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Renewable Energies in Spain:
Targets and Regulation
Gonzalo Sáenz de Miera
Head of Prospective Department
Toledo, April 5th 2006
Targets for renewable energies
in Spain
Targets for renewable energies
in Spain are set out in
the Spanish Electric Law, the EU Directive
and the Promotion Plan for Renewable Sources of Energy
The 1997 Spanish Electric Law
establishes that 12% of primary energy
in 2010 must be from a renewable
source
The EU Renewables Directive of 2001
stipulates that 29.4% of the electricity
produced in Spain in 2010 must be from
renewable sources (compared to 19.9%
in 1997) (including large hydro)
The EU Council approved last week a
recommendation to increase to 15% the
target of renewable primary energy in
the EU by 2015
To achieve these targets, a
Promotion Plan for Renewable
Sources of Energy has been
produced. This plan has
steadily increased the targets
to be met for different
technologies
The new Renewables Plan for 2005 is
firmly committed to wind power
in energy terms, wind power production represents 61%
of the efforts set out in the plan for 2005-2010
O.R
Situation in
2004
Hydroelectric
2005-2010
32,284
Hydroelectric 3,945
Special Regime
∆ period
8%
19,571 70% 25,940 61% 45,511
65%
Biomass
2,193
8%
11,823 28% 14,014
20%
Rest
2,130
8%
2,417
Total
27,838
1,958
Wind power production is multiplied
by 2.2, reaching 45,500 GWh in 2010,
with a final contribution of 65% of the
total planned production.
32,284
5,904
Wind
14%
-
Situation in
2010
5%
6%
42,138
4,547
Biomass production is multiplied by 6,
an effort that is not very coherent with
its evolution to date.
7%
69,976
Other technologies such as solar
power will grow substantially but have
a reduced contribution.
Situation analysis by technology
Promotion Plan
Current
(1)
situation
2005-2010
Wind
Minihydroelectric
20,155
2,199
10,027
1,701
Evolution
(MW/yr)(2)
1,445
40
Required
evolution
(MW/yr)(3)
2,025
99
Investment
(M€/MW)
1.1
1.2
Business
volume (M€)
11,140
Guarantee of supply of raw
materials, support from
other sectors
485
68
310
2.4
3,729
Solar
Photovoltaic
400
34
5
73
6.0
2,196
0
0
100
4.0
Economic, technical
management and
administrative framework
597
2,039
500
Key factors
Speed up administrative
processes, improving social
acceptance and taking
advantage of state dams
Biomass
Solar
Thermoelectric
Status
2,000
(1) Statistical information on Special Regime Energy sales (CNE), February 2006
(2) Average of the last five years
(3) Average evolution required to meet targets
Reduction in costs
Technological and
regulatory development
and experience
Support framework for renewable
energies in Spain
The support framework (and its efficiency)
has been progressively improving, through to
the approval of Royal Decree 436 in 2004 and
the new Promotion Plan in 2005
1997
1994
Royal Decree
1998
2002
2004
Electric Power
Act
R. Decree on
Special Regime
Energy Planning
Document
RD 436 on
Special Regime
29% of electric
production from
renewable energy
sources for 2010
Basic framework for
renewable energies
Priority Access
Premiums
2005
13,000 MW wind power Regulatory stability
to meet targets
for 2011
Renewables
Plan 2005-2010
20,000 MW wind power
for 2010
2,065
1,764
1,534
Installed capacity by year 1994-2004 (MW)
1,277*
1,232
794
614
456
7
1994
57
1995
129
193
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: CNE (Spanish acronym for National Energy Commission) and EWEA (European Wind Energy Association)
* Lower investment ratio due to uncertainty over regulatory changes
• Average installed wind power in 2004-2005: 1,915 MW
• Average installed capacity from 1994-2004: 836 MW
Current support framework for wind
power in Spain
• Established by the 1997 Electric Power Act (Special Regime)
• Regulated by Royal Decree 436/2004
• All remuneration is indexed to the Average Electricity Tariffs - AET
AET =
Total cost of electric system
Estimated demand
Tarifa Regulada
Mercado
Remuneration options
% of AET (80-90%)
+ Market price
+ Premium (50% of AET)
+ Supply guarantee
- Cost of deviations
Independent of market
price
Similar to the ordinary regime +
premiums
=
€ 76.58/MWh in 2006
Remuneration is defined for the entire
life of the asset
Once the remuneration option is
chosen, the operator must stay with it
for at least one year
There are two additional incentives:
reactive energy and voltage dips
The system may be reviewed every 4
years, to be applied only to new
assets.
The Spanish support framework is a
recognised success story
Basic pillars
Predictability: the system guarantees
remuneration over the life of the asset
A report by Ernst & Young on this subject
considers that the Spanish framework is
the most attractive in the world
Stability: the legal framework is based
on criteria of non retroactivity
Profitability: a sustainability scenario is
defined, necessary for growth in
investments
The Commission’s report for 2005 concludes that
the premiums are most effective and that Spain is a
success story
Framework review in 2006
Royal Decree 436/2004 will be reviewed
in 2006, defining the support framework
for renewables, will be reivewed in 2006
There are three reasons for this review:
The energy price scenario in which prices for RD 436 are
defined may have changed substantially.
Application of RD 436 has had effects which could not have
been anticipated in the RD itself.
RD 436 established a review for premiums and prices in
2006, to be applied from 01/2008.
Market prices have increased
significantly since 2004 due to the rise in
fuel costs and in CO2 emissions
65
60
Current
situation
Expected evolution
The scenario has gone from the 30 €
MWh considered in RD 436/2004 to
prices of 40-60 € MWh.
55
€/MWh
50
45
RD436
passed
40
35
30
25
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20
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20
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Mar 2004
The likely continuation of some of
the factors behind this change – fuel
prices and CO2 emissions – leads to
the conclusion that this price
scenario will be maintained over the
medium term, though with a high
level of volatility
The results of the wind power forecast have
improved significantly but the elimination of
the anticipated settlemanet option has
increased the cost of deviations
Deviations
Costs
Reduced to levels of 50% for some wind farms and 30% on aggregate
RD 436 considered an option for early payments, whereby deviations
were paid at 10% of the market price
With the loss of this option, the market price is paid (~ 30% of the market
price)
Cost of deviations
Market price
Cost of deviations per MWh
output (with deviations of
30%)
RD 436 scenario
(March 2004)
Early payment 10%
Market Price = 3 € MWh
30 €MWh
Deviations x cost = 30% x 3
€MWh = 0.9 € MWh
Current scenario
Real cost in the market –
30% Market Price = 16.5
€ MWh
55 € MWh
35% x 16.5 €MWh = 5,8 € MWh
Wind power is set at a market price lower
than the average pool price (and is reducing
total costs)
Example of 14-16 February 2006: with the same level of demand, an increase in
wind production reduces thermal contribution excluding fuel-oil form the market,
which triggers a fall of 20% in prices
February 14th
February 15th
February 16th
120
40000
35000
100
80
25000
60
20000
15000
40
10000
20
5000
0
0
1
3
5
Eólica
7
9
11
13
15
17
19
21
23
Resto Régimen Especial en mercado
1
3
5
7
Nuclear
No wind, fuel-oil producing.
Price = € 110 / MWh
9
11
13
15
Total Hidráulica
17
19
21
Carbón
23
1
3
CCGT
5
7
9
11
Fuel + gas
13
15
17
19
21
23
Precio mercado diario
Increase of wind energy
avoids fuel-oil to produce.
Price = € 85 / MWh
Precios MD (€/MW
30000
As a result wind energy is reducing
total costs
Example of 14 and 16 february 2006
• Wind production evolves from 16 GWh on 14 february to 141 GWh el 16
• As a result, thermal contribution decreases by 73 GWh.
• As thermal contribution decreases, coal and CCGT production falls and fuel-oil
is not required to produce.
• Accordingly, market price obtained by the whole ordinary regime is reduced by
20 €/ MWh (from 84 to 64 €/MWh)
Accordingly, in 2005 wind energy generated
savings for 660 M€ and contributed to
reduce the deficit
Extra cost of wind energy
Extra cost of 1wind MWh =
premium + incentive = 38.3 €/MWh
Wind production in 2005 =19,300
GWh
Extra cost of wind energy in 2005 for
the system= 19,300 GWh x 38,3 €
MWh = 740 M€
Extra cost
740 M€
Cost avoided by wind energy in market
Without wind energy, market price in 2005
would have been 6 €/MWh higher on
average
For example, along the 6 months in which
price was set by CCGT, if wind energy had
been producing, price would have been
set by fuel-oil, 20 €/MWh more expensive
Cost avoided by wind energy = total
demand x 6€/MWh = 230.000 GWh x 6
€/MWh = 1.400 M€
Cost avoided
SAVING OF 660 M€
1,400 M€
As a result of the above, with current
market prices, wind power is receiving a
high remuneration, but less than it may
seem
Market remuneration of wind energy in 2005
Public
Real
opinion
remuneration of wind
Market
Average market
revenue
energy
in 2005
55.70
51.20
Capacity Payment (provisional)
4.80
4.80
Value of premium (40% of AET)
29.30
29.30
Incentive (10% of AET)
7.30
7.30
Cost of deviations(35% of
deviations)
-1.90
-5.80
95.20
86.80
TOTAL
Wind
Wind energy
energy only
only
receives
receives 92%
92% of
of
average
average market
market price
price
due
due to
to inverse
inverse
correlation
correlation between
between
output
output and
and prices
prices
With
With the
the elimination
elimination
of
of the
the anticipated
anticipated
settlement
settlement option
option in
in
2005,
2005, cost
cost of
of
deviations
deviations is
is
multiplied
multiplied by
by 3.5
3.5
A reduction of 8.4 €/MWh equals more than 10% of AET
However, maintaining the scenario of
higher and more volatile prices than
those considered a “Cap & floor” system
may be justified for remuneration in the
market option
This could involve limiting the market price that wind power generators are paid. Over
a price interval (defined by the cap and the floor) the provider will receive this value
plus the premium. It will forsake higher prices but will be protected against lower
prices.
This system would not affect the basic principles of the framework (stability and
sustainability) and could be used to:
•
Limit the cost of wind power for the system (in a tariff deficit situation)
•
Prevent possible excess remuneration that may raise doubts about the market
option, which is having such positive results on the system
•
Maintain real stability in the remuneration of wind power providers, setting a floor
for remuneration.
This system would not affect retroactivity of the basic principles of the support
framework as it would not breach the legitimate trust of investors, guaranteeing a
reasonable return on the activity.
The premium and price review, to be
applied from 2008 to new investments
only, should take into account the
drivers that affect profitability
Analysis
Costs
’
Investments
Operations and maintenance
No change
Price evolution
Profitability
levers
Revenue
Market
Hours of operation
Cost of deviations
Inverse correlation
9
9
9
’
Investment unit costs are rising due
to the increase in size of machinery
and high international demand
Factors
Unit cost wind energy investment
COST Eur/MW
1300
1250
1200
1150
1100
1050
1000
950
900
850
800
750
Requirements for larger machines for
environmental reasons
+15%
1.050-1.150
Eur/MW
Although these machines make better use
of the wind, this increases the cost per
MWh output (due to higher unit costs)
950 Eur/MW
1995
1997
1999
2001
2003
YEAR
2005
2007
Prices are forecast to remain high due to
increased demand in international
markets (USA, China, India)
Wind farms that are installed in the
future will tend to have shorter
operating hours
RD 436 considered that wind farms would
operate for an average of 2,300 hrs/yr.
2.472
2500
2450
2400
2350
2.309
2.312
2300
2.239
2250
2.190
2200
2.129
2150
However, official data from the CNE show that
the operating hours are closer to 2,200 hours
per year.
2100
2050
20
05
20
04
20
03
20
02
20
01
20
00
2000
Source: CNE (National Energy Commission)
There is a trend towards a decreasing number
of hours for wind farms. This trend will
continue in the future as the best locations
get taken up.
Conclusions
Conclusions
Wind power is the main area of growth in the renewable energy business, in terms of both
power and energy.
The support framework for these energies that is set out in RD 436 is proving very efficient
and effective for promoting wind power for its stability, predictability and sustainability.
In 2006, this RD is to be reviewed in order to adapt it to the new price scenario, to
incorporate any unexpected effects it has had and because the RD itself specified this
review.
If the effectiveness of the framework is to be kept, in order to reach the targets defined, the
review must be based on the following pillars:
• Basic principles to be maintained: predictibility, stability and sufficiency
• Definition of a cap & floor scheme in the market remuneration. As a result, the
sustainability of the market option and its advantages for the system are guaranteed
without affecting the basic principles of the system, maintaining a reasonable return
on investments
• 2008 prices and premiums review must be applied taking into account the increasing
cost of investment and the trend to a lower amount of working hours of new parks.
Renewable Energies in Spain:
Targets and Regulation
Gonzalo Sáenz de Miera
Head of Prospective Department
Toledo, April 5 2005