Analysis FAES The regulatory contradictions of the electricity sector

25/03/2019

Miguel Marín is head of the economic area of FAES Foundation


The process of energy transition towards a full decarbonization of the economy by 2050, a commitment made by Spain as a member of the EU following the Paris agreements of 2015, represents a challenge of social transformation so profound that it is not even comparable to the introduction of the euro at the beginning of the current century. We are being asked - because of representative democracy, as we have decided so - to transform our way of moving and traveling, of producing and transporting goods, of heating our households, of producing electricity… We are being asked that our total energy demand generates a supply that does not emit CO2 and also with really ambitious deadlines. 

The challenge of decarbonization could not be more laudable. If only because we do not inherit the land from our elders but borrow it from our children, the goal of bequeathing cleaner air and a more sustainable planet to future generations has little talk back. The design of the right strategy to succeed in achieving the desired sustainability is another story and there are not many ways to guarantee that success. The only way to achieve the goal of full decarbonization of the economy by 2050 is to make the energy transition sustainable in itself and that requires the sustainability of the three pillars on which any energy policy is based, that is, economic sustainability, social sustainability and environmental sustainability. 

First, and foremost, the latter. We have set this whole process in motion in order to put an end to the effects of CO2 emissions on global warming and, consequently, any successful energy transition must guarantee a path of reduction of these emissions which, in the case of Spain, currently amount to some 350 million tonnes of CO2, but we have not yet managed to revert its growing trend. Secondly, economic sustainability has two very clear vectors. On the one hand, the need to generate adequate price signals so there are no breaks in the huge investment process that has to be set in motion. On the other hand, to guarantee an evolution of the price of electricity that is competitive for companies and affordable for households. This leads us, in third place, to social sustainability, which can be summarize in guaranteeing the supply and an affordable price, taking into consideration the impact on the welfare of citizens, and designing reconversion plans for the losses that the process will certainly bring. 

The situation of the energy transition in Spain is lagging behind our main reference partners, more than three years after the Paris Agreement. Weak governments, blockades and political distractions translate to a situation in which we are still far from being prepared to face a disruptive process of this magnitude with a minimum guarantee of success. 

The recently reached agreement between the Government and businesses on extending the lifecycle of nuclear power plants and the consignment of the Energy and Climate Plan to Brussels by the Government, beyond its questionable content, predicted a certain acceleration of the process. However, the call for election will delay any progress until the beginning of 2020 at the earliest. 

Therefore, perhaps it would be the perfect timing to review, since we have time, some of the foundations on which the success of the decarbonization of the economy must be based. Some elements which, unless modified, will make it very difficult for us to achieve the committed objectives in time. 

The first and most pressing issue is, surely, that political parties need to be aware of the need for this process to be carried out collaboratively and that it will not succeed if it is done behind companies' backs. This is one of the most thorough investment processes ever carried out in our country, and certain recent attitudes of the governments of the two responsible parties raise concerns about our politicians' knowledge of how the investment mechanisms of the global companies that dominate our electricity market and our productive network work. One of the most obvious consequences of this is the structural and unjustified distrust that has been generated towards the electricity companies that, in some way, legitimize public policy actions of very dubious legitimacy. 

There are many examples, but perhaps the financing system of the bono social (social bond[1]) is very illustrative of the serious distortions that public intervention has come to perpetrate in a market in which we presumably aspire to have legitimate competition between companies driving market variables. 

The bono social is based, per se, on a concept such as energy poverty, which is questionable. Unfortunately, there are no situations in which poverty will be exclusively energy poverty, when someone reaches the point of not being able to pay the electricity bill it seems obvious that poverty probably has already reached all spheres of their lives. This new political trend of generating a basic income by delivering to citizens is a much wide-ranging debate that has to do with the effectiveness of our welfare system as a whole. 

We are making a serious mistake by fragmenting the problem of poverty and, above all, by avoiding a debate in which society should be involved. Globalization and technological revolution are creating hardly-recyclable losers in Western societies. Surely, the only way to guarantee these people a decent level of welfare is through the State Budget and it is a mistake to make the electricity companies, the allies in the energy transition process, pay for this social failure. The weekly protein intake is also part of the AROPE poverty indexes, which serve as the basis for material poverty statistics in the European Union, and yet, at least until now, nobody would think of making any supermarket chain pay a food voucher for chicken and steaks. 

But taking that financing system is not very well founded, perhaps the most embarrassing thing is that the State takes advantage of all this because – must be seen to be believed - the social bond incorporates the VAT and, therefore, it becomes a direct transfer from the companies to those in need and to the State.

This brings us directly to the second point of our debate that we must analyze if we want to have any expectation of success in the 2050 decarbonization process. This issue is the merciless political abuse of the kilowatt/hour (kWh). 

After the economic crisis, scarce fiscal creativity and, undoubtedly, the pressing needs of that specific moment have led to a proliferation of taxable events, that have sprout out of nowhere, imposing restrictions on the most diverse behaviours. One of the victims of this process has been the kilowatt/hour. In some cases, one kilowatt/hour can support up to five taxable events: the VAT, the Special Tax on Electricity, the Tax on Electricity Generation -now suspended, but in force-, storage and waste production taxes if it has been produced with nuclear power plants, and the environmental taxes of the corresponding Autonomous Community. Five tributes on the same chargeable event overlapping looks a lot like the definition of confiscatory. 

However, we could even accept it if it was not for the fact that this kilowatt/hour tax persecution makes the final price of the electricity paid by households more expensive and, whether we believe it or not, has an impact on the competitiveness of businesses and, furthermore, on employment. This brings us to the third point of our debate which, if not resolved, will make it extremely difficult for us to achieve the objectives we have committed ourselves to. The question of the electricity rate. 

The price of electricity in Spain is probably one of the most distorted prices out of all the products exchanged in our markets. When we pay for electricity, we do not just pay a margin above what it costs to produce, transport and commercialise it. That would be reasonable in real markets. However, within the so-called "electricity bill", we are paying for a series of political decisions which, without questioning their laudable intentions, could be financed in several other ways; especially considering that in most cases they respond to national strategies that overwhelm the electricity sector, such as the decarbonization of other energy sectors or the integration of the Islands and their special conditions in the parameters of peninsular service. 

If we really want to orient our economy and coexistence towards full decarbonization the first thing we have to do is to orient the incentives towards the decarbonization of the demand. That, whether we like it or not, means eliminating the distortions in electricity prices which today means that, with very competitive electricity generation at European level, Spanish households and companies are paying for electricity and hydrocarbons, the main sources of primary energy in Spain, as if we were an oil-producing country, when in reality we do not even have a drop of oil. If we do not alter the relative prices of energy sources and bring them to their real equilibrium levels, any aspiration for sustainable energy transition will be a chimera.

One of the main consequences of this price distortion, that has generated an again blushing level of demagoguery in the political sphere in recent times, has been the debate on self-consumption and, the misnamed, "sun tax". It seems likely that if the price of electricity was not so abnormally high, the inclination towards self-consumption would be, let’s say, more rational. 

There is no doubt that new renewable generation technologies have provided a new landscape for distributed or autonomous generation that must necessarily fit into the total generation of the future. But it is no less true that the current technological development and urban planning of our cities make it unequal, and very difficult, to extract the maximum advantages of the figure of energy self-consumption.

It is paradoxical that it is the most left-wing parties that have waved the "end of the sun tax" flag. Of course, this is not a tax, nor does the sun have anything to do with it. It is a concept as simple as that if someone wants to produce its own energy but wants to stay connected to the grid "just in case" or to sell the electricity surplus, the rational thing to do would be sharing the network’s maintenance cost with other consumers. It is that simple. One would expect the political left to say that it is deeply unsympathetic that the rich in their detached houses, the most efficient for self-consumption, cease to contribute to the network maintenance that the rest of us must continue to pay. The misnamed sun tax is all about this; it is about taking out private insurance and not paying, so to speak, social security. Or so the debate in Spain has arisen. It is clear that everyone benefiting from a certain level of income, would be willing to pay an insurance policy to recover the lost value of the precious assets in their freezer after a weekend blackout. Even more so if these blackouts are frequent, because they depend on the intermittency still shown by renewable technologies in the absence of efficient autonomous storage.

The energy transition provides us with many opportunities as a country and, well resolved, in addition to the obvious benefit to households, it should lead to a leap in the competitiveness of our economy due to the impact on long-term energy costs, given the abundance of renewable resources. But that requires a good resolution.

The Government's Energy and Climate Plan, following the call for elections, is left in a limbo that, at the very least, provides time to rethink some of the issues mentioned above and others of a more technical nature, but not of minor importance, that should cement future consensus. Three issues stand out especially among the latter. On the one hand, setting an adequate pace for the development of renewable generation, which necessarily forces us to take into account the proliferating companies and the PPAs (Power Purchase Agreements[2]) that should reduce the need for new auctions in the future; linked to this is the urgent need to develop efficient mechanisms for remunerating the capacity and firmness of the system, in view of the future development of storage; and finally, to be aware that the development of renewables, self-consumption or the electric vehicle depend on the development of electricity grids and their digitalization. We are talking about tens of billions in investment that will not take place unless two conditions are met: long-term regulatory stability and adequate profitability based on market expectations and comparables from other countries where things work well. It is not possible to govern or make a transition as such solely on the basis of prohibitions and obligations, but in a collaborative manner, without preconceived notions. 

In Spain, in many areas, but especially in energy policy, pseudo-ideologies are superfluous and there is a lack of more common sense and more sense of State. The energy transition is an enormous challenge as a society, and we can only have a chance of success if we position it at the top of the political agenda, as a genuine national ambition. If we really want and believe in the energy transition (this is what we economists call a heroic assumption), it is evident that we have not yet calibrated its possible effects and consequences on our productive model. We still have time to put an end to this situation and provide certainty from the political consensus and intelligent planning for a process in which we all have a great deal at stake. 

At the time of writing this analysis, Spain-based multinationals continue to announce ERE's[3] because they are unable to meet energy costs. The same political decisions that keep the price of electricity artificially high in Spain should be reviewed in order to lift that burden on Spanish companies and households that, for no reason, continue to pay higher prices than the market would provide.


[1] Referring to the Spanish term bono social which is a discount on the electricity bill, regulated by the Government, that aims to protect households in a situation of social or economic vulnerability.

[2] Agreement or contract for the purchase and sale of energy between a generator and a buyer, generally for a long period of time. The buyers are energy traders, who in turn will resell the energy purchased through the PPA to their final customers.

[3] An employment regulation file (ERE by its initials in Spanish) is a procedure contemplated in the current Spanish legislation whereby a company in a bad economic situation seeks to obtain authorization to suspend or dismiss workers.


Translated by Carmen Amado Paredes

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