A Spanish Tale: Poor Regulation and a $26 B Tariff Deficit

Today, Spain's electricity tariff deficit stands at €26 B and this year it seems the government will be able to finally balance the revenues and costs from the electricity sector. While this is an improvement on the €4 B shortfall that was added to the deficit in 2012, it comes as the result of years of retroactive cuts to renewable energy contracts, the termination of the feed-in-tariff (FIT) system, and taxes on all forms of generation both renewable and conventional.

The origin of the tariff deficit lies in the government's restriction on the increases in customer's electricity bills. Whenever the costs of generating electricity exceeded the legal limit on what utilities can charge customers, the difference, or deficit, was financed through debt. These debts were intended to be a temporary measure to be paid at a later date. However, this systems breaks down when the increase in costs consistently exceeds the legal limit on revenue rates, as has happened 11 out of the last 13 years. 

While renewable energy, primarily solar power, has been the main contributor to the trade deficit since the FIT scheme started in 2008, the tariff deficit predates the FIT scheme. Figure 1 below shows the annual tariff deficit from 2000 to 2011. The FIT scheme for solar power was introduced in 2008, which corresponds to a large increase in the tariff deficit in that year and onward. However, significant annual deficits were ran in the years prior to the solar FIT scheme in part due to increases in natural gas prices. 

Figure 1: The annual tariff deficit from 2000 - 2011 in million €. [1]

Figure 2 shows a breakdown of the costs of the electricity system and illustrates how significant the renewable energy FIT plays in driving the tariff deficit today. A projected 2013 balance sheet of the electricity system, shown in Figure 3, estimates FIT payments will make 44% of all the costs to the electricity system. This comes despite retroactive cuts to the FIT, reduction in the hours power plants are eligible to receive the FIT, and many other measures to increase revenue and reduce spending. (See the chart in the previous blog for a full list of changes.) Solar power (both PV and CSP) accounts for the majority of the FIT payments. A 2013 projection estimates, solar power will receive 63% of all FIT payments while only producing 19% of the renewable generation. [2] Wind power, on the other hand, earns more revenue than it takes in from FIT contributing to reduce the tariff deficit.

Figure 2: Access costs in million € and breakdown into categories. [2]

Figure 3 shows the the projected balance sheet for the electricity system in 2013. The projection estimates revenues will be sufficient to cover all the costs, which means no annual tariff deficit. However, with 20% of all costs coming from servicing the existing tariff deficit, generating a surplus to begin paying down the cumulative deficit is very difficult. The difficulty of the Spanish electricity system holds true for all debtors. The deeper in debt, the more difficult it is to climb out as more and more money goes to servicing the debt.

Figure 3: The projected balance sheet for the Spanish Electricity Sector in 2013. [3]

Figure 3 also shows tax law 15/2012, which levies a 7% tax on all electricity generation, plays a significant role in covering the €5.7 B shortfall between costs and revenues. Here you see the line between private and public enterprise blurring.  In 2012, in response to concerns over the solvency of the Spanish utility companies, the government put together a public financing vehicle called the FADE (abbreviation is Spanish for Electricity Deficit Amortization Fund), which currently holds 66% of the electricity deficit. Of the remaining portion, 19% is still held by utilities and 15% is held by third parties. [3] It should be noted that the FADE is not officially on the government's balance sheet. The FADE is a separate fund that issues its own bonds, but in the end guaranteed by the government. 

There is no denying the FIT policy is causing many problems for Spain. The Spanish FIT policy when initiated provided subsidies even more generous than those in Germany, despite the solar irradiation in Spain being almost double that of Germany. The target for installed PV in 2008 was 400 MW. The actually installations was 2400 MW, or six times the targeted amount. The problems in the Spanish electricity market is inherently due to poor policies. The tariff deficit resulted from a legal restriction on electricity prices preventing utilities from passing the true costs onto customers. The high cost of solar power was the result of an unnecessarily generous subsidy scheme. 

Since the beginning of 2012, Spain has ended their FIT scheme. Yet, a few solar power plants have been installed and many others are in the works. It is unlikely that most of these plants will be build due to administrative constraints, but it shows that solar power can still be profitable even without subsidies. If Spain had only waited four more years, it may have been able to build a thriving solar industry without any subsidies. 

Sources

[1] Couture, Toby. "FITs and Stops: Spain's New Renewable Energy" E3 Analytics. Mar 2012.

[2] CNE. "Spanish Energy Regulator's National Report to European Commission 2013." 18 Jul 2013.
[3] Paz Espinosa, Maria. "Understanding Tariff Deficit and Its Challenges". U of Basque Country. Jan 2013.