A regulatory blow to Spain’s subsidised coal-fired electricity sector

IEEFA

In its rejection this week of a government proposal to prop up the nation’s oldest and most polluting coal power plants, Spain’s energy regulator has concluded that a “significant part” of the country’s coal fleet can be closed without risking national energy security.

The decision, detailed in a statement by the Comisión Nacional de Mercados y la Competencia (CNMC), is significant for its repudiation of a long history of Spanish government intervention to support domestic coal extraction and coal-fired power generation.

The ruling appears to favor Iberdrola, a big Spanish electric utility that is already seeking to close its last two remaining coal plants while making another utility, Endesa, look out of step with the times.

Endesa is pushing to extend the life of three of its coal-fired power plants by arguing that they are crucial components of Spain’s supply security.

As Platts reported yesterday: “The CNMC estimates that the Spanish system could easily absorb the closure of as much as 3 GW of coal-fired capacity by 2020 (or one third of existing capacity) without it materially affecting the system’s balance.”

Coal-fired generation has been sustained in Spain by political support coupled with uncompetitive gas supply contracts even as cleaner-burning gas-fired plants stand idle.

The Spanish-government last November proposed the “royal decree” that would have allowed the government to overrule any company wishing to shut down a power plant if the government deemed that the plant n question was necessary for security of supply, for economic reasons, or for energy-planning purposes.

The proposal appeared to have been targeted at Iberdrola’s coal phase-out plans.

Organizations that included IIDMA (International Institute for Law and the Environment/Instituto Internacional de Derecho y Medio Ambiente) objected on the basis that the proposal was against both Spanish and European Union Law.

The CNMC in its ruling agreed, noting that it could be contrary to European regulations and be anti-competitive.

CNMC rejected the decree’s underlying security-of-supply justification.

Spain has an electricity-generation capacity margin of about 30 percent (as measured as the excess of supply over peak demand), far exceeding the safety cushion of 10-15 percent typically sought by grid operators.

Even so, the government had used a supply-security campaign to support capacity payments for conventional generation in general—and additional supports for coal.

CNMC stated: “The Spanish electricity system will not have problems of security of supply in the medium nor the long term. (Even) in the worst scenario with demand peaking at 46,000 MW and low generation, a significant part of the existing coal park could be safely discarded.”

The finding calls into question Endesa’s strategy to invest some €400 million in upgrades to keep three of its coal power plants operating beyond 2030. Endesa has maintained that the upgrades are crucial to Spain’s energy security.

As IEEFA noted in a report published last year, tighter EU air pollution standards that take effect in 2021 offer Endesa a strategic opportunity to break with its coal legacy.

IEEFA concluded in that report that the time is now to invest cash earmarked for coal power upgrades toward the more progressive growth strategies of Endesa’s parent, Enel, which is moving toward decentralized, digital and renewable energy technologies.

CNMC on Wednesday also appeared to call into question Spain’s capacity market, which IEEFA research has found is inefficient and is a poor value for Spanish consumers.

“Excess capacity should be analyzed,” CNMC said, “taking into account that Spanish consumers have paid significant payments for the availability of power stations since the liberalization of the electricity sector (in 1997).”

The commission said big-picture perspective is crucial as well.

“It is necessary to review the regulatory framework in a global manner: security of supply methodology, power plant mothballing, the capacity payment mechanism, and the authorization procedure for new installations.”

Gerard Wynn is a U.K.-based IEEFA energy finance consultant. Paolo Coghe is president of Acousmatics and Carlota Ruiz-Bautista is an Environmental Lawyer at IIDMA. Source: IEEFA. Reproduced with permission.