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Energy in Spain. Legal Issues – No. 6 (April 2021)
29 de Abril de 2021
On the 8th of April the Spanish parliament approved the Bill on Climate Change and Energy Transition. After passing through the Senate (the Upper Chamber), it is expected that its final approval will take place in the forthcoming weeks.
The main aim of the new Act is to contribute to Spain meeting the objectives of the Paris Agreement, with the purpose of achieving so-called climate neutrality before 2050 (the electricity system must be powered exclusively by renewable energy sources).
The main minimum objectives established in the Act for 2030 are as follows:
- Reduction in greenhouse gas emissions for the whole of the Spanish economy of at least 23% compared to emissions in 1990.
- Penetration of renewable energies in final energy consumption of at least 42% (compared to the current 20%).
- To have an electricity system in which at least 74% of the electricity is generated through renewable energies (compared to the current 40%).
- To improve energy efficiency by decreasing the consumption of primary energy by at least 39.5%.
The Act will promote reversible hydroelectric power plants and own-consumption solar power facilities in property owners’ associations.
The Government will draw up a zoning plan of sensitive areas where it will not be possible to carry out wind and solar power projects.
The text approved by the Spanish parliament provides that the Government and the Spanish National Competition and Markets Commission (CNMC) will submit, within a maximum period of 12 months from approval of the Act, a proposal for the reform of the Electricity Sector Act.
Regarding fossil fuels, new mines and projects for the extraction of hydrocarbons will be prohibited and current research permits and mining concessions may not be extended beyond 31 December 2042. The technique of fracking and the extraction of radioactive minerals is expressly prohibited.
Conversely, the Act will provide for the promotion of the use of renewable gases (such as biogas, biomethane and hydrogen) and sustainable alternative fuels in the area of transport.
As regards mobility, the aim of the Act is to ensure that by 2050 there is a fleet of passenger cars and light commercial vehicles without direct CO₂ emissions, prohibiting the sale of new passenger cars and light commercial vehicles, not used for commercial purposes, that emit CO₂, by 2040 at the very latest.
The Act will establish the obligation of the current owners of certain service stations to install recharging points for electric vehicles and facilitates their installation in buildings and car parks, meaning that all buildings that are not used for residential purposes and that have more than 20 parking spaces must have recharging infrastructure by 2023.
All municipalities with over 50,000 inhabitants (as well as those with fewer inhabitants if the air quality is not good) must put in place sustainable mobility plans that, inter alia, include low emission zones.
The Bill contains other measures regarding energy efficiency and the refurbishment of buildings, maritime transport and ports, climate change adaptation (national plan for adapting to climate change, climate risk reports or specific strategy for the conservation and recovery of ecosystems and species that are particularly sensitive to the effects of climate change) or contaminated waste and land (the Government committing to submitting to parliament within a period of six months the bill on contaminated waste and land to promote a circular economy).
The Bill involves large companies, financial institutions and insurance companies in the management of the risks to which the country’s economy is exposed due to climate change, introducing the obligation of the responsible public bodies to submit a twice-yearly joint report on the degree of alignment of the financial sector with the goals of the Paris Agreement and of the EU, as well a risk assessment for the system. Large companies must calculate the emissions generated by their activities and draw up and publish a plan for the reduction of greenhouse gas emissions with five-year objectives.
2.- The Government intends to establish a National Sustainability Fund for the Electricity Sector to finance the costs related to the remuneration of the activity of electricity generation with renewable technology
The Government is drawing up a preliminary draft of a bill on the National Sustainability Fund for the Electricity Sector (“FNSSE”), with a view to its subsequent consideration by parliament.
The FNSSE establishes a new system for distributing the regulated costs that finance the renumeration of electricity generation through renewable energies, high-efficiency cogeneration and waste.
Such costs are currently financed through charges (the main item paid by electricity consumers), the collection of the environmental taxes provided for in Act 15/2012 and the revenues obtained as a result of holding CO2 emissions allowances auctions.
The preliminary draft provides that the FNSSE must be financed through contributions of the electricity, gas and oil product sectors on the basis of their relative weight in the sales of energy products at any time, by following a gradual straight line since its inception.
The CNMC has published a report on the preliminary draft bill in relation to the FNSSE, in which it views that this system provides a more suitable energy price signal than the current model and ensures the sustainability of the electricity sector, preventing greater increases in electricity bills.
In any event, the CNMC deems that although the creation of the FNSSE is a more suitable financing solution than the model based on charges, the optimum solution in the medium term would have to involve an overall reform of energy and environmental taxation.
3.- Latest developments regarding investment arbitrations in which Spain is a party
Within the context of the nearly fifty arbitration proceedings brought by various international investors against the Kingdom of Spain on the grounds of the possible infringement of the Energy Charter Treaty (above all article 10.1 thereof, which sets forth the obligation of Contracting States to accord to investors of other Contracting States and to the investments made by them fair and equitable treatment), as a result of the amendment of the remuneration scheme of the activity of electric power generation with renewable technology that occurred in 2013, two awards have recently been issued that have entirely or with regard to the substance dismissed the arbitration proceedings filed by such investors (in line with some previous rulings of dismissal, such as that delivered in the case Stadtwerke München Gmbh, RWE Innogy Gmbh and others v. Kingdom of Spain).
Accordingly, in the case Freif Eurowind Holdings v. Kingdom of Spain (award of 8 March 2021) the arbitral tribunal reached the conclusion that Spain had not breached its obligation to accord to foreign investors and to their investments fair and equitable treatment, as it had acted transparently and in good faith, the changes introduced being reasonable: “The Tribunal determines that Spain has complied with the fair and equitable treatment clause by acting transparently and in good faith, particularly by consulting with lobby groups before implementing the new regulation, and without creating legitimate expectations on the part of FREIF. Additionally, the due diligence carried out by Linklaters supports Spain’s argument that FREIF was in fact aware of the likelihood of changes in the remuneration scheme. Further, because Spain modified its remuneration scheme due to its tariff deficit, not only was it not bound to keep the same scheme, but it was also its duty to adapt the scheme through a variable reasonable rate of return to protect its economic health”.
Furthermore, it concluded that the expectation of obtaining a reasonable return had not been frustrated: “Spain has not frustrated the expectation of a reasonable return since the return for the wind farms exceeded the reasonable rate” and “the only guarantee made by Spain was to ensure a reasonable rate of return”.
In the case Eurus Energy Holdings Corporation and Eurus Energy Europe B.V. v. Kingdom of Spain (award of 17 March 2021), the tribunal likewise does not view that the obligation to accord to the foreign investor fair and equitable treatment has been breached, since the claimant did not entertain a legitimate expectation that the special regime remuneration would continue to apply during the useful life of the plants and Spain had not breached its obligation to guarantee a reasonable return. However, it deems that the retroactive application of the new regulation (in relation to the amounts received in excess in respect of the new reasonable return) constitutes a breach of the obligation to guarantee stability in accordance with the Treaty.
4.- Proposed Decision in relation to detailed specifications for determining the generation access capacity to the transmission network and distribution networks
On 30 April 2021 the deadline expires for submitting observations in the public consultation on the proposed decision in relation to detailed specifications for determining the generation access capacity to the transmission network and the distribution networks, it being reasonable to assume that the Council of the CNMC will approve such decision at the beginning of May (“CNMC Decision”), implementing Circular 1/2021 of 20 January of the CNMC, which sets out the methodology and conditions for access and connection to the transmission and distribution networks by electric power production facilities (“CNMC Circular”).
The decision of the CNMC completes the legislative framework for accessing and connecting to the electricity transmission and distribution networks and fulfils the provisions of the Single Transitional Provision of the CNMC Circular. In this regard:
- It sets the date for lifting the current moratorium on new applications for access and connection licences imposed by Royal Decree-Law 23/2020, extended by the Eighth Transitional Provision of Royal Decree 1183/2020 of 29 December, establishing that network managers shall publish information on their web platform, from 8 a.m. on 1 July 2021, regarding the amounts of access capacity available in their networks, in accordance with the new criteria for assessing such capacity, meaning that from such date new access and connection applications may be accepted.
- It stipulates the criteria and methodology for calculating the access capacity to the transmission network and the distribution networks in the processing of access applications for generation or storage facilities, whether these be new facilities or existing facilities that change their significant technical characteristics (in the sense that they no longer continue to be same facility in accordance with the criteria established in Annex II of Royal Decree 1955/2000). In short, for the transmission network it is provided that the lowest amount obtained of either the weighted short circuit ratio (WSCR), the result of the dynamic performance tests or the result of the static performance tests will be applied. Whereas for the distribution network, the lowest amount obtained of either the SCC parameter (short-circuit capacity), the N-1 failure control parameters or the connection/disconnection voltage fluctuations would be applied.
5.- Planning of electricity transmission network for the period 2021-2026
On the 21st of April the public consultation period expired for the proposed planning (development) of the electricity transmission network for the period 2021-2026, in accordance with the provisions of the Order of the Ministry for Ecological Transition (Order TEC/212/2019 of 25 February), which opens the process for making proposals for the development of the electricity transmission network until 2026.
The new planning of the electricity transmission network is a key element for Spain in achieving the objectives of development of a set of renewable energy generation facilities and the reduction of emissions and decarbonisation of the economy set out in the National Integrated Energy and Climate Plan (PNIEC).
The main factors underpinning the planning are as follows:
- Very contained growth in demand (yearly rate of less than 0.5%).
- Deployment of renewable energy generation facilities with a total accumulated capacity of 39 GW in 2026 (it should be noted that the market expected installed capacity is 330 GW, almost ten times the target amount).
- The planned transmission network allows for a 67% integration of renewables.
- The estimated investment cost is €6.668 billion, of which €1.064 billion corresponds to actions to support international interconnections and €5.604 billion to actions to support the transmission networks of the national electricity system.
- The planning includes 6,648 kms of upgrades, a change of conductor in 243 kms of existing lines and the installation of dynamic monitoring systems for monitoring transmission capacity in 692 kms of existing lines. In addition, 2,704 kms of new overland lines and 383 kms of underwater cables are planned.
- 69% of the connection of new renewable generation will be carried out through existing facilities or facilities already previously planned.
After the public consultation period, the proposal will be consolidated and will be submitted for a strategic environmental assessment. It will later be approved by the Council of Ministers as set out in Section 4 of the Electricity Sector Act.
6.- Requirements for the development of renewable energy generation projects in Spain
In the first quarter of 2021 the price of electricity has fluctuated significantly. Average prices in January wee significantly high (as a result of storm Filomena). These dropped in February thanks to wind power production. In Abril prices have begun to climb sharply. It should be noted that the price of energy in April is between 50% and 60% higher than the price recorded for the same month in recent years.
Two factors have contributed to the latest rise in the price of energy: firstly, the relentless rise in the price of gas (due to geopolitical factors and low temperatures), and secondly, the rise in CO2 emission costs (which this year is already above 38%).
In the world of renewable energies and in particular in greenfield projects, there continues to be significant activity in relation to their promotion and sale. That said, there are certain uncertainties relating to the achievement by the projects of the various applicable government milestones, which has led to a greater balance between the growing interest in new projects, in view of their return, and prudence in the structuring of payments by buyers.
One of the significant milestones that will shortly be reached is the lifting on 1 July 2021 of the moratorium that affected new applications for licences to access and connect to the electricity transmission and distribution networks.
