The Spanish Council of Ministers held on 12 July 2013 approved a reform of the Spanish energy sector. The energy reform will be implemented by means of a new Energy Sector Act, a Decree-Law, eight Royal Decrees and three Ministerial Orders. However, it has to date only approved a Royal Decree-Law on urgent measures to guarantee the financial stability of the energy sector and a Draft Electricity Sector Bill, the texts of which are not yet available.

The main aims of the energy reform are:

  1. To establish a regulatory framework to guarantee financial stability in the electricity sector.
  2. To remove the electricity sector deficit once and for all, preventing future deficit and guaranteeing supply to consumers at the lowest possible cost and with increased transparency.
  3. To simplify and clarify electricity bills and encourage competition in domestic electricity tariffs to foster competition towards consumers, while maintaining the social bonus.

Along with the announcement of the approval of the energy reform, the Ministry for Industry, Energy and Tourism (the "Minetur") published a presentation in which it justified the need for reform given the current position of the Spanish energy sector and what is known as the "tariff deficit1". The presentation is attached as Appendix I.

Having outlined the general content of the reform, we now analyse how the announced2 measures will be implemented to achieve the objectives sought:

1. Regulatory framework to ensure the system's financial stability

A series of regulation changes have been announced (according to official information) to provide the system with a greater degree of flexibility with the aim of adapting it to prevailing circumstances and to avoid future deficit.

The main measures that have been announced are:

  • A financial stability rule has been established by means of an automatic system of review that will prevent deficits from emerging in the future.
  • A limit has been placed on the introduction of new costs in the electricity system without them being accompanied by an equivalent increase in income.
  • Overcosts generated by regional or local regulations must be borne by the respective regions or local authorities.

2. Rebalancing the electricity sector

The reform goes on to explain that several measures have been approved since 2012 aimed at reducing the annual tariff deficit generated by the system. Due to the measures that have already been implemented, the forecast deficit for 2013 is €4.5 billion.

The energy reform shares the effort of rebalancing the system among companies, consumers and the state. As a result, of the €4.5 billion deficit:

  • €2.7 billion will be borne by the electricity companies as a result of modifications to the income they receive. According to the information provided by the Industry Minister, 50% of that amount will be borne by companies producing energy by "conventional" means, whereas the remaining 50% will be covered by companies developing renewable energy projects;
  • €900 million will be borne by the Spanish state in its general state budget; and
  • The remaining €900 million will be paid by consumers through an increase in electricity bills.

The energy reform explains that the €2.7 billion borne by energy companies as a result changes to their income will be implemented by means of the following measures:

  • Renewables, cogeneration and waste – a new income regime is established for renewable energy, cogeneration and energy generated from waste. These plants will receive a supplement for their investment costs based on technological standards, ensuring a reasonable rate of return based on 10-year Treasury bonds plus 300 basic points, equivalent to a rate of return of approximately 7.5%.

The Industry Minister highlighted that Decree-Law 1/2012, of 27 January, which suspended income pre-allocation processes and removed economic incentives for new renewable energy, cogeneration of waste generation power plants ("Moratorium RDL") will remain in force, although certain exceptions may be made in relation to new plants, if recommendable, although at all times in compliance with new regulations and profitability criteria.

  • Transmission and distribution networks – a new regime is established in relation to the transmission and distribution networks. A new distribution is established on the basis of 10-year Treasury bonds plus 200 basic points, equivalent to a rate of return of approximately 6.5%.

A maximum volume of investment is also established, to be borne by the electricity system as an annual cost.

  • Other regulated activities – measures (which have not been specifically described) will be implemented to reduce the cost of electricity production and to improve efficiency of oil-fired power plants in the non-peninsular and island systems. The power capacity payments currently received by combined cycle plants will be reduced, and a market mechanism is established to calculate supply cut-off.

A basic system of incentives is also established for the Canary and Balearic Islands.

Without providing specific details, the Spanish government also hinted at the possibility of plants closing down temporarily (hibernation), although subject to strict criteria to guarantee security of supply.

3. Simplification, clarification and competition

According to the Industry Minister, the aim sought with the energy reform is to guarantee the supply of energy to consumers at the lowest possible cost and in a more transparent manner. To achieve this end, electricity bills will be simplified and modifications will be made to the electricity tariff.

The "Tariff of Last Resort", which used to apply to most domestic consumers, will now be known as the "Small Consumer Voluntary Price". The reform will authorise new energy traders to supply those consumers, fostering competition among them and allowing them to make offers and offer discounts. The reform will also make it easier to change supplier, while strengthening customer care mechanisms.

The most vulnerable consumers may continue to benefit from the social bonus discount.

The reform also establishes measures to combat fraud by modifying tariff structures, reducing the cost to average consumers and penalising second homes and empty residential buildings.