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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 de c 1 oc 998 t1 au 999 g 20 ju 00 n 20 ap 01 r2 0 fe 02 b 20 de 03 c 2 oc 003 t2 au 004 g 20 ju 05 n 20 ap 06 r2 0 fe 07 b 20 de 08 c 2 oc 008 t2 au 009 g 20 10 20 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