The Minister of Energy, Tourism and Digital Agenda, Álvaro Nadal, stressed in a public appearance his intention to review the subsidies for renewable energy plants in Spain from 2020. According to the official, this decision will allow consumers to reduce their electricity bills by between 5% and 10%, benefiting the entire Spanish population.
The cut, however, has sparked controversy in the renewable energy sector, as many investors and companies that had taken advantage of the tariffs set by the government expect a considerable reduction in the profitability of their investments, which could lead to serious financial problems for the sector.
Reasonable profitability of renewables
Nadal also stated that the government's intention is that the remuneration of renewable plants is linked to the State bonus, a measure that is already contemplated in the current legislation. This would, in fact, mean a fall in the profitability of the plants, which in the current period is 7,39%. According to forecasts, with a review that takes into account the changes in the bonuses, this figure would be considerably lower, affecting all the plants that receive bonuses.
Renewable energies have been encouraged for years with subsidies that sought to support their expansion as a more sustainable alternative. However, with the progressive decline in technological costs and the country's economic situation, these subsidies have come into question. In this regard, the 2013 regulations linked the remuneration of renewables to the 10-year Treasury obligation, plus a differential of 300 basis points, which has been the subject of criticism by companies in the sector.
The government, however, remains firm in its decision, arguing that the rules of the game were clear from the beginning and that the 2020 review simply follows what is stipulated in the current regulations. According to Minister Nadal, this change will reduce the pressure on consumers' electricity bills and make the energy model as a whole more sustainable.
Effects on industry
The renewable energy sector, however, has expressed concern about the financial consequences that this cut will bring. With more than 20.000 megawatts affected, the financial impact could be severe for many facilities that signed contracts promising a 7,39% return over 25 years. Moreover, several experts point out that the cut could have consequences beyond the renewable energy sector, affecting some banks that have extended loans for the construction of these facilities.
Current data reflects that more than 40% of the sector's financing is committed to bank loans, which means that any drop in profitability could generate systemic problems beyond the energy sector, impacting the financial system. However, other experts point out that the cut is necessary to avoid an increase in the tariff deficit, which has already generated a significant economic hole in the Spanish electricity system.
The debate on reducing premiums has also found echo in international courts. ICSID (International Centre for Settlement of Investment Disputes) has previously ordered Spain to pay compensation to foreign investors for retroactive cuts to renewable energy, something the Spanish government has repeatedly tried to avoid.
Implications of the tariff deficit
Renewable energy subsidies have played a key role in the tariff deficit, especially since the approval of Royal Decree 661/2007, which boosted a rapid growth of renewable energy in the country. However, the excessive growth of projects, especially in solar photovoltaic energy, and the high subsidies represented a great cost for the Spanish electricity system. This led the government to take corrective measures in 2013 with a drastic reduction of these subsidies.
The aim was to reduce the tariff deficit, which at one time had exceeded 30.000 billion euros. Despite the efforts of the different governments to control this aspect, the premiums continue to represent a significant portion of the cost of electricity, which has forced the current administration to implement new reforms to avoid an increase in the electricity bill.
International awards and their impact
The decision to reduce premiums has also triggered a wave of international arbitrations. According to the most recent data, Spain has faced more than 52 arbitrations in international courts. In many of these cases, the courts have ruled in favor of the plaintiffs, forcing Spain to pay compensation that, to date, amounts to more than 1.600 millones de euros.
One of the most notable examples has been the award in favour of the Eiser Infrastructure fund, which won an ICSID arbitration against Spain and was awarded compensation of more than 128 million euros. This ruling, along with others, has led the government to reconsider its strategies and has encouraged the intervention of the European Commission.
Despite the convictions, Spain has maintained a firm stance in not paying compensation, based on a ruling by the Court of Justice of the European Union (2021), which has limited the validity of international arbitrations when they involve EU investors. However, international funds have responded by seeking to seize Spanish assets in other countries, such as the headquarters of the Cervantes Institute in London or stakes in airports.
Future vision for the renewable energy sector
The future of the renewable sector in Spain will largely depend on the policies implemented as a result of the planned reforms. Royal Decree-Law 960/2020, which governs the current auctions, has laid new foundations for the growth of clean energy in the country, with competitive prices that have made solar photovoltaic and wind energy the most attractive without the need for large subsidies.
Thanks to these advances, the weight of renewables is expected to continue to grow in the country's energy matrix, with the installation of new wind and photovoltaic parks that will contribute to meeting European emissions reduction targets. However, the challenge remains how to combine this growth with an aid policy that does not compromise the financial stability of consumers or generate new legal conflicts.
The renewable energy sector in Spain faces a future of uncertainty and opportunities. While current reforms seek to consolidate a more sustainable and competitive energy matrix, the challenge lies in finding a balance between the cost of premiums, the tariff deficit and the need to maintain the confidence of investors, both national and international.