#SomosRyC
Energy in Spain. Legal Issues – No. 2 (April 2020)
29 de Abril de 2020
The Spanish Government has passed a Royal Decree-law to tighten the control of foreign investments made in certain sectors or by certain investors.
Royal Decree Law 8/2020 of 17 March, modifies Law 19/2003, and suspends the foreign direct investment liberalization regime provided therein of those investments carried out in “strategic sectors” and affecting public order, public security and public health. The new regime is supposed to be aligned with Regulation (EU) 2019/452, of the European Parliament and of the Council of 19 March 2019.
For the new regime purposes “foreign direct investments” are defined as those made by residents of countries outside the EU and the EFTA when the corresponding investor: (a) becomes the owner of a stake equal to or greater than 10% of the share capital of the Spanish company; or (b) as a consequence of the corporate transaction, legal act or business effectively participates in the management or control of the Spanish company.
“Critical infrastructures”, whether physical or virtual, including energy infrastructures, as well as land and real estate that are key for the use of said infrastructures, and the supply of essential inputs, in particular those which are regulated in Law on the Electric Sector and in Law on the Hydrocarbons Sector, are qualified as “strategic sectors” (among others). According to Law 8/2011 of 28 April, critical infrastructure are those installations and networks whose operation is indispensable and does not allow for alternative solutions, so that their disruption or destruction would have a serious impact on essential services (including energy supply).
Additionally, and regardless of the sector, Royal Decree Law 8/2020 suspends the liberalization regime for foreign direct investments in Spain –as previously defined– in the following cases:
(i) If the foreign investor is controlled, either directly or indirectly, by a government – including public bodies or the armed forces– of a third State.
(ii) If the foreign investor has made investments or has been involved in activities with sectors that affect public order, public safety and public health in another Member State.
(iii) If an administrative or judicial proceeding has been opened against the foreign investor in another Member State, in the State of origin or in a third State for carrying out criminal or illegal activities.
Therefore, foreign direct investments, as previously defined, will be restricted and subject to obtaining the corresponding prior administrative authorization. According to Spanish Law, the referred authorization should be granted by the Spanish Council of Ministers subject to a prior report by the Foreign Investments Board (“Junta de Inversiones Exteriores”). If not obtained in a six-month period, the request should be considered as denied. Carrying out any of the investments indicated above without obtaining the corresponding prior administrative authorization will be considered as a very serious infringement sanctioned with fines up to an amount of the transaction´s value. Besides, the investment transactions carried out without the required prior authorization will lack validity and legal effects as long as they are not legalized in accordance with the established procedure.
It is expected that a regulation will be approved to develop the previous legal regime of authorization (the Council of Ministers agreed on 24 March 2020 on the urgent procedure for the approval of the draft royal decree on foreign investments), which may establish an amount below which foreign direct investment will not be subject to authorization.
Royal Decree Law 11/2020 of 31 March, establishes a transitional simplified procedural regime to expedite the processing and resolution of applications for prior administrative authorization of subsequent foreign direct investments in the following cases: (a) Transactions for which there is evidence by any legally valid means of agreement between the parties or a binding offer in which the price was fixed, determined or determinable prior to March 18, 2020. (b) Operations of EUR 1 million or more but less than EUR 5 million. Applications for prior administrative authorization under the simplified procedure will be temporarily addressed to the head of the Directorate General for International Trade and Investment, who will decide on them following a report from the Board of Foreign Investment.
In principle, the new regime applicable to foreign direct investment is to be maintained after the end of the state of emergency.
Investment operations to be carried out in the energy sector in Spain will have to be analyzed in order to determine, on a case-by-case basis, whether they would be subject to the new authorization regime or not. Particularly, it is not clear whether the investment in greenfield projects qualifies (or not) as one carried out in a “strategic sector” (the plants are not connected to the grid and do not supply any power) and is (or is not) affected by the new foreign investments regime. Whilst standards are not clearly defined by the competent authorities, a principle of minimum prudence advises making the appropriate consultations before any decision.
Spain has referred its Integrated National Energy and Climate Plan (PNIEC 2021-2030) to the European Commission
In compliance with the provisions of Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action, on 31 March the Spanish Government agreed to submit the 2021-2030 Integrated National Energy and Climate Plan (Plan Nacional Integrado de Energía y Clima, "PNIEC") to the European Commission.
Changes to the PNIEC could be made as a result of the completion of the environmental assessment process that was interrupted when the state of emergency to address the Covid-19 health emergency was declared. If this is the case the PNIEC should be sent back to the European Commission.
The plan envisages various measures aimed at achieving the following targets by 2030:
• A 23% reduction in greenhouse gas (GHG) emissions relative to 1990.
• 42% of renewables in final energy use. The expected 20% for 2020 is therefore doubled.
• A 39.5% improvement in energy efficiency over the next decade.
• 74% of renewable energies in the electricity sector, to enable a 100% renewable electricity sector in 2050.
Among the measures contemplated to facilitate greater penetration of renewable technologies in the electricity sector, the 2021-2030 PNIEC envisages auctions for the allocation of a specific remuneration scheme (at least 3 GW/h per year) as the main tool to ensure that the plan is implemented, in accordance with Directive 2018/2001 on the promotion of the use of energy from renewable sources.
It is also expected that storage technologies will increase by 6 GW, providing greater management capacity for generation.
The 2021-2030 PNIEC estimates that 241.4 billion EUR will be raised over the period (80% from the private sector), mainly for the promotion of renewables, energy saving and efficiency measures, electrification and networks.
A lower import of fossil fuels -especially oil and coal- and a steady penetration of renewable energies will improve energy dependence from abroad from 74%, according to 2017 data, to 61% in 2030.
The Spanish National Commission for Markets and Competition (Comisión Nacional de los Mercados y la Competencia, CNMC) approves Circular 4/2020 of 31 March, which sets out the methodology for determining the remuneration of natural gas distribution
The Spanish National Commission for Markets and Competition recently published Circular 4/2020 of 31 March (Official State Gazette of 3 April 2020), establishing the methodology for determining remuneration for the activity of natural gas distribution. This circular is undoubtedly the most controversial of all those approved by the CNMC to date, so much so that the CNMC was forced to publish a new proposed methodology to introduce a more gradual adjustment over the period 2021-2026.
It is estimated that the new methodology will result in an average remuneration reduction of 9.6% for the period 2021-2026 compared to the existing one (approximately EUR 137 million per year, slightly more than EUR 820 million over the six-year period) compared to the average 17.8% reduction initially proposed in July 2019 (a proposal which led, for example, to a drop in the price of Naturgy). The new circular eliminates the remuneration for assets built before 2002, which are considered to be depreciated, reducing the remuneration by EUR 239 million. According to the explanatory memorandum attached to the circular, the estimated remuneration for 2021-2026 is around EUR 7.7 billion, with an annual average of EUR 1.283 billion. Cutting the amount allocated to remuneration for this activity could mean lower tolls paid by consumers, although the overall deficit in the gas sector of approximately EUR 1 billion must also be considered. The circular includes incentives for the connection of industrial customers and for promoting the use of natural gas in land transport.
Developments in investment arbitration against Spain in relation to the potential infringement of the Energy Charter Treaty due to the alteration of the 2007 remuneration legal scheme for renewable generation
Spain has implemented a strategy aimed at (i) avoiding new investment arbitration proceedings resulting from a potential infringement of the obligations assumed under the Energy Charter Treaty as a result of the modification of the remuneration regime for the activity of renewable generation, (ii) terminating existing proceedings or (iii) waiving the enforcement of awards made in favor of foreign investors.
To this end, Royal Decree-Law 17/2019 amended Law 24/2013 on the Electricity Sector to introduce a third final provision. For electricity generation facilities based on renewable energy sources, cogeneration facilities and waste-based electricity generation facilities that were recognized as having primary remuneration on the entry into force of Royal Decree Law 9/2013 of 12 July, this final provision establishes that, as an exception, the value on which the reasonable return fixed for the first regulatory period is based, may not be revised during the two consecutive regulatory periods starting on 1 January 2020, unless (i) they waive this right before 1 April 2020, or (ii) if arbitration or legal proceedings are or have been initiated previously in respect of the profitability of these facilities and based on the modification of the special remuneration system made after Royal Decree 661/2007 of 25 May, and unless evidence is provided to the Directorate-General for Energy Policy and Mines before 30 September 2020 that the arbitration or court proceedings have been terminated early and that these have been restarted or continued, or that compensation or indemnification has been recognized as a result of such proceedings (in which case they may benefit from the exceptional measure).
In addition, a number of recent awards have largely dismissed the claims made by various foreign investors as a result of the change in the remuneration system for the renewable generation under the Energy Charter Treaty. For example, in the matter of Baywa R.E. Renewable Energy GMBH and Baywa R.E. Asset Holding GMBH vs. the Kingdom of Spain (ICSID Case No. ARB/15/16), the arbitral tribunal said that “the European state aid regime and the ECT apply concurrently to the investment and form part of the applicable law” and that the “Claimants did not have a legitimate expectation that the Special Regime subsidies, notably in terms of RD 661/2007, would continue to be paid for the lifetime of its Plants”.
Preliminary public consultation processes for the Storage Strategy and Renewable Hydrogen Roadmap (Estrategia de Almacenamiento y la Hoja de Ruta de Hidrógeno Renovable) open
The Ministry of Ecological Transition (Ministerio de Transición Ecológica) has opened the public consultation processes for the Storage Strategy and the Renewable Hydrogen Roadmap. The term for receiving contributions is 15 days, which will start to run once the state of emergency declared by Royal Decree 463/2020 of 14 March has ended.
With regard to the "Storage Strategy", the prior public consultation raises a number of questions about the role of storage in the electricity sector, the incentives to promote its deployment, how to articulate active participation (especially of the different sectors) in the implementation of the strategy, the most useful technologies for this purpose depending on the sector, or how to leverage the involvement of other sectors. Storage appears as a key tool to allow the effective integration of renewable technologies into the electricity system. It is particularly useful in isolated systems, to provide network services and promote self-consumption or in certain sectors including industry, construction and mobility.
As regards the "Renewable Hydrogen Roadmap", the prior consultation raises questions about the sectors in which renewable hydrogen could contribute to decarbonizing the Spanish economy, the possible barriers to its deployment, or the cross-cutting aspects to be considered from a socio-economic and environmental point of view. This road map seeks to steer the deployment and development of renewable hydrogen as a technology, allowing the integration of surplus renewable electricity and displacing the use of industrial raw materials or fossil fuel sources, and opening up new and interesting horizons in the field of transport.
Conditions for the development of renewable generation projects in Spain
Both primary energy prices (oil, gas) and electricity prices have dropped significantly in Spain in the last quarter. The declaration of the state of emergency by Royal Decree 463/2020, of 14 March, and the measures taken therein have resulted in a substantial reduction in the demand for energy in general and for electricity in particular.
| ENERGY PRICES (source: www.meff.es) | ||||
| April 2020 | Q2 2020 | Q4 2020 | 2021 | |
| Futures prices 13 March (EUR/MWh) | 32.85 | 35 | 43 | 42.85 |
| Futures prices 25 March (EUR/MWh) | 21.5 | 27 | 38 | 39.3 |
| May 2020 | Q2 2020 | Q4 2020 | 2021 | |
| Futures prices 27 April (EUR/MWh) | 21,85 | 35,40 | 41,78 | 41,77 |
Notwithstanding this drop, the table above shows that, compared to the situation on 25 March, energy prices and derivatives have improved as of 27 April. In particular, the price for the fourth quarter of 2020 has risen slightly and so has the price for 2021. This recovery has brought prices back to 13 March levels.
In a scenario marked by low electricity prices and reduced demand, there could be investors and financiers who choose to delay their investment or financing decisions to the call for auctions for the allocation of a specific remuneration scheme to avoid merchant risk. It is essential, particularly with regard to investment decisions, that the new rules on access and connection be approved.
Some projects underway with signed PPAs could face problems, especially those to be put into operation this year, given the existing problems in the supply chain or the halting or slowing down of the processing of the necessary permits, licenses and authorizations. These problems may be more significant in the case of projects with specific payment entitlements and access and connection rights that were to expire on 31 March 2020 (which have been granted an additional two months from the lifting of the state of emergency to be put into operation, as this extra time may be insufficient in the light of current circumstances).
Similarly, a reduction in demand and a fall in prices could, in the short term, cause financial problems for projects in operation (with or without PPAs). These problems should be temporary and have a greater impact on those projects that are selling energy on the market and are not covered by the primary remuneration system.
