Hybrid Plants entitled to receive the specific remunerative regime are subject to the following:

  • The investment-based remuneration will be calculated according to the remuneration parameters approved in the ministerial order to determine technology-based remuneration.
  • The technology-based remuneration applicable to the electricity generated is valued according to the primary energy produced by each technology and/or fuel.

3.7. Modification of Plants entitled to the specific remunerative regime

A specific remunerative regime is awarded to each Plant according to its technical characteristics when applying for operational registration in the RRRE. Any modification made after the application for operational registration could lead to a modification to the applicable remunerative regime. As a result:

  • Modifications made after completion of the Plant will not be entitled to investment-based remuneration.
  • If the Plant's power capacity is increased, the Plant will not be entitled to receive the technology-based remuneration for the power generated proportional to the increased power capacity.
  • If the Plant is modified in such a way as to reduce its nominal power, the new nominal power will be used to calculate the investment-based remuneration.
  • If modifications are made that change the type of Plant and that, thus, change the applicable technology-based remuneration, there are two possible scenarios:
    • Where the value of the new technology-based remuneration would be lower than before the modification, the new technology-based remuneration will enter into effect on the date on which the modification is definitively registered in the RAIPEE.
    • Where the value of the new technology-based remuneration would be higher than before the modification, the technology-based remuneration will not change.

Finally, it should be pointed out that modifications cannot be made that would reduce the value of the Plant's initial investment, as defined when applying for operational registration in the RRRE, without at the same time proportionally reducing the Plant's nominal power. Doing so would result in the loss of the specific remunerative regime and the cancellation of the Plant's operational registration in the RRRE.

3.8. Waiver of the specific remunerative regime

Plants that are entitled to receive the specific remunerative regime may waive that regime at any time. However, if they do so, the waiver will be definitive and they will receive the market price for the power they produce. They will not therefore subsequently be entitled to any the remunerative items that may be established.

3.9. Breach of fuel consumption limits

If, over the course of a year, Plants receiving the specific remunerative regime exceed the established fuel-use limits or the permitted maximum percentage of energy generated from back-up non-renewable sources in the case of hybrid and non-hybrid solar thermal plants, they will forfeit the specific remunerative regime for that year. If so, they will receive the market price for the power they produce in that year.

Plants that fail to notify their compliance with fuel-use requirements, or that after an inspection are unable to provide evidence that the notified values have been complied with, will forfeit the specific remunerative regime for that year and will receive the market price for the power they produce.

A Plant may commit the above breaches only once during its useful life. If the Plant commits a second breach, a process will be opened to cancel its operational registration in the RRRE and disciplinary actions may also be brought.

The Proposed RD points out that Plants that have undergone an inspection and that are unable to provide evidence that they meet the notified values are considered to be in breach of the established limits.

3.10. Specific considerations for high efficiency CHP generators

3.10.1. Fulfilment of power efficiency requirements

High efficiency CHP plants must meet the requirements set out in the Proposed RD to be entitled to receive the specific remunerative regime.

3.10.2. Temporary suspension of the specific remunerative regime

High efficiency CHP plants are able to notify the temporary suspension of the specific remunerative regime. If so, they will receive the market price during that period.

High efficiency CHP plants are able to temporarily suspend the application of the specific remunerative regime once a year, for a minimum period of one month and a maximum of six. Those plants will not be required to fulfil power efficiency requirements during that period.

3.10.3. Breach of power efficiency requirements

High efficiency CHP plants that have failed to comply with the limits in a certain year and that have not notified the temporary suspension of the specific remunerative regime for that same year will not be entitled to receive the specific remunerative regime for the year in question.

A Plant may commit the above breaches only once during its useful life. If the Plant commits a second breach, a process will be opened to cancel its operational registration in the RRRE and disciplinary actions may also be brought.

High efficiency CHP plants that have undergone an inspection and that are unable to provide evidence that they meet the notified values in the calculation of the plant's equivalent power performance or percentage primary power saving, are considered to be in breach of the power efficiency requirements.

4. Other provisions – transitional rules

4.1. Specific remunerative regime applicable to new wind and photovoltaic power plants and modifications to the existing remunerative regime applicable to non-mainland electricity systems

The second additional provision of the Proposed RD establishes a specific remunerative regime for new onshore wind and photovoltaic power plants and modifications to existing plants that are part of the non-mainland electricity systems, which shall be subject to the provisions of the new Royal Decree8 governing the specific remunerative regime.

The specific remunerative regime will be allocated by tender process, which will be approved by ministerial order. However, other mechanisms may be devised to award the specific remunerative regime to onshore wind power plants in the Canary Islands.

4.2. Specific remunerative regime applicable to certain facilities that qualify for registration in the income pre-allocation register before Royal Decree Law 1/2012, of 27 January, entered into effect

The third additional provision of the Proposed RD establishes a specific remunerative regime (which shall be subject to the provisions of the Royal Decree governing the specific remunerative regime) applicable to facilities – excluding wind, solar thermoelectric and photovoltaic plants – that meet the following requirements:

  • they have applied to the DGPEM for registration in the income pre-allocation register before Royal Decree Law 1/2012, of 27 January, entered into force.
  • they fulfilled the requirements for registration in the income pre-allocation register – except for the requirement to deposit a guarantee inuring to the DGPEM in the General State Depository – when Royal Decree Law 1/2012, of 27 January, entered into force.

In order to register a facility for pre-allocation in the RRRE the titleholder must, within two months of the Royal Decree entering into force, send an application to the DGPEM for a specific project, including documentation that offers evidence that the requirements established for the specific remunerative regime have been met and attaching a receipt from the General Depository as evidence that the guarantee has been provided.

Facilities have 36 months within which to fulfil the requirements necessary to achieve operational registration in the RRRE. To do so, the facility in question must have the same characteristics and features as included in the application to register the facility for pre-allocation.

4.3. Facilities enjoying a premium-based remuneration before the Royal Decree entered into force

4.3.1. Automatic registration

According to the first transitional provision of the Proposed RD, when the Royal Decree enters into force, facilities that at that time were entitled to receive the premium-based remuneration under the regulations below will receive automatic pre-allocation or operational registration, as appropriate, in the RRRE:

  • Royal Decree 661/2007, of 25 May, which regulated electrical power production under the special regime.
  • Royal Decree 1578/2008, of 26 September, on the remuneration of electrical power production using solar photovoltaic technology in the case of facilities coming on line after the deadline for obtaining the remuneration under Royal Decree 661/2007, of 25 May, applicable to that same technology.

Facilities will not be automatically registered in the RRRE if the economic right associated with their inclusion in the income pre-allocation registers has been revoked.

Pre-allocation registration in the RRRE

Facilities that have been registered in the registers below, but that were not included in the settlement system when the Royal Decree enters into force, will be registered for pre-allocation in the RRRE:

  • The income pre-allocation register regulated in article 4 of Royal Decree-Law 6/2009, of 30 April, and article 4 of Royal Decree 1578/2008, of 26 September.
  • The income pre-allocation register for special regime experimental facilities, regulated in the second additional provision of Royal Decree 1565/2010, of 19 November.

Operational registration in the RRRE

Facilities that are already included in the settlement system when the Royal Decree enters into force will be registered as operational in the RRRE.

Facilities that have only been awarded premium-based remuneration for a part of the facility's power will be registered in the RRRE only in respect of the power entitled to that premium-based remuneration.

4.3.2. Remuneration parameters

Within three months of the Royal Decree entering into force, a ministerial order will approve the remuneration parameters applicable to the standard facilities, taking into account the rate of return for generation facilities entitled to a premium-based remunerative regime (average yield of Spanish 10-year Government bonds plus 300 basis points).

The ministerial order may even establish different parameters on the basis of technology, power output, age, the power system, or any others that it considers necessary.

4.4. Derogation of former regulation

According to the single derogatory provision of the Proposed RD, the following are expressly supressed:

  • The income pre-allocation register regulated in article 4 of Royal Decree 1578/2008, of 26 September, on the remuneration of electrical power production using solar photovoltaic technology in the case of facilities coming on line after the deadline for obtaining the remuneration under Royal Decree 661/2007, of 25 May, applicable to that same technology.
  • El income pre-allocation register regulated in article 4 of Royal Decree-Law 6/52009, of 30 April, which adopts certain measures in the energy sector and approves the social bonus.
  • The income pre-allocation register for special regime experimental facilities regulated in the second additional provision of Royal Decree 1565/2010, of 19 November, which regulates and modifies certain aspects of the production of electrical power under the special regime.
  • The non-premium based income pre-allocation register created in the second additional provision of Royal Decree 1003/2010, of 5 August, which regulates the settlement of the equivalent premium applicable to special regime electrical power facilities using photovoltaic technology.