Spain's Royal Decree-Law 17/2021 on natural gas prices: Key considerations for the energy sector

The decree brings into force urgent measures to mitigate the impact of the rise in natural gas prices on Spain's retail gas and electricity markets.
 
The purpose of these measures is to cushion the impact of the corresponding abrupt rise in electricity prices, following the increase in the cost of wholesale gas.

Below we summarise the key points of the RDL affecting energy regulation in Spain (for analysis of the RDL's impact on tax, see our article: Subida de la luz. Analisis de las novedades fiscales para mitigar el impacto).

Spain's Royal Decree 17/2021: Key points

1. New auctions

A new type of long-term power purchase auction will be held alongside the wholesale market. In these auctions, the dominant operators in the generation market must offer their zero-CO₂ emitting, manageable inframarginal generation products (not included in the renewables auctions), with a settlement period equal to or greater than one year.

The first auction will take place before 31 December 2021, and the total amount of energy to be auctioned has been set at 15,830.08 GWh.

On this occasion, the obliged entities from the generation market are Iberdrola, Endesa, Naturgy and EDP. The bidders will be both suppliers and direct consumers.

These new auctions seem to be analogous to the renewable auctions previously held in Spain (with a reserve price, methodology, etc.). The auction will be managed by the Spanish Market Operator (OMIE) and the Spanish competition regulator (CNMC) will supervise the proceedings.

This system will continue indefinitely, for as long as the degree of competition and liquidity in the electricity markets requires.

2. Pricing mechanisms

The RDL establishes a mechanism to redistribute the excess remuneration that certain installations receive, due to the marginal cost price setting of the energy market.

All electricity production facilities regardless of their technology (nuclear, hydraulic, wind, photovoltaic, etc.) in mainland Spain that do not emit greenhouse gases must "give back" any excess remuneration to the electricity system when the price of gas exceeds €20/MWh, so that this can be used to offset the higher cost of electricity generated from natural gas and reduce bills for consumers.

This measure is set to last from 15 September 2021 until 31 March 2022.

This appears to include electricity generated under power purchase agreements (PPAs), regardless of the type of agreement in place.

• The only generating facilities not affected are:
• Generation facilities not on the Spanish mainland;
• Generation facilities applying a regulated economic remuneration regime (such as those applying the specific remuneration regime or the economic regime for renewable energy assigned by auction, although the latter are for the most part still under development);
• Generation facilities with a net capacity of 10 MW or less.

These reductions will be carried out by the Spanish TSO (REE) and the formula for calculating returns is provided in article 7 of the RDL.

It is questionable whether this measure interferes not only in the marginalist market prescribed by EU regulations, but also in the field of bilateral contracting in a supervening, retroactive, and unforeseen manner.

For PPAs, it will be necessary to review the clauses in the agreement to see to what extent it is affected by the RDL and what possible resolutions can be applied.

But according to REE's general procedure for liquidation, affected facilities may submit claims against different types of liquidations (initial, intermediate, and final) and a subsequent conflict of economic management of the system claim before the CNMC, which would later be heard by the courts.

It is in this last phase that it is possible to raise preliminary questions of constitutionality or EU law before a ruling with problematic legal status.

3. Limits on variations in the costs of raw materials

The RDL limits the increase in the Gas Regulated Tariff (TUR) for families and SMEs.

Starting on 1 October 2021, costs calculated in accordance with the methodology established under Order ITC/1660/2009 may not exceed 35% of the current value, and from 1 January 2021 costs may not exceed 15% of the current value.

The difference between the cost of raw material and the cost of such raw material that arises from these calculations mentioned will be recovered in the last resort tariff beginning in January 2022 in accordance with the following:

• If the increase in the cost of the raw material in relation to the value applied in the previous revision is greater than or equal to 15%, no amount will be recovered.

• If the increase in the cost of the raw material in relation to the value applied in the previous review is less than 15%, this value will be increased up to the maximum limit of 15%.

4. Reservoir management

The RDL includes criteria for the management of large reservoirs, whose main purpose are not home supply or agricultural use.

It is expected that, at the beginning of each hydrological year (for this coming year they must be approved before 31 December 2021) hydro-regulators will set:

(a) A minimum and maximum regime of monthly flows to be discharged for situations of hydrological normality and prolonged drought;

(b) A regime of minimum volumes of reservoir reserves for each month; and

(c) The minimum monthly reserve that must remain stored in the reservoir to avoid unwanted environmental effects on the fauna and flora of the reservoir and the bodies of water associated with them.

5. Protecting vulnerable electricity consumers

The period for which suppliers are prohibited from interrupting electricity supply to vulnerable consumers who are beneficiaries of the electricity social bond is increased by six months.

6. System charges

The RDL also updates Spain's electricity system charges, in line with the additional income that the electricity system has because of the measures approved by the RDL.

7. Carbon dioxide

Finally, regarding CO₂, given the higher income obtained due to the higher prices, the Spanish government has considered it appropriate to a maximum of €2,000 million the amount allocated to the automatic reduction of electrical system charges.

Of course, there is an opportunity to adjust its value for the specific remuneration scheme, as the Supreme Court has suggested in recent rulings.

In conclusion, this new rule has many rough edges and there are difficulties fitting it into Spain's constitutional and EU law parameters.

The RDL has come into effect but must be validated in Parliament. This is perhaps the best moment and the best way to qualify, modify or eliminate some of its most controversial provisions.

This article was written by Ramón Vázquez del Rey Villanueva, a partner specialising in energy and natural resources, infrastructure, environmental, urban planning, public procurement, and administrative litigation at Fieldfisher JAUSAS.