Renewable Sector Joins Big Electricity Companies Against Energy Reform; Plan a Historic Legal Battle

renewables auctionThanks to this auction, the average annual price of the electricity market will be reduced

The government’s energy reform is stirring up the whole sector, according to the daily Expansión. And not only the large electricity companies, such as Endesa, Iberdrola and Naturgy, which are already preparing a legal battle. Renewable energy companies are also coming out en masse. They are demanding this reform be softened by modifying some aspects which would lead to many of their installations posting losses and being doomed to closure, declaration of cessation of activity, and even technical bankruptcy. Dozens of renewable energy companies, many of them controlled by large international funds, will spare no legal means to fight the new regulation. Thus, the renewable companies join the large electricity companies, which have threatened to shut down nuclear power plants because the regulatory changes will not make the figures.

The Royal Decree Law drafted by the government includes a paragraph stating that the mechanism will be applied to the remuneration received for the total amount of energy produced by the affected facilities in the settlement period in question, measured in power plant busbars, and regardless of the type of contract used.

In other words, the energy sold outside the wholesale market, through bilateral contracts (or PPAs, in technical jargon) will also be reduced as, according to the government, these contracts, regardless of their price, have already internalised the opportunity cost of selling at gas and CO2 prices. These bilateral contracts are the essence of the current development of the renewable energy sector, because they serve to finance it. Under a PPA, a renewable commits to supply electricity to a customer at a certain price for a certain period of time. Currently, the contracts being signed are around EUR 40 / MW.

Industry sources told the newspaper that, at today’s prices, they would have to return around 80 euros/ MW, which would lead them to sell at a loss. It is estimated that there are currently 5 billion euros worth of PPAs on the market, all of them affected by the new regulation. Expansión therefore anticipates a historic legal and litigation battle. Moreover, the problem with PPAs is not only that they affect renewable energy companies, but also that they serve as a financial guarantee. So there are dozens of banks affected, which are the ones that lend money to build renewable energy facilities under the promise of recurring income they will no longer receive.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.