Spanish Royal Decree to Regulate Production of Renewable Energy

On June 10, 2014, Royal Decree 413/2014 was published in the Official Spanish Gazette (Boletín Oficial del Estado), regulating the production of energy from renewable sources, cogeneration, and waste ("Royal Decree"). The publication of the Royal Decree is a response to the mandate established both in Royal Decree Law 9/2013, dated July 12, 2013, whereby urgent measures were taken to ensure the financial stability of Spain's energy system ("RDL 9/2013"), and in Energy Sector Law 24/2013, dated December 26, 2013 (Ley del Sector Electríco, or "LSE"). The Royal Decree's primary innovation is the creation of a new remuneration system intended to increase the production of electricity from renewable-energy sources.

Royal Decree 661/2007, dated May 25, 2007, regulates Spain's energy sector and the production of the nation's electricity supply under a special regime ("RD 661/2007"). However, 10 subsequent regulations have been adopted to adjust to existing economic circumstances the remuneration provided to renewable facilities. This new system will replace RD 661/2007 and will be applicable to new facilities as well as to those regulated under the previous system, according to the general terms described below.

Object and Scope of the Implementation of the Reform

The main objective of the Royal Decree is to ensure the financial sustainability of the electricity system, so as not to increase Spain existing tariff deficit. The new economic regime will apply to more than 60,000 existing renewable facilities in Spain.[1] Indeed, the second additional regulation of the Royal Decree states that the remuneration regime approved by the Royal Decree will apply to the country's existing facilities, following the regulations in both RDL 9/2013 and the LSE. However, this economic regime will be specified in a ministerial order of remuneration parameters for standard facilities ("Remuneration Parameters Order"), which has been recently approved.

With respect to new facilities, the Royal Decree creates a new competitive tender mechanism for the granting of the specific remuneration regime, the parameters of which have been established for each standard facility by ministerial order under the following scenarios: (i) the existence of an obligation to comply with energy objectives derived from EU law regulations; or (ii) when the facility's including them implies a reduction of energy costs and dependence on foreign energy (neither of which appears likely in the short/medium term).[2] As a result of this competitive tender mechanism, titleholders and those awarded projects will be recorded in the specific remuneration register, as provided in Article 12.3 of the Royal Decree.

Finally, the Royal Decree also applies to those facilities that have not been recorded in the remuneration pre-allocation register pursuant to Royal Decree Law 6/2009 but have: (i) submitted a registration form with the Ministry of Industry and Energy prior to the entry into force of Royal Decree Law 1/2012, which suspended the remuneration pre-allocation procedures and eliminated economic incentives for new facilities producing electricity from cogeneration, renewable sources, and waste ("RDL 1/2012"); and (ii) obtained a final operating license within 30 days of the entry into force of the LSE.[3]

Article 2 of the Royal Decree divides the energy production facilities included in its scope of application into three categories, 13 groups, and 13 subgroups, mainly on the basis of the energy source used for electricity production and the technology employed.[4]

Obligations and Rights

Among the obligations of the titleholders of the facilities are: (i) signing an agreement with the distributor regulating the technical specifications to determine the connection point and measurement; (ii) adding the facilities to the administrative registry of the country's energy production facilities; and (iii) recording the qualitative and quantitative characteristics of the transferred energy, as well as the assigned power, production, sales, and consumption forecasts (i.e., the operating conditions of the connection).

The Royal Decree maintains, among other things, access priority and network connectivity for the facility titleholders.

Specific Remuneration Regime

The primary innovation of the Royal Decree is the remuneration system (which had previously been included in Article 1 of RDL 9/2013 and in Articles 13 and 14 of the LSE). Under the new system, those facilities whose market price is insufficient to achieve reasonable profitability will receive a specific remuneration.

The specific remuneration will be implemented as follows:

A standard facility will be designated as a reference for each type of technology, with specific remuneration parameters established for each facility type. The most important remuneration parameters are identified in Article 13 of the Royal Decree. The classification of each standard facility and any other subdivisions thereof, for the implementation of the remuneration system, which is established in the Remuneration Parameters Order.

The right to receive the specific remuneration will depend on whether the market price of energy for any given facility covers the investment costs of the standard facility for that type of installation. While remuneration was previously based on the existence of a guaranteed remuneration for the energy generated, it is now based on: (i) a remuneration period with respect to the investment, to be received during the regulatory life of the standard facility, as specified in Article 16 of the Royal Decree; and (ii) a second remuneration period with respect to the operation of the facility, which is set out in Article 17. Only those technologies whose estimated operating costs are higher than the average estimated market price will receive this type of remuneration.

As reflected in Article 21 of the Royal Decree, hour caps are applied to terms (i) and (ii) of the preceding paragraph. The Remuneration Parameters Order: (i) establish a minimum number of equivalent hours, below which no remuneration shall be paid on the investment; and (ii) determine the equivalent number of maximum operating hours for which a given facility has the right to remuneration with respect to its operation.

The calculation of the compensation parameters takes into account, among other things, the estimation of energy prices on the market. In order to reduce uncertainty with respect to the remuneration for a facility, upper and lower limits will be established. As provided in Article 22 of the Royal Decree, if the average annual daily and interday prices fall outside these limits, the positive or negative balance generated thereby will be applied to the next liquidation applicable to such facility.

To ensure that profitability is tailored to current market circumstances, six-year regulatory periods have been established under Article 15 of the Royal Decree, with two regulatory half-periods of three years within each regulatory period. Thus, in accordance with paragraph 1 of Article 20 of the Royal Decree, by order, the compensation parameters of the standard facilities, the revenues from the sale of energy, the adjusted values for deviation, the foreseen operating costs, and the value of the rate of financial and reasonable return may be revised at the end of each period.[5] These revisions will take into account the cyclical nature of the economy, the demand for electricity, and adequate profitability, in accordance with the provisions of Article 14.4 of the LSE.

Similarly, in accordance with paragraph 2 of Article 20 of the Royal Decree, after each regulatory half-period, the estimated standard income of the standard facilities from the sale of energy, valued at market price, and the compensation parameters directly related to it may be revised on the basis of the revenues expected from the sale of the energy generated in the market and the adjusted values for deviation from the market price. Finally, the remuneration with respect to operation for those standard facilities to which it may apply, and whose operating costs depend primarily on fuel prices, may be revised at least annually, as stipulated in paragraph 3 of Article 20 of the Royal Decree.[6]

This should result in a specific remuneration that ensures a reasonable return, which, for the first six-year regulatory period,[7] ending December 31, 2019, will be calculate: (i) for facilities with a right to the premium on the basis of the previous rules, such as the average performance in the secondary market, for the 10 years preceding the entry into force of RDL 9/2013, of the 10-year sovereign obligations plus 300 basis points; and (ii) for the facilities or modified facilities employing any technology other than wind, thermosolar, and photovoltaic, in any of the scenarios in the fourth additional regulation. The reasonable profitability will be the average performance of the 10-year sovereign obligations in the secondary market, calculated as the average of the contributions for April, May, and June 2013 plus 300 basis points.[8]

Procedure for Administrative Registration, Inspections, Waiver, and Breach

Procedure for Administrative Registration. The new facilities will require administrative authorization, the procedure for which is regulated in Articles 37 through 42 of the Royal Decree.

Inspections. The Administration may conduct periodic and random inspections to check compliance with the requirements necessary for the issuance and maintenance of the right to the specific remuneration regime.

Waiver. According to the provisions of Article 31 of the Royal Decree, the facilities that are granted the right to the remuneration regime may waive such right, which will result in the cancellation of the registration in the specific remuneration register and the execution of the guarantee deposited for registration. According to the provisions of Article 34 of the Royal Decree, cogeneration facilities, those that cannot be classified in any group or subgroup, and Type1 hybrid plants may temporarily waive the specific remuneration regime, since they are not required to comply with the energy-efficiency conditions and fuel consumption limits. During that period, they will receive income exclusively from the participation of the facilities in the energy production market.

Breach. The procedure for cancellation due to breach of contract can be initiated:[9] (i) upon the occurrence of two breaches of the energy-efficiency conditions stated in Article 32 of the Royal Decree; and (ii) for breach of the consumption limits assigned to each group and subgroup, where such failure is repeated and where, as a result of the consumption of the fuel used, the facility cannot be classified within a group or subgroup.

Other Questions Included in the Royal Decree

As before, the installed power to be taken into account at the production facilities will correspond to the maximum power that a certain unit of production may achieve with the lowest power of those specified in the rating plates of the motor, turbine, or alternator groups installed in series or, when the facility is made up of several motors, turbines, or alternators in parallel, the lower of the total of the power of the rating plates of the motors, turbines, or alternators that are in parallel.[10]

Modifications to the Facilities. Article 26 of the Royal Decree establishes that modifications carried out after the facilities have been terminated will not be recognized as an investment. Should the modifications involve an increase in power, the electricity generated with the increased power will not be eligible for payment of the operation remuneration. Finally, if the modifications reduce the investment value of the facilities, as recorded at the registry, without a proportional reduction in the nominal power, the right to receive the specific remuneration for the total amount of power is lost.

Representatives. The 15th transitory Disposition establishes the obligation to coincide with the representation modality of the facility (directly or indirectly) vis-à-vis the market operator and the entity in charge of payment of the specific remuneration regime.

Extra-Peninsular Systems. For territories outside the Iberian Peninsula, an investment incentive—additional remuneration—has been established for the reduction of generating costs. In order to reduce the cost of extra-peninsular generating systems, in developing the provisions of Article 3.3 of RDL 1/2012, the fifth additional Disposition of the Royal Decree establishes a specific remuneration regime for new wind and photovoltaic facilities to establish themselves in these systems, which will be adjudicated by tender mechanism. This mechanism will be approved by ministerial order, together with the remuneration parameters.

Lawyer Contacts

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Luis Muñoz

Raimundo Ortega

Guillermo Pérez

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[1] As stated in the liquidation database, up to January 28, 2014.

[2] Without prejudice to the specific regime for new facilities in systems located outside the Iberian Peninsula, which will be discussed herein.

[3] These requirements have been established in the fourth additional Disposition of the Royal Decree and refer only to mainland facilities.

[4] Modifications of the facilities should be notified as stated in the fourth additional Disposition of the Royal Decree.

[5] Upon finalization of such regulatory period, the regulatory life span and the standard value of the initial investment will not be reviewable.

[6] The Royal Decree has removed remuneration for extended operation. Previous drafts provided that once the regulatory useful life of a facility had lapsed, if the facility could be maintained in operation, ministerial order could establish an additional remuneration, which over a period of time could be maintained as long as the facility remained in operation.

[7] Applicable to the existing facilities since the entry into force of RDL 9/2013.

[8] Pursuant to paragraph 5 of the second additional regulation, the compensation with respect to the operation that may be established will be applied after the entry into force of RDL 9/2013 for the standard type of facilities, when compensation with respect to investment is zero according to the method applied, and when it has not completed its regulatory life span.

[9] For facilities referred to in the seventh additional regulation of the Royal Decree, the procedure for cancellation due to voluntary abandonment of the facility's administrative procedures can be initiated. Also in accordance with the eighth additional regulation of the Royal Decree, the specific remuneration scheme may be revoked for those facilities registered in the remuneration pre-allocation register stipulated in Article 4 of Royal Decree 6/2009, which, having previously been registered in the pre-allocation registry, had not been definitively registered in the pertinent administrative register of facilities or had not started selling energy within the maximum period established.

[10] With respect to photovoltaic facilities, the Royal Decree specifies in Article 3 that the installed power will be the sum of the maximum unit power of the photovoltaic modules that comprise the installation.