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Spain’s energy regulator rejects government plan to prop up coal

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Spain’s energy regulator has rejected an attempt by the government to prop up the nation’s oldest and most polluting coal power plants, stating that Spain’s massive overcapacity means it can safely close a “significant part of the existing coal fleet” without undermining security of supply, write Gerard Wynn of IEEFA (Institute for Energy Economics and Financial Analysis), Paolo Coghe of Paris-based indepdent consultancy Acousmatics, and Carlota Ruiz-Bautista of environmental law centre IIDMA (Instituto Internacional de Derecho y Medio Ambiente) in Madrid.

The statement by the Comisión Nacional de Mercados y la Competencia (CNMC) is significant, given a long history of Spanish government intervention to support domestic coal extraction, and to support coal-fired power generation burning both domestic and imported coal.

The CNMC statement appears favourable for one Spanish electric utility, Iberdrola, which wants to close its last two remaining coal plants, while making another, Endesa, look out of step. Endesa wants to extend the life of three of its coal power plants, arguing this is important to preserve Spain’s security of supply.
Political support for coal, coupled with uncompetitive gas supply contracts, has seen cleaner burning gas-fired power plants stand idle while dirtier, older coal plants operate at full capacity.

Coal phaseout plans

Last November, the Spanish-government proposed a “Royal Decree” which would allow the Government to over-rule a company wishing to shut down a power plant, if the government deemed that the plant was necessary for security of supply, or for another economic reason, or if it found that its closure was incompatible with energy planning.

The proposal appeared targeted at Iberdrola’s coal phaseout plans.

Environmental organizations, such as IIDMA (Instituto Internacional de Derecho y Medio Ambiente), objected on the basis that the proposal was against both Spanish and EU Law.

The CNMC has now made it clear that it agrees with IIDMA’s assessment, noting that it could be contrary to European regulations and be anti-competitive.
CNMC rejected the underlying justification for the royal decree, namely to preserve Spain’s security of supply.

Spain has a capacity margin of about 30% (as measured as the excess of supply over peak demand) (see also this article by Gerard Wynn), far exceeding the safety cushion of 10-15% that grid operators might seek. Despite this, the Spanish government has used a perceived threat to security of supply to support capacity payments for conventional generation in general, and additional support 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 somewhat undermines 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 needed to preserve Spain’s security of supply.

“Preserving efficient thermal capacity will ensure security of supply, and avoid additional costs to the system while reducing emissions,” it stated late last year, in its 2018-2020 strategic plan. The strategy appears to disregard Spain’s idle gas generation, however, and over-capacity in general.

Coal legacy

As IEEFA noted in a report last year, tighter EU air pollution standards that take effect in 2021 offer Endesa a strategic opportunity to break with its coal legacy, and divert cash for coal power upgrades instead towards the more progressive growth plans of its parent, Enel, in decentralised, digital and renewable energy technologies.

CNMC in its decision also appeared to call into question Spain’s capacity market, which IEEFA has previously described as inefficient and poor value for money for Spanish consumers. The regulator said:

“CNMC considers that excess capacity should be analyzed … taking into account that Spanish consumers have paid significant payments for the availability of power stations, since the liberalisation of the electricity sector (in 1997). The CNMC concludes that … 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.”

Editor’s Note

This article is based on a post on the IEEFA website, A Regulatory Blow to Spain’s Subsidized Coal-Fired Electricity Sector, published on 26 January 2018. Gerard Wynn is an independent energy expert who regularly works for IEEFA (Institute for Energy Economics and Financial Analysis) and keeps a blog, Energy and Carbon, with Gerard Reid. Paolo Coghe is an international energy and financial economist and owner of the Paris-based independent consultancy Acousmatics, Carlota Ruiz-Bautista is a lawyer at the environmental law centre IIDMA (Instituto Internacional de Derecho y Medio Ambiente) in Madrid.

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