For decades, Spain has been regulating its electricity prices, not allowing them to rise more than a certain percentage per year. With volatile fossil prices, this was always problematic, leading to ‘boom’ years and ‘bust’ years for utilities. As a result, this occasionally created a ‘tariff deficit’, which represents the difference between true system costs and what utilities could legally recover from rates.
The crux is that Spain's remarkable move to modernise its electricity system by accelerating the deployment of renewable energy occurred in an environment of rising fossil fuel prices, in the midst of which utilities would already have been incurring a tariff deficit.
“This means that renewables have (rightly or wrongly) taken the blame for the growth in the deficit. That being said, there is no question that the boom in solar PV in 2007-08 contributed to the deficit - the data on that are clear,” explains Toby Couture, Director of Energy Analysis at E3 Analytics.
However, Couture argues that the picture for wind is far less clear. “Previous academic reports (de Miera et al. 2008, etc.) have found that Spain's wind power has contributed to softening spot prices, not increasing them. Since wind is a far greater contributor to Spain's renewable energy mix than solar, on balance, renewables may well have helped lower the tariff deficit versus business as usual”.
Not a renewable energy problem
He stresses that this assumption would require more detailed analysis, but says that “it is definitely unfounded to blame the deficit solely on renewables”. The root of the problem is that the entire Spanish electricity system wasn't paying all of its bills. By failing to pass costs on to ratepayers, it accumulated this ballooning deficit.
Couture emphasises that the tariff deficit in Spain, which has led to the Government taking the decision to freeze FiTs is ultimately a problem with the way the electricity market, and rate increases in particular, are regulated; a view shared by FiT commentator, Paul Gipe.
“Spain has long needed to correct an imbalance in the way its electric utilities bill consumers for electricity. This has little to do with renewable energy but a lot to do with the untenable cost of fossil fuels on which Spain's electric utilities are unfortunately dependent,” says Gipe.
Change accounting standards exacerbating issue
Toby Couture goes on to say that there is another crucial element underlying all of this: new international accounting standards developed in the wake of the financial crisis by the International Accounting Standards Board are cracking down on ‘deferral accounts’, and other forms of accounting that put off debts or liabilities to future years. This change in accounting standards, which is being implemented between 2012-2014, will likely mean that regulated utilities cannot continue to post ‘profits’ in years where they actually are experiencing deficits. Or they will have to find other loopholes in order to do so, because the traditional loopholes are being eliminated.
“From a disinterested standpoint, this is a reasonable practice to prohibit, but it has potentially significant bearing on Spain's (and indeed, much of the world's) regulated utilities. They won't be able to continue putting off certain liabilities until a later date. Given that Spain's tariff deficit is currently near €25 billion, this would represent a massive ‘rate shock’ if the utilities had to suddenly recover that from electricity rates. More likely is that it will have to be recovered over a longer period of time,” says Couture. “Equally problematic is that the government is arguably not in a position to assume these liabilities either. How they resolve this is unclear.”
In conclusion, Couture says that “faced with all of this, it appears that the Spanish government has decided to do what most people do when they have to figure something out: they pushed pause”.
Answer to Spain's dependence on fossil fuel is renewable energy
That said, Paul Gipe is concerned with the impact this moratorium could have. “Rather than an unwise temporary suspension of its renewable program, Spain instead needs to continue the rapid development of its renewable resources or it will continue to bleed desperately needed funds to countries outside the Eurozone”.
The National Federation of Electricity and Telecommunication Installers (FENIE) in Spain is also worried about the impact on jobs. It issued a statement earlier in the week lamenting the Government’s decision, which it considers “puts the viability and future of thousands of jobs and companies that are generating an enormous amount of employment at risk”.
The Spanish Association of Renewable Energy Producers (APPA) echoes this concern. “The measures approved have paralysed the renewables sector in our country, destroying the burgeoning industrial fabric and going against what the rest of Europe is doing, where Germany – a renewable energy leader – has the lowest unemployment rates on the continent and one of the strongest economies," it points out. APPA claims that the renewable energy sector in Spain generates by far more jobs per MW produced that any other energy sector, and that the moratorium is a “major blow" to the possibilities of Spain making an economic recovery.
“We hope Spanish leaders see this reality and lift the temporary suspension immediately. The problem in Spain is and has been the high cost of fossil fuels, and the disastrous efforts – over many years – to keep electricity prices to consumers artificially low. Renewable energy has never been the problem. Renewable energy is the solution,” concludes Paul Gipe.
For additional information (in Spanish):
