Time for new energy sector thinking – Garayar Asociados

In its present form, the Spanish electricity system is financially unviable, but major changes could produce mid-term results, says Javier de Montalvo, Head of Energy at GARAYAR ASOCIADOS.

“The cash deficit resulting from the nonmonetisation of the “déficit tarifario” – supported by Spanish utilities’ balance sheets – is penalising their market quotation, as it has now reached unsustainable levels, over €13bn.”

Financing difficulties have been made worse by problems in the international debt markets, but a major issue for the Spanish electricity system is the structure and regulation of the Production Market, he says. “Electricity price setting is increasingly subject to distortion, by external circumstances and recent regulatory measures, preference for renewable generation, or the promotion of domestic sources over others.”

The Spanish pool price does not truly reflect production costs in many instances, so many now say that Spain no longer has a “real” competitive market.

The setting of a marginal price for all technologies is not economically rational, he says, particularly when it benefits sources such as nuclear and hydroelectric, where their production costs are already amortised and the primary energy cost is – as in the case of hydroelectric – virtually zero.

Major reform is then required although measures could already be adopted to improve matters, he believes. Among the most urgent, the extension of licences for Spain’s nuclear power plants and the limited installation of new capacity, as well as a competitive re-tendering of hydro-electric resources.

“With respect to recent domestic coal incentive measures, gas production should not be at a disadvantage – gas is operationally more flexible, efficient and produces much less CO2 emissions than comparable coal facilities,” says de Montalvo. “Support to the coal sector could be made via “garantía de potencia” up to a certain level. Its lack of competitiveness should not be transferred to the power system.”

Support for renewable technologies should be maintained, but it must be accepted that sources such as solar photovoltaic have proven speculative, he says. “More emphasis should be placed on ‘real’ industrial technologies, such as biomass or wind production – which now accounts for 18% of electricity demand.” He remains however optimistic about the Spanish energy sector. “It remains among Spain’s most dynamic economic sectors, international, export-driven and forceful – albeit less so in the face of the current crisis.”