Market framework

Definition of ‘renewable energy’

Is there any legal definition of what constitutes ‘renewable energy’ or ‘clean power’ (or their equivalents) in your jurisdiction?

Article 2 of Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 (Directive 2009/28/EC) defines ‘electric energy from renewable sources’ as electric energy coming from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases. This definition is further developed in article 2 of Royal Decree 413/2014, which mainly includes the technologies set forth in the Directive.

Framework

What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

Spain’s renewable electricity regulations are governed by the common framework for the generation and promotion of renewable energy established by the European Union, mainly Directive 2009/28/EC, which establishes national targets for each member state on renewable energy generation, reduction of greenhouse effect gas emissions and energy efficiency. It also requires member states to introduce support schemes and measures of cooperation between different member states and with non-member states in order to achieve their national targets.

At state level, such policies and legal regimes are mainly implemented in Spain through:

  • Law 24/2013, of 26 December, on the Electricity Sector (LSE);
  • Royal Decree 413/2014, of 6 June, on electricity generation by means of renewable, cogeneration and waste facilities (Royal Decree 413/2014);
  • Royal Decree 1955/2000, of 1 December, on regulation of transport, distribution, commercialisation, supply and authorisation procedure for electricity facilities (Royal Decree 1955/2000);
  • Royal Decree 244/2019, of 5 April, regulating administrative, technical and economic types of electricity supply and generation with self-consumption;
  • Royal Decree 2019/1997, of 26 December, organising and regulating the electricity production market; and
  • Order ITC/1522/2007 of the MITECO, regulating guarantee of origin certificates (Order ITC/1522/2007).

Most autonomous communities have also passed legislation developing several issues of state legislation in relation to the authorisation process in their territories.

Town councils also have their own regulations regarding the issuance of works and activity licences.

Environmental and town planning regulations (which are mainly developed at autonomous community and town council levels) also have to be taken into consideration when developing a renewable energy project.

Government incentives

Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

Yes. In general terms, under the Spanish incentive scheme, renewable power generators:

  • sell the electricity they generate into the Spanish wholesale market and receive the market price for such sales; and
  • also receive additional regulated payments during their respective regulatory lives (eg, 20 years for wind farms and 30 years for solar photovoltaic (PV) facilities, starting on the commissioning operation date).

Renewable energy generators receive the following regulated payments in addition to the market price:

  • remuneration for the investment, which is intended to compensate for investment costs in renewable installed capacity that cannot be recovered through the market price. This remuneration is based on the investment costs that an efficient and well-managed company cannot recover from the market (based on technology-dependent standards). The set of standard parameters includes a standard value of initial investment; and
  • remuneration for the operation, which is intended to compensate for the difference between operating costs and operating income. This is also determined by reference to technology-dependent standards, including a standard value of operating costs.

Royal Decree 413/2014 provides for the review of the remuneration scheme by establishing statutory periods of six years. Each statutory period is divided into two three-year regulatory sub-periods. At the end of each regulatory sub-period, the MITECO may amend the remuneration for investment to reflect:

  • changes in expected future wholesale electricity prices, with a corresponding adjustment to remuneration for investment; and
  • deviations in actual wholesale electricity market prices (as determined and published by the CNMC) as against expected future wholesale electricity market prices as established during the previous regulatory sub-period.

The regulation provides for lower limits (LI1 and LI2) and upper limits (LS1 and LS2), as determined by the MITECO, which govern how potential deviations from the estimated wholesale market price may be reflected in remuneration for investment in subsequent regulatory sub-periods.

Generators bear the market risk with respect to any portion of the actual market price that falls within the first band (between the estimated wholesale market price and LS1 or LI1), meaning that there will be no adjustment to remuneration for investment for the upcoming regulatory sub-period.

With respect to any portion of the actual market price that falls between LS1 and LS2, half of the difference between the actual pool price and LS1 will be reflected in the adjustment (as a decrease) in the next regulatory sub-period. Conversely, for an actual pool price that falls between Ll1 and Ll2, half of the difference between the actual pool price and Ll1 will be reflected in the adjustment (as an increase) in the next regulatory sub-period.

With respect to any portion of the actual market price that falls above LS2, the full difference between the actual pool price and LS2 will be reflected in the adjustment (as a decrease) in the next regulatory sub-period. Conversely, for an actual market price that falls below Ll2, the full difference between the actual pool price and Ll2 and half of the difference between Ll2 and Ll1 will be reflected in the adjustment (as an increase) in the next regulatory sub-period.

The above-described remuneration scheme is intended to allow each standard renewable facility to achieve a pre-determined pre-tax rate of return over that facility’s regulatory life (reasonable return). The specific determination of the reasonable return is fixed in the corresponding regulation approved at the beginning of each regulatory period based on the average yield on Spanish 10-year bonds on the secondary market in the 24 months preceding the month of May prior to the commencement of the new regulatory period.

However, for the first regulatory period (until 31 December 2019), Royal Decree 413/2014 established that (i) the reasonable return for new installations was determined by reference to market yields for the 10-year Spanish government bond calculated as the average of the months of April, May and June of 2013 plus a spread of 300 basis points (which resulted in a rate of return of 7.503 per cent); and (ii) the reasonable return for existing facilities in the first regulatory period was determined by reference to market yields for the 10-year Spanish government bond during the 10 years prior to 14 July 2013, plus a spread of 300 basis points (which resulted in a rate of return of 7.398 per cent).

In addition to economic incentives, other policies that promote the development of renewable energies in Spain are the following rights granted to renewable generators:

  • priority of access to the grid. Renewable energy generators have priority over other operators to access and connect to transmission and distribution networks; and
  • priority of dispatch of electricity generated in the wholesale market. Under equal market conditions, renewable energy generators have priority over other conventional generators to deliver their electricity in the wholesale market.

Note also that Royal Decree 413/2014 established that the support for new renewable facilities (to be in operation after 14 July 2013) is granted through competitive public tender processes. The remuneration scheme and parameters are the same as those described above. However, through these auction processes, bidders propose the initial value for investment that they will be willing to accept, and the MW auctioned are allocated to the most competitive offers (the lower ones). So far, the Spanish government has carried out three auctions that have ended with a result that no incentive (or a very low incentive) will be granted to the projects, and most of their remuneration comes from the market price. In addition, the new Spanish government has announced its intention to auction new MWs to fulfil EU objectives by 2030, which could amount to up to 40,000MW until the deadline of 2030.

Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Renewable energy incentives are established at state level (economic incentives, priority of access, priority of dispatch). In Spain, the MITECO is the body with exclusive competence to determine the economic regime for those renewable facilities entitled to regulated remuneration.

Legislative proposals

Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

The LSE and Royal Decree 413/2014, which develops the LSE, represent the most notable legislation recently enacted in reference to renewable energies. The approval of the LSE was part of the structural reform of the electricity sector included in the Council Recommendation on the 2013 National Reform Programme of Spain, approved by the Council of the European Union on 9 July 2013.

The LSE and its developing regulation profoundly reformed the previous framework in relation to renewable energy and the electricity sector. The depth of this reform means that there has been no notable pending legislation or proposals since 2014. However, the possibility of further changes cannot be completely discarded. The next piece of legislation expected to be approved before the end of 2019, is a specific regulation to be extended by the CNMC on access and connection rights to the grid by renewable generators.

Disputes framework

Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

Pursuant to the Operation Rules of the wholesale electricity market for the Iberian Peninsula (Spain and Portugal) managed by OMIE, any disputes arising in relation to the application of these rules must be settled through an arbitration proceeding under UNCITRAL rules.

However, the CNMC will resolve any disputes that may arise in connection with access to the transport or distribution network or conflicts related to the technical or economic management of the system.

Market participants may also challenge authorisations, permits and concessions, and any administrative resolutions in an administrative proceeding before either the administrative authority that issued them or the relevant superior administrative body. They can subsequently be challenged before the competent courts, which may be the Superior Court of Justice of an autonomous community, the Supreme Court, or lower courts, depending on the specific administrative resolution being challenged.

Foreign investors may also try to resolve any dispute through arbitration pursuant to the Energy Charter Treaty (ECT), to which Spain is a signatory country. The ECT seeks to protect foreign energy investors against key non-commercial risks (eg, discriminatory treatment, direct or indirect expropriation, or breach of individual investment contracts). The ECT includes a ‘fork in the road’ provision by which an investor has to choose whether to submit the dispute to a domestic legal proceeding or to an international arbitration proceeding under the ECT.