Ten years of renewable electricity policies in Spain: An analysis of successive feed-in tariff reforms

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Ten years of renewable electricity policies in Spain: An analysis of successive feed-in tariff reforms Pablo del Rı´o Gonza´lez  Department of Spanish and International Economics, Econometrics and History and Economic Institutions, Faculty of Social Sciences and Law, ´rtir s/n, Toledo 45071, Spain Universidad de Castilla-La Mancha, C/ Cobertizo de S. Pedro Ma

a r t i c l e in fo

abstract

Article history: Received 7 October 2007 Accepted 25 March 2008 Available online 3 June 2008

Spain has been one of the most successful countries in the public promotion of electricity from renewable energy sources (RES-E), particularly wind electricity. This support has been based on a feedin tariff (FIT) scheme. Although the basic structure of the system was implemented in 1998, it has been modified in 2004 and 2007. This paper provides an overview of the last 10 years of RES-E promotion in Spain, focusing on the FIT system and analysing the main differences and improvements of the three FIT systems. A political economy approach, which considers the interactions between key stakeholders in RES-E promotion, is used to interpret the actual outcomes of successive FIT reforms and their main design elements. & 2008 Elsevier Ltd. All rights reserved.

Keywords: Renewable energy Support schemes Political economy

1. Introduction Spain has been one of the most successful countries regarding the public promotion of electricity from renewable energy sources (RES-E),1 particularly wind. The European Commission itself has praised the effectiveness of the Spanish support scheme, which has also come at a low cost compared to other countries (European Commission, 2005; Held et al., 2006).2 Together with Germany, the impressive increase of RES-E generation in Spain is responsible for the significant rise in overall RES-E capacity in the EU in the last decade (Table 1). In addition to wind electricity, solar PV has recently experienced significant growth rates, albeit starting from a very low base. In contrast, biomass and hydro are deadlocked. Two major factors behind this success are the broad social and political coalition leading to political commitment and continuity of support schemes and the specific design elements of the support scheme itself: the feed-in tariff (FIT). The FIT has been modified twice in order to accommodate concerns from different

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E-mail address: [email protected] Throughout this paper, the general term ‘‘renewable energy sources’’ (RES) and the more specific term ‘‘electricity from renewable energy sources’’ (RES-E) will be used. 2 These studies build on an effectiveness indicator which measures the absolute growth of normalised RES-E generation with respect to the additional available mid-term potential to generate RES-E. Spain ranks first in this indicator. Regarding the cost-effectiveness indicator for wind on-shore (calculated as the ‘‘levelised profit’’ per unit of electricity generated (hcent/kWh)), Spain scores better than countries with a quota with TGC scheme (except Sweden). 1

0301-4215/$ - see front matter & 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2008.03.025

actors, particularly the government (regarding the financial impact of an increasing RES-E generation on electricity consumers) and RES-E generators (concerning the continuity of support and ‘‘appropriate’’ support levels). The effectiveness of the Spanish FIT is usually mentioned and some publications have dealt with the details of this system (see, among others, Lopez, 2000; Dinica, 2003; Bustos, 2004; Garcı´a and Mene´ndez, 2006; Bechberger, 2006; Meyer, 2007). If not all FIT systems are structured well enough (Fouquet, 2007) and the Spanish FIT is praised for its effectiveness and cost-effectiveness in RES-E deployment, an analysis of this system is worth undertaking. This paper analyses the main design elements of the Spanish FIT and their evolution in successive reforms.3 This issue is of utmost relevance because FITs are an obvious candidate on which to base a harmonised framework for RES-E ˜ oz et al., 2007), a long-term aspiration of the support (Mun European Commission, although the current approach is to allow Member States to use the support scheme which better adapts to its circumstances and socioeconomic objectives. It is also relevant for particular countries, both within and outside Europe, which are discussing which promotion instrument to apply in order to encourage RES-E generation. The Spanish system provides a good experience in this regard. Particularly useful for the implementation of FIT systems in other countries is to analyse how

3 Therefore, the aim of this paper is not to assess the effectiveness or efficiency of the Spanish support scheme. This has been done elsewhere (see del Rı´o and Gual, 2007; Held et al., 2006). In addition, the paper focuses on the FIT system and its successive reforms. For an overview of Spanish RES-E policy more generally, see Garcı´a and Mene´ndez (2006) and Bechberger (2006), among others.

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Table 1 Evolution of RES-E generation in Spain in the last 14 years (GWh)

1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Solar

Wind

Hydro

Biomass

1 1 1 1 1 1 2 5 9 18 41 106 427

2 181 374 697 1354 2696 4689 6931 9603 12,063 16,078 21,173 23,143 26,315

977 2240 3589 3451 3621 3790 3926 4394 3901 5092 4752 3816 4136 3953

203 235 107 170 192 275 698 1155 1535 1745 2105 2126 2019





Source: CNE (2008).

problematic issues related to an increase in RES generation and how the (conflicting) interests and concerns of different actors have been tackled. On the other hand, this analysis follows the recommendation of recent literature on the comparison between RES-E support schemes, which concludes that the specific design elements of support schemes and not so much the type of support scheme being chosen, are a major factor for their success (see Haas et al. (2004) and Huber et al. (2004), among others).4 Therefore, the objective of this paper is to provide an answer to the following question: What have been the design elements leading to the success of the Spanish FIT? How the scheme has integrated different (and sometimes conflicting) concerns and suggestions for improvement by different stakeholders? What have been the outcomes of the 2004 and 2007 reforms? What have been the factors behind those reforms and which actors and factors led to changes in key design elements? A political economy approach which takes into account the interactions between key stakeholders in RES-E promotion is used to interpret the actual outcomes of successive FIT reforms in Spain. This complements the analyses in other countries, which have been carried out using distinct conceptual and methodological approaches.5 Accordingly, the paper is structured as follows. Section 2 provides an overview of the evolution of RES-E support regulation in Spain. Section 3 interprets and compares the design elements of successive FIT reforms. The paper closes with some concluding remarks.





2. The evolution of RES-E support regulation in Spain The promotion of renewable energy in Spain started in 1980. Since then, despite legislative changes, there has been continuity and stability in the RES-E promotion framework under different governments and different political majorities. The main regulations regarding RES-E promotion in Spain are (del Rı´o and Gual, 2007):

 The Law 82/1980 for the Conservation of Energy, which entered into force in 1980, was the first policy document providing a 4 In addition to design elements and political commitment, other factors are important, including the granting of administrative authorisations, which may cause delays in investments and render RES-E investments unattractive. 5 See, among others, Lauber and Mez (2004) and Michaelowa (2005) for Germany, Van Sambeek and Van Thuijil (2003) for the Netherlands, Varho (2006) for Finland, Mitchell and Connor (2004) for UK, Menz (2004) for the US, Meyer and Koefoed (2003) and Meyer (2007) for Denmark and Lipp (2007) for Denmark, Germany and UK.



justification for the support of RES and energy efficiency, clearly motivated to reduce energy import dependence. Environmental concerns were virtually absent at the time, although their increasing importance materialised in the following regulations. A guaranteed price for the excess RES-E being fed into the grid for installations up to 5 MW, set by annual orders of the Ministry of Energy and Industry, as well as investment subsidies, were implemented.6 Royal Decree on electricity produced by hydro sources, cogeneration and RES (R.D. 2366/1994) established the basic contractual relationship between RES-E producers and distribution companies. Plants with an installed capacity less than 100 MW could sell their surplus electricity to distributors, which were obliged to buy it, at a price dependent upon electricity prices and other complements. Law of the Electricity Sector (Law 54/97). Its relevance for RES-E is threefold (APPA, 2003b): (1) With the aim to achieve the EU target of 12% of gross energy consumption coming from RES in 2010, it establishes a ‘‘Special Regime’’ (different from the conventional, ‘‘Ordinary Regime’’), in which RES-E is given a special treatment. It provides the basic framework for RES-E support, which was developed by Royal Decree 2818/1998. (2) Guaranteed grid access for RES-E producers. (3) Price support for RES-E producers. RES-E plants less than 10 MW will receive a premium set by the government (art. 30.4). The price of electricity paid to these plants would be within a range of 80–90% of the average electricity price.7 Royal Decree on Special Regime (RD 2818/1998) developed the administrative procedures and conditions of the plants to access the Special Regime. RES-E generators could choose between two alternatives: (a) A fixed premium on top of the electricity market price. (b) A fixed total price (fixed feed-in), also adjusted annually, which allowed generators to know their revenue in advance regardless of changes in the market price. These prices were finally paid by consumers.8 Generators supplied the electricity to the distributor, who paid the premiums but passed these to the Comisio´n Nacional de la Energı´a (CNE) and, finally, to the end consumer (del Rı´o and Gual, 2007). The next section provides a detailed overview of this and the following two Royal Decrees. The 1999 Plan for the Promotion of Renewable Energy (PFER) included a detailed set of measures to reach the RES-E Directive target for Spain in 2010 (29.4% of electricity from renewables), with national targets per technology. The Electricity and Gas Infrastructures Plan 2002–2011, adopted in 2002, set even more ambitious targets for wind and biomass electricity. The Renewable Energy Plan was updated in 2005 (PER 2005–2010), with new targets for RES-E (30.3% in 2010), thermal applications and biofuels. Royal Decree 436/2004 includes relevant changes with respect to RD2818. RES-E generators may sell their electricity to distributors or directly to the market. In both cases, support is tied to the average electricity tariff (AET). Although AET is still being set annually through a government decision, the calculation of the support is less discretionary than before. The RD436 encourages the participation of RES-E in the wholesale electricity market and addresses the concerns about the impact of an increasing share of intermittent RES-E generation on the stability of the grid (see below).

6

I thank an anonymous referee for this remark. This Law states that support levels will be determined according to the effective contribution of RES-E to environmental protection, primary energy savings, energy efficiency and investment costs so that ‘‘reasonable’’ profitability rates with respect to interest rates are attained. 8 The costs of FIT support are shared equally across electricity consumers. 7

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 Royal Decree 661/2007, which entered into force in June 2007, decouples RES-E support from the AET. Updating of support is tied to the evolution of the Consumer Price Index (CPI). A capand-floor system for RES-E support levels is implemented.

3. Interpreting and comparing the design elements of successive fit reforms—a political economy approach 3.1. Approach, methodology and data sources An exhaustive comparative analysis of the three main norms regarding FIT in Spain (RD2818/1998, RD436/2004 and RD661/ 2007), their treatment of key aspects and the respective changes of specific design elements has been carried out. This has been complemented with other information sources, including informal discussions with some key stakeholders and written documents (including statements made by RES-E generators, reports issued by the National Energy Commission, CNE, and declarations made by policy makers published in the general press). Of course, there is a highly subjective element in this analysis. This is common in political economy approaches of this sort, which depend very much on the interpretations made by the author and ‘‘soft’’ data (i.e., the opinions of stakeholders). However, it also contains a component of ‘‘hard’’, objective data, which is the comparative evolution of major design elements as reflected in subsequent regulatory reforms. We adopt a political economy approach, which allows us to interpret the design choices of successive FIT reforms as the interaction between different stakeholders (utilities, RES-E generators, the system operator, policy makers, etc.). This approach deals with the political nature of decision-making and is concerned with how politics affect economic choices in a society (Drazen, 2000, p. 5). Our main assumption is that the theoretical best design of a FIT will tend to differ from choices made in actual policy practice. Thus, as argued by Oates and Portney (2001), the actual policy outcome may vary from the socially optimal design, given the rent-seeking activities of some actors and the need to meet other interests conflicting with economic optimality for society as a whole.9 3.2. The design features of successive FIT reforms The major modifications of the FIT have taken place in 2004 and 2007. Table 2 provides a comparative overview of the evolution of the basic elements of the system resulting from successive reforms. Tables 3 and 4 show the trends in fixed prices (regulated tariff) and fixed premiums for renewable technologies since RD2818 (in nominal prices). Even considering inflation, support has increased significantly, especially after the approval of RD661 (the accumulated growth in the consumer price index in the 1998–2006 period has been 27%). Since renewable energy technologies have experienced significant cost reductions, the increase in support is making some RES-E investments very attractive, as shown by the large increases in the deployment of wind and solar PV.10 The stagnation of small hydro and biomass, although not only related to support levels, has led to a large increase in support levels in RD661 for these technologies. 9 As argued by Pearce (2006), the distributional incidence of a policy does much to explain why it is designed in this way. It is because the potential losers may lobby against the measure, leading to its redesign. Therefore, the various pressures on governments in making decisions should be captured. 10 Nominal prices, i.e., not corrected for inflation.

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The reduction in support in the period 2000–2003 was related to the concern of the Ministry of Economics about the financial burden for consumers and the possibility that the government could change support levels year after year (as envisaged in RD2818). In contrast, updating of support in RD436 was automatic and increased significantly in 2004–2007, linked to the evolution of AET.11 3.3. Main actors concerning RES-E policy in Spain The analysis of the interactions between relevant actors is crucial to understand successive policy (FIT) reforms. This section provides a brief overview of those actors, their interests and strategies12: 3.3.1. National government13 RES-E policy has traditionally been a responsibility of the Ministry of Economic Affairs. Since 2004, the Ministry of Industry is responsible for energy policy.14 The main objective of both Ministries has been to ensure security of energy supply while keeping costs for consumers at reasonable levels. A mixed perception of RES exists: being Spain a country without significant conventional primary energy sources, the diversification of energy supply due to RES is welcome. However, it is believed that the uptake of RES should be done gradually and not lead to significant consumer costs. A related major concern has been to mitigate the (perceived) windfall profits for RES-E generators. This was tackled in RD 661, which set a cap on support levels. Ensuring the stability of the grid and encouraging the participation of RES-E in the electricity market have been recent concerns. 3.3.2. RES-E generators Two major categories of RES-E producers can be distinguished: large ones, usually linked to the big players in the traditional electricity sector, and smaller (independent) RES-E generators. The latter are well organised in the influential Association of Small Renewable Energy Producers (APPA), which negotiates directly with the authorities. Furthermore, its meetings with the regional authorities, social and environmental organisations, CNE and mass media are all part of an intensive communication and lobbying campaign, published in its website and in its periodical journal. Two major motivations of these actors are to ensure ‘‘appropriate’’ support levels for RES-E investments and investor security. The continuity and stability of support schemes and the lack of retroactivity of the law (i.e., that successive regulatory reforms do not change the economic regime for existing RES-E plants) are key aspects to achieve the later.15 Another concern is 11 The evolution of AET in 2004–2007 was: 7.2072 hcents/kWh in 2004, 7.3304 in 2005, 7.6588 in 2006 and 7.6588 in 2007. 12 Of course, other actors are affected or have a relevant role to play in RES-E deployment and/or RES-E policy, including electricity consumers, renewable energy equipment manufacturers, financial institutions and environmental NGOs. However, their influence is not as direct and strong as that of the other actors. Some of them (notably equipment manufacturers) have sidelined with the opinions of RES-E generators. 13 In addition, regional governments have an increasing relevance regarding RES-E policy, because they approve the location of installations and have regional energy plans with ambitious targets and support schemes. 14 In addition to the Ministry itself, a key government agency attached to the Ministry has been the Instituto para la Diversificacio´n y el Ahorro de la Energı´a (IDAE) whose major role, apart from providing some support to RES-E in the form of interest loans and investment subsidies, has been to elaborate the Renewable Energy Plan 1999 and its updating in 2005. 15 Note that both aspects (support levels and investor security) are key to ensure a certain degree of profitability for investors. The continuity of support levels and schemes makes it easier to obtain the necessary loans for investment from financial institutions at moderate interest rates. Uncertainty on support levels or future continuity translates into a higher risk premium, discouraging RESE investments and/or making RES-E investments more costly.

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Table 2 Comparing the design features of FITs in Spain Design element

RD 2818/1998

RD 436/2004

RD 661/2007

Setting the support level

Two alternatives for RES-E generators, both updated annually by the government: (a) Fixed premium (on top of the electricity price) (b) Fixed total price (fixed feed-in)

Two alternatives:

Two alternatives:

(a) Sale to the distributor. A regulated tariff is received, set as a % of the annual average electricity tariff (AET) (b) Sale to the daily electricity market. The market price plus an incentive to participate in the market plus a premium are received (the later two as a % of AET). Support levels (%) fall some years after the plant starts operation

(a) Sale to the distributor. A fixed tariff is received (b) Sale to the electricity market. The generator receives the market price plus a premium

Decision on support levels

Annual decision

Annual updating of support levels

Annual updating by the government at the end of the previous year Every 4 years according to the evolution of the market price of electricity, the share of RES-E in electricity demand and its impact on the technical and economic management of the system

Revisions of support levels

Support is guaranteed for the whole lifetime of the plant, descending after some years: solar (25 years), wind (5–15 years), geothermal (20 years), small hydro (25 years), etc. % of AET. AET is set annually, according to the calculation method defined in RD 1432/2002 Annual updating is tied to AET Every 4 years since 2006 and only for new plants according to the same criteria as in RD2818 costs and/or when technology-specific targets are reached

Complement for reactive power (voltage control)

Applied to the aggregation of market price and premium

5% of AET for 4 years

Payment for capacity guarantee

Unregulated. Only available for plants bidding in the electricity market

Only available for plants selling directly to the market

Payment procedure

The distributor pays the support to the generator, passes them to the CNE and, finally, to the end consumer Transition period for plants subject to the previous system (i.e., RD2366/1994)

Unchanged

Treatment of existing installations (transitions)

Rights of RES-E generators

Obligations for RES-E generators

1. To transfer their electricity to the distributor ‘‘if it can be absorbed by the grid’’ 2. To receive the support (1) To deliver the electricity without causing major distortions in the normal functioning of the system (2) To pay the fees for accessing the grid (3) Inform the distributor on the electricity to be fed into the distributor grid in each of the 24 h of a given day (plants 410 MW). This communication should be made 30 h in advance

Transition period for plants under RD2818. The economic regime of RD 436 will not apply to them until 12/31/2010 (except costs of deviations)

Same as RD 436

(a)+(b)+(c)+(e) Plants 410 MW will inform the distributor on the amount of electricity to be fed into the grid in each of the 24 h of a given day. This communication should be made 30 h in advance. Predictions can be corrected one hour before the start of the daily market. Plants selling electricity in the market are not obliged to provide this information

Regulated tariff or premium set in RD661 in 2007 Annual updating is tied to the CPI minus 0.25% until 12/31/2012 and minus 0.5% afterwards Every 4 years since 2010 and only for new plants (according to the targets set for 2010) and the same criteria as in previous regulations*. Reasonable profitability levels are ensured. Once 85% of the target is reached for a technology, the maximum period over which plants may receive the support will be set 7.8441 ch/kWh applied to a percentage representing the capacity factor of the electricity fed into the grid Only available for plants selling directly to the market and not available for ‘‘non-manageable’’ RES-E (wind, PV and wave) Unchanged

Transition period for plants under RD436 (except for solar technologies). Plants commissioned before 1/1/2008 may choose: (a) to be subject to the regulated tariff of RD436; (b) to opt for the regulated tariff under RD661; (c) to sell their electricity in the market. In this case, the support levels of RD436 will be applicable until 12/31/2012 Same+mention to priority access to the grid

(a)+(b)+(e) (f) Plants 410 MW should be attached to an electricity generation control centre. +(g) Wind farms should comply with the tension hollow (voltage dip) regulation

ARTICLE IN PRESS

A generic ‘‘No time limit’’ was included in the introduction, but not formally in the text

´lez / Energy Policy 36 (2008) 2917–2929 P. del Rı´o Gonza

Guaranteed duration of support

Cap-and-floor price system for (b) (see text) Solar technologies can only apply for (a) Levels are differentiated according to the time of the day for (a) and only for biomass and hydro support (peak vs. off-peak hours) Support is guaranteed for the whole lifetime of the plant, descending after some years: solar (25 years), wind (20 years), small hydro (25 years), etc.

(4) To cut the connection to the distributor grid in case of force majoeure and if requested by the distributor Obligations on distributors

Targets

Distributors have to sign a contract (with a minimum duration of 5 years) regulating the technical and economic relationships between distributors and RES-E generators Generic: 12% of primary energy consumption from RES in 2010

Costs of deviations

Unregulated

Voltage dips (only wind)

Unregulated

Other issues

 Access of RES-E to the electricity market. RES-E 



generators have the right to access the bidding system of the electricity production market Minimum duration contracts. Guaranteed purchase (5 years min.) and measures facilitating the access of RES-E to the distributors’ power lines (agreement on grid connection for 5 years min.) Premium of 1 peseta/kWh (0.6 hcents/kWh) for RES-E plants 450 MW

10% (AET*Sdeviations over tolerance limits) Tolerance limits: 20% for solar and wind, 5% for the rest Wind farms with the equipment to ensure the continuity of supply receive a complementary payment (5% AET for 4 years)

 Representative. The RES-E generator may 

participate in the market through a representative More favourable treatment for PV. Capacity threshold to receive maximum support level increased from 5 to 100 kW. Conditions for grid connection are simplified

30.3% of gross electricity consumption from RES in 2010. Targets of the PER 2005–2010

Priority access and connection to the grid of RES-E explicitly stated. A procedure to share the costs of grid reinforcements is established

No costs incurred if deviations are below 5%. Costs of deviations are those of the conventional system New wind farms are required to be connected to the grid after a fall in grid tension. Farms will receive 0.38 hcents/kWh until 2014 (a maximum of 5 years) if certified that they have adopted equipment to prevent voltage dips  Control centre. Obligation for generators to connect their plants 410 MW to a generation control centre in order to receive the support  Announcement of a new PER for 2011–2020. The new targets will be considered when revising the support levels for 2010  Mandatory guarantee of 20 h/kW for all plants (500 h/kW for solar plants) in order to access the distribution grid  Support for hybrid plants mixing technologies or fuels), co-combustion (using biomass or biogas) and RES plants 450 MW (except hydro)  Support for repowering of wind farms (0.7 ch/ kWh for installations registered before 12/31/ 2001, maximum 2000 MW)

Source: Own elaboration. * However, changes in support in alternative (b) would also affect the premiums paid to already existing plants.

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(a) RES-E generators will notify the distributor their preferred connection point and connection conditions. The distributor will accept this proposal or provide alternatives. The public administration mediates if the generator rejects these alternatives (b) Grid-connection costs will fall on RES-E generators (c) If the distributor grid has characteristics impeding RES-E absorption, then the public administration will set a deadline to correct them. The costs will fall on RES-E generators

Same as RD 436

´lez / Energy Policy 36 (2008) 2917–2929 P. del Rı´o Gonza

Access to the grid, and share of the costs of grid connection and reinforcements

This contract should be signed within a month after setting the connection point. The distributor will pay the RES-E generators the support levels within 30 days after receiving the invoice 12% of primary energy consumption and 29.4% of electricity consumption from RES in 2010 Targets of the 1999 Renewable Energy Plan (updated in 2003) Same as RD 2818/1998

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Table 3 Tarifa regulada E-FER (opcio´n venta a distribuidor) (ce´ntimos de h/kWh) Technologies

Solara o5 kW 45 kW p100 kW 4100 kW and p10 MW 410 MW p50 MW Solar thermal elect. Wind On-shore p5 MW On-shore 45 MW and p50 MW Off-shore p5 MW Off-shore 45 MW Small hydroc p10 MW

1999

39.6 21.6

2000

2001

39.6 21.6

39.6 21.6

2002

2003

39.6 21.6

2004

2005

2006

2007 RD436

RD661

44.0381 22.9764 22.9764 22.9764

44.0381 41.7500 22.9764 26.9375

39.6 21.6 41.4414 21.6216 21.6216 21.6216

42.1498 21.9912 21.9912 21.9912

44.0381 22.9764 22.9764 22.9764

–

–

–

–

–

6.62

6.26

6.26

6.28

6.21

6.48648 6.48648 6.48648 6.48648

6.59736 6.59736 6.59736 6.59736

6.89292 6.89292 6.89292 6.89292

6.89292b

7.3228

6.73

6.36

6.36

6.38

6.49

6.48648

6.59736

6.89292

6.89292

7.8

6.50

6.15

6.15

6.17

6.85

6.48648

6.59736

6.89292

6.8922

6.73

6.36

6.36

6.38

6.49

6.48648

6.59736

6.89292

6.89292

d

Biomass Energy crops Biomass from agricultural wastes Biomass from forestry wastes Geothermal, wave and tide

15.889e 12.571e 11.829e 6.89

Source: Own elaboration. Data for 1999–2002 based on APPA (2003b). a Support is differentiated between plants below and above the 100 kW threshold after RD436. A special tariff was already implemented for solar thermal power in 2002 by RD841/2002. b Support differs per technology band after 5 years. c Support is also provided for hydro plants between 10 and 50 MW. d Support levels for other types of biomass have not been considered. e Support is higher for installations below 2 MW than for those above 2 MW. The values included are for plants below 2 MW.

Table 4 Fixed premiums (sales to market) (hcents/kWh) Technologies

Solara PVo5 kW PV45 kW PVp100 kW PV4100 kW and p10 MW PV410 MW p50 MW Solar thermal elect. Wind On-shorep5 MW On-shore 45 MW and p50 MW Off-shore p5 MW Off-shore 45 MW Hydrob p10 MW Biomassc Energy crops Plants using biomass from agricultural wastes Plants using biomass from forestry wastes

1999

2000

2001

2002

2003

36 18

36 18

36 18

36 18

36 18

2004

a

0.03

0.03

0.03

3.16

2.87

2.87

12

2.89

12

2.66

18.738 18.738 18.738

2005

a

19.059 19.059 19.059

2006

a

19.912 19.912 19.912

2007 RD436

2007 RD661 (ref.)

2007 Upper limit (cap)

2007 Lower limit (floor)

25.4

34.397

25.403

a

19.912 19.912 19.912

3.6036 3.6036 3.6036 3.6036

3.6652 3.6652 3.6652 3.6652

3.8294 3.8294 3.8294 3.8294

3.8294 3.8294 3.8294 3.8294

2.9291 8.430

8.4944 16.40

7.1275 –

3.27

2.98

2.98

3

2.94

3.6036

3.6652

3.8294

3.8294

2.5044

8.52

6.52

3.04

2.76

2.76

2.78

3.32

3.6036

3.6652

3.8294

3.8294

11.529d 8.2114d 8.2114d

16.63 13.31 13.31

15.41 12.09 12.09

3.27

2.98

2.98

3

2.94

3.6036

3.6652

3.8294

3.8294

3.8444

–

–

Geothermal, wave and tide

Source: Own elaboration. Data for 1999–2002 based on APPA (2003b). Notes: Nominal prices. a Support is differentiated for plants below and above the 100 kW threshold after RD436. Solar PV under RD661 and below 100 kW under RD436 does not have the premium option. b Support is also provided for hydro plants between 10 and 50 MW. c Support levels for other types of biomass have not been considered. d Support is higher for installations below 2 MW than for those above 2 MW. The values are for plants below 2 MW.

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the removal of barriers to grid access. Utilities have been accused in the past of using third-party grid access as an obstacle to renewable energy deployment (Garcı´a and Mene´ndez, 2006). Traditional electric utilities initially showed some reluctance to RES-E deployment but have gradually got on the RES-E deployment train.16 All in all, the Spanish utilities entered the domestic RES-E market much earlier than utilities in other EU countries (i.e., Germany).17 3.3.3. The National Energy Commission (CNE) CNE is the regulatory body for Spain’s energy system. It is a public body (attached to the Ministry of Industry, Tourism and Commerce) with its own legal personality and patrimony and full capacity to act (CNE, 2007a). The goals of CNE are to ensure effective competition in Spain’s electricity market and its objective and transparent functioning. The CNE has been assigned wideranging functions to fulfil these goals, also acting as a consultative body on energy matters to the government. Its functions are: (1) to implement legal rules and standards; (2) to issue reports and proposals for the determination of tariffs, rates and remuneration of energy activities; (3) to settle electric power transmission and distribution costs and the permanent costs of the system; (4) to defend competition; (5) to arbitrate in any disputes arising between the agents in the electricity industry; (6) inspection. Regarding RES-E deployment and support more specifically, the influence of CNE has materialised in the elaboration of mandatory reports, which are later sent to the Ministry of Industry. A draft RES-E support framework is first elaborated by the government and latter sent to CNE, which has to elaborate a report which is later sent to the government. Although the possible impact on consumers has been a major preoccupation, the CNE has argued in the past against the reduction of support levels (in the annual revisions taking place under RD2818) in order to comply with the targets in the Renewable Energy Plan and the Kyoto Protocol (see CNE, 2002, p. 106) and against some aspects of the reforms proposed by the Ministry (for example, regarding the retroactivity of the revision of support levels proposed in a draft version of RD661 (see CNE, 2007b, p. 19). In turn, the Ministry has not always followed its recommendations.18 ´ctrica de Espan ˜a (REE) 3.3.4. Red ele As manager of the grid and electricity system operator (since 1985), the main goals of REE are to ensure the stability of the grid and the access of generators to the grid, although both objectives are sometimes regarded as contradictory (i.e., a greater share of intermittent RES-E generation may affect the stability of the grid). The concern about how best to balance those two goals has led to the recent creation of the Centre for the Control of the Special Regime, whose aim is to make compatible the integration of RESE, particularly wind, with the stability of the system.19 Spain has 16 Several factors are responsible for this change. First, the support granted made investments in some RES (wind) highly profitable and attractive. The strong government backing of this policy reassured investors of the continuity of this support in the medium term. Although ENDESA was the first large utility to have a wind farm built (in 1984), Iberdrola is the company which has been more successful in building a ‘‘green’’ image out of renewable energy investments. The other firms tried to follow suit in order to also be seen as ‘‘green’’. Furthermore, strategic positioning in the new RES-E market and diversification of the traditional business lines was another factor leading to investments in renewable energy by electric utilities. Finally, the prospect of carbon restrictions imposed by either the EU ETS or the Kyoto Protocol may have also had an impact in this regard. 17 I thank an anonymous referee for this remark. 18 For instance, concerning those annual revisions in RD2818, the government decided to reduce the support levels against the opinion of CNE. 19 The Centre allows generation control by REE, which is crucial for the secure integration of wind electricity. This involves the capacity of REE for receiving real time info from all wind plants. Wind farms have to follow REE’s instructions

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now all its wind farms (with an installed capacity greater than 10 MW) connected to a control centre. This is a response to the specific features of the Spanish electricity system, highly disconnected from other European countries and with a large increase and relatively high share of wind generation.20 Other actions undertaken by REE include improving wind prediction models, improving access and connection procedures, undertaking network planning activities, analysing the maximum wind power penetration and proposing regulations to guarantee system security (Alonso-Llorente, 2006). The collaboration with the RES-E sector with the aim to integrate RES-E into the grid has been very close recently. Finally, in addition to its socioeconomic and environmental benefits, the high legitimacy of RES-E among the Spanish populace is probably related to very few electricity consumers really knowing how much they are paying for RES-E support in their electricity bills (see below). 3.4. The outcome of successive FIT reforms This section discusses the factors that led to subsequent FIT reforms and the outcome of those reforms. 3.4.1. The design elements of the fit in RD2818/1998 The Law 54/1997 opted for a FIT system, developed in RD2818/ 1998. This choice was probably influenced by policy developments elsewhere in Europe, by the relative absence of other alternatives, by the pressures of lobby groups, by the easiness to implement such a system and by the institutional inertia (i.e., RD2366/1994 had already implemented a FIT in 1994). The two most relevant promotion schemes at the time were FITs and tendering/bidding systems. FITs had been adopted by countries with a traditional influence on the regulation of energy issues in Spain, such as Germany, and this system seemed to be working in this country (and in Denmark) quite well. On the other hand, it was unclear why the bidding system was not adopted, even more so considering that it can be combined with the other schemes for some technologies (as done in Denmark, with a tender for off-shore wind and FITs for other technologies, or in France, which combines FIT with tenders for larger projects) and that a trend towards the combination of elements from different schemes can be observed in the EU (Ragwitz et al., 2007). The attractiveness of FIT for RES-E generators may have played a role in this regard, although this discussion is certainly speculative. Lobby groups (i.e., RES-E generators) pushed for a FIT system from the start, regarding it as very attractive. Social and political opposition to its implementation was regarded as unlikely by the government, given the environmental and employment benefits of RES-E and the fact that FITs were being adopted elsewhere.21 Electricity consumers paying for the policy would be unlikely to complain because the costs would not be very high, at least initially, because most of them ignored how much they were paying for in their electricity bills (Herna´ndez, 2008) and because (footnote continued) regarding production control. This communication between REE and RES-E plants occurs through Generation Dispatch Centres (Alonso-Llorente, 2006). The costs of installation and maintenance of those Centres are charged to RES-E generators. 20 See Table 1. In 2007, wind electricity covered 10% of total electricity demand. On the other hand, the interconnection capacity of the Spanish system is only 3% of its demand, compared to 40% in Denmark and 12% in Germany. 21 Unemployment rates in Spain at the time were the highest of all OECD countries, and more than double the EU-15 average. This was a key issue in Spanish politics and, thus, the government regarded RES-E deployment as a promising employment source.

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even if they knew, they would be unlikely to make noise and organise against the system.22 Therefore, the non-visible costs imposed on consumers made the system politically feasible.23 Some key design choices made in RD2818 are more difficult to explain, however. This is the case of the ‘‘double option’’ (fixed premium or fixed tariff), which has been maintained, albeit with some retouching, in successive FIT reforms.24 The rationale of this unique feature of the Spanish system was to encourage the gradual participation of RES-E in the electricity market while simultaneously mitigating the risk for RES-E generators by ensuring a certain support level (irrespective of the evolution of market prices). The annual revision of support levels included in RD2818 was related to the two major goals of policy makers at the moment: effectiveness (i.e., encouraging a significant increase of RES-E deployment, given its alleged benefits) and a relatively low burden for consumers, a policy goal of the Ministry of Economics. Reaching both (conflicting) goals required setting the support at a level which encouraged further RES-E investments without leading to excessive windfall profits for RES-E generators, and an unbearable financial burden for consumers. This required a constant assessment of technology costs. A system setting long-term support levels would certainly ‘‘trap’’ the government into this decision, with the risk of an excessive support level in the future. Although the design of the system was very simple (flat support levels annually revised and only differentiated per technology), RES-E generators claimed that the annual revisions of support levels by the government were regarded as a major drawback of the system (APPA 2002, 2003a).25 Not knowing what the revenue stream would be during the lifetime of the plant was considered a significant risk for investors. 3.4.2. The first reform: RD436/2004 Some elements of the basic system were first modified in 2004, as problems of the RD2818 and other imbalances were perceived, 22 A few energy experts were asked about this topic and they confirmed this assertion. Cost is also not visible in the electricity bill of consumers (Herna´ndez, 2008). News on renewable energy in the last five years in the three main ‘‘general’’ newspapers and the specific economic press have been consulted. The general press does not provide data on those costs, and has rather focused on the environmental benefits (mostly in terms of CO2 emissions reductions) resulting from RES-E deployment. In contrast, the economic press has produced a number of articles which show the amount of support provided by the FIT to each technology. However, the audience of these latter newspapers is very limited compared to the general ones (according to the General Survey on Media Sources, EGM 2007, the general newspapers had almost 15 million daily readers, while the economic press had only 226,000 readers, see http://www.aimc.es). 23 An exception to the aforementioned non-visibility of costs for electricity consumers might be industrial consumers and, particularly, those industrial sectors with high levels of electricity consumption. In Spain, this is the case of the sectors belonging to the Association of Large Energy Consumers (AEGE), made up by the aluminium, the cement and the chemical sector (chlorine), among others. Together, they represent 15% of total electricity consumption in Spain. Since the costs of electricity are very important for their competitiveness (between 20% and 40% of total costs and three times as much as labour costs), they are fully aware of the costs of electricity for their business. They are concerned about the impact of RES-E support on final electricity prices and about the effects that a higher penetration of intermittent RES-E might have on the security of electricity supply (AEGE, 2007). 24 To our knowledge, only Slovenia and the Czech Republic have adopted this double option. 25 The annual revision was based on the expected electricity price for the following year and technology and cost information provided by RES-E generators. It is unknown whether the information asymmetry between RES-E generators and the government may have initially resulted in higher than reasonable levels of support. The latter reduction in support between 1999 and 2003 (see Tables 3 and 4) was criticised by APPA, which claimed that this would not help achieve the ambitious targets for RES-E. Public officials argued that consumers were loaded with the costs of RES-E promotion and defended the reduction on the basis of the ‘‘sharp decrease in wind costs’’.

and also as a result of pressures from and interactions between key stakeholders. The RD2818 did not regulate some issues which were not considered relevant at the time but which gained importance as RES-E generation increased (i.e., deviations, regulation of voltage drops, grid stability, etc.). The new Royal Decree was mostly the result of the interactions between three types of actors:

 The government, whose main goals were: effectiveness in RES-E

 

deployment, a greater participation of RES-E generation in the electricity market and a limited financial burden on consumers. REE, the grid manager, was worried about the impact of a relatively high (and increasing) share of wind generation on grid stability. RES-E generators claimed that the annual revisions of support levels were non-transparent and arbitrary and argued that the lack of a medium-term price signal led to risks for investors (in the form of a higher risk premium required by lending institutions). Knowing the support level in advance would allow them to reduce capital costs. Thus, they asked for guaranteed and stable support.

The outcome of this Royal Decree reflects which actor got what. Generally, the main goals of those actors were accomplished, although this was difficult to achieve when the interests and goals of the actors were conflicting. First, support was tied to the average electricity price (AET), decreasing over the lifetime of the installation and guaranteed during this lifetime. This was a more objective and transparent manner to set the support level and reduced the discretionarity of the previous system. It tackled the request of RES-E generators that a medium-term price signal be provided, allowing them to plan their investments accordingly. The final design of this system was a direct influence of RES-E generators, which had long claimed that stability could be improved if support levels were indexed to a more objective parameter (like the AET) and not through a government decision.26 This indexing reduced some of the conflicts (and, thus, transaction costs) associated to the annual updating. Other positive modifications for RES-E generators were that revisions of the levels of the support scheme would take place every 4 years and without retroactivity (i.e., it would not affect previous investments) and that support was guaranteed for the whole lifetime of the plant.27 Furthermore, the new RD led to a more favourable treatment of solar installations. The capacity threshold below which those installations would receive the maximum support level was increased from 5 to 100 KW. In exchange for these concessions, RES-E generators had to give up on other issues, particularly regarding the participation of RES-E in the electricity market and the contribution to grid stability (which were goals of the system operator and the government, respectively). The following were other elements of the reform: 3.4.2.1. Participation in the electricity market. The government has encouraged RES-E generators to participate in the electricity market. This possibility to access the electricity market in addition 26 RD436 provides security on support levels because these are the result of multiplying the AET by the corresponding percentage (90% for wind, 300% for solar thermal, etc.). RD1432/2002 established the growth rate of AET. 27 Although RD2818 stated that support would be received ‘‘without time limit’’, this generic mention had a weak legal force.

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to receiving support makes RES-E more compatible with the electricity market and leads to a lower administrative intervention in the setting of electricity prices and to a better imputation of system costs, particularly regarding deviations (difference between planned and effective generation). It makes RES-E more compatible with the electricity market. A key element to financially encourage this participation in the market was introduced in RD436: Those RES-E producers opting to sell their electricity in the market would receive a ‘‘market incentive’’ (in addition to the market price plus the premium). This corresponded to 10% of AET and could be regarded as an additional risk premium for the higher volatility of market prices. This objective has been achieved. RES-E represented 22% of total electricity market sales in December 2006. A total of 96% of wind generation currently goes to the market. According to Intermoney Energı´a (2006) this has led to the rationalisation and diversification of expensive generation resources28 and to an increased transparency of the price-formation mechanism, mitigating the exercise of market power by dominant players and softening peak-load prices at times of great demand.29

3.4.2.2. Access to the grid. RD436 did neither state the priority access of RES-E to the grid nor create a mechanism to share the costs of grid reinforcements between distributors and RES-E generators. This lack of regulation has led to conflicts between the government, RES-E generators and REE. This issue was later regulated under RD661.

3.4.2.3. Modulation of support depending on the size and age of the installation. Support differed not only per technology (as in RD2818), but also per technology band and/or size of installations, with lower support for larger installations, given their lower costs due to economies of scale.30 In addition, in order to avoid windfall profits support is reduced 5, 15, 20 or 25 years after commissioning (depending on the technology). Differentiating support according to the size of the plant is a positive element of a stepped FIT, because it adjusts the support level to the real costs of RES-E deployment, reducing the producer surplus (and, thus, the costs for consumers) compared to the ‘‘flat’’ alternative.31 Reducing the support as the initial investment is paid back can also be justified in order to reduce windfall profits for investors. In contrast, support was not adjusted according to the RES-E potentials of different locations, which is another positive element of a stepped FIT (Ragwitz et al., 2007).32 This would encourage a more even deployment of renewables across the territory, particularly wind, in a country with a relatively high geographical concentration of RES-E and would mitigate local opposition in the medium term, although the administrative costs of this design option should also be considered. 28 More specifically, the sector has assumed the real costs of the system and there has been an improvement in the management of deviations and in wind prediction (op. cit.). 29 Intermoney Energı´a (2006) shows that, in 2005, when demand was above 33,000 MW, an additional 1000 MW of wind generation reduced off-peak prices by 5 h/MWh. 30 For example, in the case of wind, support is different for wind farms with an installed capacity above and below 5 MW. The support (regulated tariff) for wind farms below 5 MW is 90% of AET for the first 15 years and 80% thereafter, whereas it is 90% of AET for wind farms above 5 MW for the first 5 years, 85% for the following 10 years and 80% thereafter. 31 A stepped FIT is characterised by a lower tariff for technologies, locations and plant sizes with a greater efficiency. Stepped FITs are a tool to reduce the producer surplus and, consequently, the societal burden (Huber et al., 2004). 32 When this has been considered in the past (i.e., Germany) lower support has been given to sites with lower potentials.

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RD436 missed an opportunity to introduce elements of a degressive FIT, as in Germany, where reductions in support levels for new plants are linked to cost reductions due to economies of scale and learning effects. 3.4.2.4. Deviations. One of the novel aspects of RD436 was that a payment was required for deviations (20% for solar and wind and 5% for the rest) in option ‘‘a’’ (i.e., sales to distributors). RES-E generators were required to inform the distributor 30 h in advance about their expected production facilitating the integration of RES-E generation into the grid. This regulation was the result of the concern of the system operator about the stability of the grid and the predictability of wind electricity. It increases the incentive for generators of wind electricity to provide predictions and avoid paying the penalty for deviations. The share of wind generation in total electricity demand had already reached 5% in 2004. Paying for deviations was not strongly opposed by RES-E generators, since they regarded it as an unavoidable requirement, considering the high share of wind electricity.33 The costs of deviations were calculated as 10% of AET multiplied by the sum of deviations over tolerance thresholds. Plants selling to the market were subject to the costs of deviations for plants in the Ordinary system. 3.4.2.5. Regulation of voltage drops. The concern of the government and the system operator about the contribution of RES-E to the stability of the grid led to the setting up of a special payment (5% of AET for 4 years) for RES-E generators which bear voltage drops. They received this requirement favourably, since it gave the sector ‘‘an opportunity to contribute to the stability of the grid’’ (APPA, 2003c, p. 4). 3.4.2.6. Support escalator. Furthermore, a decreasing support escalator whereby plants received a lower percentage of AET after some years, was introduced to reduce long-term windfall profits and limit the burden on consumers.34 This design element was not criticised by APPA, probably because the plants would be already paid off when the support decreased. It provided more stable and predictable support levels than the previous regulation, a historical request of RES-E generators. This translated into a lower risk premium in their loans and a lower financial cost. 3.4.2.7. Transaction costs. Dealing with the aforementioned issues led to a more complex regulation than the RD2818 and probably to an increase in transaction costs (for firms and the public sector). In order to integrate the different concerns, the management of the grid, the market and the settlement process have become more complicated. Further research should be devoted to the empirical analysis of the transaction costs related to the implementation and functioning of different RES-E support instruments and different design elements. 3.4.2.8. Targets. The RD436 set targets for RES-E. These were absent in RD2818, although a generic target of 12% share of RES in 33 However, APPA criticised that this regulation benefited the large generators because their electricity generation allows them to compensate the deviations. Furthermore, it did not agree with the retroactivity of the law regarding the payment of deviations because plants under RD2818 were not required to do so at the time such regulation was passed. They appealed in Court against this decision. 34 For example, in the regulated tariff option, wind onshore o5 MW received 90% of AET for the first 20 years and 80% thereafter. Wind onshore 45 MW (but o50 MW) received 90% of AET in the first 5 years, 85% of AET for the following 10 years and 80% thereafter. The percentages for other RES-E were: solar PV o100 kW (575% for 25 years, 460% thereafter), solar PV 4100 kW and solar thermal (300% for 25 years, 240% thereafter), biomass and geothermal (90% for 20 years, 80% thereafter) and hydro o10 MW (90% for 15 years, 80% thereafter).

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energy consumption by 2010 had been adopted. In addition to the 12% target, the RD436 adopted the targets of the PER 1999 and the revisions of those targets made in 2002 (by the Electricity and Gas Infrastructures Plan) for some renewable electricity sources: solar PV (150 MW), solar thermal (200 MW), wind (13,000 MW), small hydro (2400 MW) and biomass (3200 MW for all biomass types). Once these targets were reached, support levels would be revised. They were timidly welcome by RES-E generators because they provided an additional signal of the medium-term continuation of the support scheme. The RD436 was not really the result of a negotiation process. Instead, it was rather a top-down process. RES-E generators informed public authorities about their claims and the government decided which of those claims could fit its goals. Indeed, APPA was highly critical about some of the outcomes of RD436, but also about the regulatory process itself, claiming that its opinions had not been considered in court and appealed against the retroactivity of the law (see footnote 33).

3.4.3. The second reform: RD661/2007 In contrast to RD436, whose negotiation process was relatively smooth but whose outcome (some design elements) were strongly criticised by APPA, the negotiation of the 2007 reform has lasted almost a year and the final norm was favourably received by all actors, although a previous draft was strongly criticised by RES-E generators and CNE. Again, the outcome has been the result of the interactions between stakeholders and some issues emerging as the share of RES-E increases. Three major issues have been tackled: (1) Security of electricity supply. RD661 reaffirms RES-E priority access to the grid, requiring plants (410 MW) to be attached to a generation control centre. Furthermore, technologies with a fluctuating production (wind and solar PV) will not receive the payment for capacity guarantee. New wind farms are required to be connected to the grid after voltage drops (tension changes). Finally, the regulation of deviations becomes more restrictive for wind and solar, with tolerance thresholds being restricted to 5% for all RES-E (it was 20% for wind and solar before RD661). However, generators are allowed to correct their predictions 1 h before the opening of the market. As in RD436, APPA has not strongly criticised this aspect of the regulation, which was regarded as a logical way to proceed. The ‘‘priority access to the grid by RES-E’’ mentioned in art.17e was highly welcome. Although RD661 is said to create a procedure to share the costs of grid infrastructures and reinforcements between the different actors, the attribution of those costs is still controversial. Generally, they have to be paid by the RES-E generator. A legal framework with clear, objective and nondiscriminatory rules for cost-sharing is still missing. (2) Encouraging the participation of RES-E in the electricity market. Although the RD states in its introduction that the participation in the electricity market is encouraged, ‘‘in order to achieve a lower level of administrative intervention in the setting of electricity prices’’, much in the same vein as RD436 (see Section 3.4.2). Two new elements lower the attractiveness for RES-E producers in participating in the market: (1) The abolition of the market incentive which was introduced by RD436 for RES-E producers opting to participate in the electricity market and (2) the cap on premium prices introduced by RD661, which is received by those RES-E generators participating in the market. Both changes are driven by the goal of minimising consumer costs (I thank an anonymous referee for this remark).

(3) System costs. AET increased significantly between 2005 and 2006 (4.5%), which increased the costs of RES-E support. In addition, according to Alonso-Llorente (2006) the spot market price rose up to h50/MWh, instead of the average h32 which had been predicted by the government, making wind energy earnings rise to h87/MWh, It was decided to de-link support levels from AET in order to limit the increase in system costs. A cap on support levels has also been established. These changes have been regarded positively by RES-E generators because: (i) the new system maintains the two options for RES-E generators (i.e., sales to the distributor or to the market).35 (ii) Existing plants are subject to a transition period whereby they may decide to be subject to the support levels of the RD436 (see below), (iii) The new regulation guarantees minimum profitability levels though a cap-and-floor system. Indeed, a major change of the great change of RD661 with respect to pre-existing regulations in Spain and to FITs in other countries is the cap-and-floor price, which only applies to option b) (i.e., installations participating in the market). If the market price plus the premium are above the cap, then RES-E generators will only receive the cap level. If they are below the floor, they will receive the floor price (see the last two columns in Table 4). Support is reduced sometime after the plant starts operation (i.e., 20 yr for wind). What were the arguments in favour of the cap-and-floor price? The goal was to mitigate the possibility of windfall profits for investors, with perverse effects on consumers (cap), while simultaneously encouraging RES-E investments (floor).36 However, if there is a concern about the costs of the system, it is contradictory that the support significantly increases with respect to RD436, as shown by APPA (2007).37 Indeed, the new regulation guarantees very attractive profitability levels for RES-E investors.38 Furthermore, it will continue to be provided even when RES-E plants are fully paid-off, which will entail an unnecessary burden for consumers. Other significant changes of RD661 with respect to the previous regulation are: (i) Updating of support levels is tied to the evolution of CPI (minus 0.25% until 2012 and minus 0.5% afterwards). Although RES-E generators prefer the linking of support levels to AET rather than to the CPI (since the former has had higher growth rates), they regard the linking to the CPI positively, because it provides certainty on support levels. This indexation to the CPI had already been proposed by the CNE in 2003. (ii) Revisions of support levels will take place every 4 years starting in 2010 and illustrate how the interests and goals of different actors may conflict. Uncertainty linked to these revisions has not disappeared, because support levels still depend on a government decision.39 Periodic revisions of support levels are necessary if they are to be adjusted to the 35 (a) They can sell the electricity to the distributor, receiving a regulated tariff. (b) They can sell the electricity in the market, receiving the market price of electricity plus a premium. 36 Electricity prices increased significantly and the premium was not reduced accordingly, leading to an increase in support for those who opted for the alternative of market price plus premium. 37 The increase in support levels has been between 50% and 100% for biomass, between 16% and 40% for biogas, between 7% and 13% for hydro, around 17% for solar thermoelectric, 12% for wind and 82% for solar PV. 38 Internal rate of return percentages range between 5% and 11%, depending on the technology and option (a or b) chosen. 39 Furthermore, revisions from 2010 onwards (in the case of premiums) apply to already existing installations.

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(iii)

(iv)

(v)

(vi)

evolution of technology costs, specially taking into account that cost reductions in renewable energy technologies occur in short time frames, although it is criticised by RES-E generators (APPA, 2007),40 who argue that if revisions took place after 8 years, this would increase the certainty for investors. However, this clashed with the concern of the government over windfall profits. Support is differentiated according to the time of the day. Hydro, biomass and biogas installations under option a) (regulated tariff) may choose between a ‘‘peak’’ and an ‘‘off-peak’’ period to feed electricity into the grid.41 The corresponding support level is multiplied by 1.0462 for plants selling in the peak period and by 0.9670 for plants feeding electricity during periods of off-peak demand. Therefore, feeding electricity in periods of peak demand is encouraged. Mandatory guarantees. RES-E plants should deposit a 20 h/ kW guarantee when asking for grid access (500 h/kW for solar PV plants). The high amount of deposit for solar PV was a request from APPA in order to address the problem of projects being adopted for ‘‘speculative reasons’’. Renewable Energy Plan for 2011–2020. Its elaboration will start in 2008 and its targets will be taken into account in the revision of support levels in 2010.42 This provides a signal for investors that support will continue after 2010.43 Transition period. Plants selling to the distributor may opt to be subject to the support levels of RD436 for the remaining life of the installation. Plants selling to the market have the right to receive the premium plus the incentive to participate in the market until 12/31/2012. Existing solar technologies are subject to RD661 (i.e., no transition period for them).

The retroactivity of the new regulation was hotly debated between RES-E generators and the government. This issue illustrates the interests and arguments put forward by different stakeholders and their respective negotiation power. It also highlights the crucial role played by CNE in these disputes. In a first draft sent to the CNE in November 2006, the Ministry of Industry proposed the retroactivity of support levels, i.e. that updating of support would apply to existing installations in order to reduce the perceived high revenues for RES-E generators. This decision was strongly opposed by generators, who argued that those installations had been deployed under a specific regulatory framework. This created a political turmoil without precedents, with several large RES-E generators threatening to redirect their investments abroad and to appeal in Court against the government’s decision. The members of CNE voted against the retroactivity of the law, which was finally removed from the text. Avoiding the conflict against a sector recently becoming quite strong and being in the centre of a coalition of forces might have been a major factor leading to this change. The decision was politically sold by the government as an ‘‘agreement’’ with the sector.

40 Although the criteria for such revision are mentioned in art. 44 (costs of the technologies, share of RES-E in electricity demand, impact on the technical and economic management of the grid) and it is stated that ‘‘reasonable’’ profitability rates will be ensured (reasonable with respect to interest rates), RES-E generators argue that the decisions on support levels in the revisions are arbitrary and lead to uncertainty. 41 The ‘‘peak’’ period in the winter season is between 11 a.m. and 9 p.m. and in the summer season between 12 a.m. and 10 p.m. 42 In turn, the evolution of energy demand and the development of the electricity grid will be taken into account in the setting of targets for each renewable energy technology. 43 Notwithstanding, this signal is probably less relevant than the 20% RES-E EU target for 2020 and the corresponding Spanish target.

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3.5. Discussion In the last 10 years of FIT reforms, effectiveness in RES-E deployment and a reasonable (low) financial burden for consumers have been two major goals of the government, although those considerations may have had a different weight in successive reforms. In a first stage (RD2818), effectiveness was the main concern, although the goal of a minimum burden for consumers has had an influence on the annual revisions of support levels. Ensuring an appropriate level of security for investors was a main motivation of the government in RD436. Capping the cost of the system44 and ensuring a minimum profitability level for RES-E generators have been the main factors behind the FIT reform in RD661, leading to the cap-and-floor system. On the other hand, the successive governments have been increasingly worried about the impact of a growing share of RES-E on grid stability and tried to encourage the participation of RES-E in the market, as shown by the final design elements of RD436 and RD661. Political economy considerations allow us to interpret the final outcome of the reforms, as a result of the interactions between the government and RES-E generators. The grid operator (REE) and CNE have also had a relevant influence. The later has played a consultative albeit highly influential role in these reforms. It has sidelined with RES-E generators at times (for example, by arguing against the retroactivity in the revisions of support levels in the first draft of RD661 and by proposing an increase in the cap-andfloor support levels), but with the government most of the times. Other actors (environmental NGOs and consumers) have played a less relevant role in this context.45 The balance of power between government and RES-E generators is relatively even. The influence of RES-E generators has grown in parallel to the increase of RES-E deployment. The renewable energy sector, which made a marginal contribution to the Spanish economy only a decade ago is now a highly dynamic, export-oriented and job-creating sector. This is much valued in a country with traditionally high unemployment levels and with the greatest current account deficit among OECD countries. Furthermore, similarly to the case of Germany, a RES-E coalition has been formed, although in the Spanish case this includes RES-E generators,46 the financial sector, the research community, regional governments, environmental NGOs, labour unions and agricultural organisations.47 The FIT has led to the formation of a broad coalition and, in turn, this broad coalition has influenced FIT reforms. The influence of RES-E generators through APPA as well as the Spanish Wind Energy Association (AEE) is worth mentioning. Some requests made by these lobby groups have gradually been included in the legislation. For example, the removal of the 5 kW threshold in RD436 led to a differentiation in the support levels

44 According to CNE (2007a, b), the costs of RES-E support (subtracting the electricity price) have increased from 728 Mh in 2002 to 1817 Mh in 2006. 45 In contrast, financial institutions have played an important role in this context, sidelining with RES-E generators in their pressure towards a more predictable and stable regulatory framework. There have been highly sensitive to regulatory changes in their lending policies towards RES-E investments. 46 Spanish RES-E producers have certain peculiarities with respect to other countries. For example, with respect to Denmark, the model of RES-E generation is based on large projects and relatively large companies (traditional generators), although independent developers also play a key role (Garcı´a and Mene´ndez, 2006). With respect to other countries like Germany, the big utilities participated in RES-E production much earlier. The first grid-connected wind farm in Spain was installed in 1984 by the utility ENDESA. Furthermore, local ownership of RES-E plants is not common in Spain. I thank an anonymous referee for this remark. 47 According to Lauber and Mez (2004), in Germany this coalition is formed by RES-E generators, some political parties, the equipment goods industry and environmental NGOs.

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received by solar PV plants before 2004 (see APPA, 2002)48 or the request for a cap-and-floor price included in RD661 (see APPA, 2006). However, other petitions have not been accepted (for example, that support levels be revised every 8 years). The relationship between RES-E generators and the system operator (REE) has not been without tensions in the past, especially until 2005, due to controversies concerning the access of RES-E to the grid. The behaviour of wind turbines with respect to voltage drops led to the reticence of REE towards wind electricity (APPA, 2006).49 Furthermore, generators have argued that Spanish legislation guarantees grid access to renewables and requires REE to take all wind generation onto its grid. The confrontational aspect of this relationship has softened with the agreement between RES-E generators and REE, their joint efforts and some measures taken.50 The RES-E generators have been required to provide better predictions for the electricity fed into the grid and to pay for deviations.51 REE has created the Centre for the Control of the Special Regime, which facilitates the management of an increasing share of intermittent RES-E generation. Successive regulations have been the result of the interactions between different stakeholders but not of the cooperation or collaboration between different actors. Instead, the process has been one characterised by tensions. The relationship between regulator and regulated can be deemed a rather confrontational one, in a context of some distrust between stakeholders.







4. Concluding remarks and policy implications This paper has compared the three successive reforms of the FIT system and has analysed the main changes as a result of the interaction between key stakeholders. Its main conclusions can be summarised as follows:

 FITs may not provide markets which are stable and, thus, attractive to investors if frequently amended or if major policy shifts are experienced. This has not been the Spanish case. The reforms have allowed the continuation and stability of the system while at the same time solving problems as they appeared. In spite of successive reforms, the structure of the system has been maintained. This flexibility can be deemed a great strength of the Spanish FIT. It has provided a signal of stability and certainty for investors which is necessary to encourage the realisation of long-term investments at moderate costs52 while simultaneously adapting to new situations 48 Under RD2818, installations below the 5 kW threshold received a higher support level than those above this threshold. 49 Whereas in 2001 REE calculated that it was only prepared to handle 13,000 MW of wind electricity by 2011 in order to guarantee grid security and reliability, RES-E generators defended that a total installable power of 40,000 MW was a limit which was supported by grid integration studies in other countries (Denmark). However, REE retorted that Spain was a special case concerning wind integration because, unlike Denmark, it had poor interconnections to its neighbours (3% of its capacity) and, thus, wind fluctuations had to be absorbed with its thermal generation. 50 According to APPA, the new situation was also the result of the change in the management board of REE. 51 Forecasting of wind electricity was also an issue of debate in the past between the wind electricity generators and REE. The later demanded better forecasting while the former asked for greater support if generators had to pay the costs of forecasting. 52 It is a widespread opinion that a great advantage of FIT systems is the longterm certainty they provide. However, the stability of the support policy and a clear and long-term institutional setting, providing good investor security and reducing uncertainty for investors, should be a key design element of any support system, and not only of FITs. In addition, the conclusion that there has been increased certainty (stability and predictability) of support levels for investors is unlikely to be true with respect to existing installations in option b (sales to the market), as they are subject to changes in the RES-E premiums.



and/or to the requirements of different stakeholders. The reduction of uncertainty may have significant dynamic efficiency implications in so far as a more stable support scheme encourages equipment suppliers to mass produce. Economics of scale reduce the costs of renewable technologies and equipment. The setting up of medium-term targets, requested by RES-E generators, has been an important element contributing to reduce the uncertainty for investors. Successive reforms have been the result of the imbalances between the existing regulation and a growing share of RES-E, the need to maintain an equilibrium between different (and sometimes conflicting) policy criteria and the interaction between stakeholders with distinct (and sometimes opposing) interests and with different negotiation power. In this context, the most relevant interactions occur between four main stakeholders: government, RES-E generators, CNE and REE. A political economy approach is deemed useful to interpret the final design elements included in successive FIT reforms. Successive reforms have increased the transparency in the setting of support levels, have reduced the discretionarity and have increased the stability, security and predictability of support levels. Investors have now a better idea of the range of possible support levels in the near future. The increased participation of RES-E in the electricity market has been another goal of the reforms. Efforts have been made to efficiently integrate RES-E into the electricity market and to improve the security and quality of RES-E by introducing a forecasting obligation leading to costs in case of deviations. Despite these reforms and an increase in its complexity, the design of the system is still relatively simple. Although this simplicity has certain advantages in terms of low transaction costs for firms and the public administration, it fails to include some elements applied in other countries which would improve the system by adjusting support levels to the generation costs of specific RES-E plants. But it could also be argued that trying to make this adjustment in order to reduce the producer surplus and potential windfall profits (i.e., reducing the burden on consumers for a given level of effectiveness) would lead to problems in terms of administrative costs, asymmetric information and a potential reduction in effectiveness. For example, other elements of a stepped FIT could be introduced, differentiating support according to the quality or availability of the renewable resource. Elements of a degressive FIT could also be adopted, requiring that the level of support per technology be reduced year after year according to technological learning.53

Furthermore, a long-term target (beyond the 2020 horizon) should be set in order to send a signal to investors. Measures should also be implemented to encourage the deployment of biomass technologies, which are stagnant, in spite of their significant potential in Spain. The Spanish case illustrates that the political commitment of all political parties to continue with the FIT scheme and the attitude of key stakeholders is a necessary factor leading to the success of the scheme. Once political commitment exists, the issue is then how to design the system properly. This analysis could provide useful lessons for other countries which aim to achieve an effective implementation of RES-E.

53 It could be argued that revisions of support levels allow technology costs reductions to be integrated in the FIT. However, this is not a genuine degressive FIT, based on technological learning and with prearranged annual percentage reductions in support, as in Germany. It is a less objective mechanism and tends to an increase in support levels as a result of pressures from interested parties.

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