Sweeping reform could reveal potential of gas sector

With a growing tariff deficit, proposed Government measures could also increase competition and make Spain a hub for the gas industry

After years of discrepancy between regulated prices and the cost of power, in 2014, a controversial new power reform comes into force in Spain, in order to deal with a multi-billion euro tariff deficit in the electricity sector. And the Spanish Government’s attention is now turning to a similar problem in the gas sector by way of preparing a new reform. And lawyers say that the contributing factors that led to a deficit in the first place could hold the key to ensuring future global opportunities in the gas market.
In theory, gas and power go together hand-in-hand, so when a reform is being implemented in the power sector, there is the automatic assumption that there will be similar troubles in the gas sector, explains Luis Pérez de Ayala, Energy Partner at Cuatrecasas, Gonçalves Pereira. “Both markets are treated very differently in Spain, and the gas sector just doesn’t have the same kind of problems.”
Lawyers believe that the Government has a right to be concerned, however. “Clearly the electricity sector is taking precedence as there is a €26bn deficit compared to what was reported in 2012 as a €300m tariff deficit in the gas sector,” says Álvaro Valle de Alvear, a Partner at Garrigues. “But this gas deficit wasn’t there in the past and while it’s not currently that big, it is growing.”
Despite the lack of preparatory drafts about the exact terms of the new framework, the new gas reform is considered as urgent as the power reforms, and therefore it is likely to have similar objectives say lawyers – to cut costs and improve competition.
But while these markets share a number of features, they clearly differ in terms of the players and the activity involved. “With electricity, there is talk about generation and renewables,” says Valle de Alvear. “In gas, the debate is completely different as Spain doesn’t have any gas producers. Talk tends to revolve around transmission and distribution costs.” Added to which, with the same players that own the infrastructure also trading the gas, the sector doesn’t have thousands of players to raise its profile.
The cause of this gas sector deficit has been largely attributed to forecasting and planning mistakes that were made in the years before the economic crisis when constructing the infrastructure, combined with a dramatic drop in demand, say lawyers. This has meant that Spain’s gas plants have been operating at a fraction of their capacity, and due to the recent surge in renewable energy, the country is battling an excess gas supply.
To align costs and revenues involves the Government changing remuneration schemes of various activities, such as transmission, distribution and underground storage to bring down the deficit. It also means finding a way to increase competition – something law firms view as an ongoing challenge in that there may be less of a deficit, but this in turn means fewer players and transactions.
However, concerns about reducing the deficit have given way to hopes of a future international expansion of the gas market. “The players and the economic impact are less than in the power sector, but there are other additional measures to be taken that could create other opportunities,” says Valle, referring to a possible plan to use the existing gas facilities and infrastructure to enable another measure to run in parallel – the creation of a gas exchange. This is a potential area of interest for international players with an appetite for the Spanish market, based on a forthcoming gas hub.
Spain is still one of the few markets in Europe that trades on a bilateral basis, whereby traders find a counter-body and negotiate a contract with no reference of indexes of gas prices. Creating a formal gas exchange in Spain would not only bring more competition and offer consumers more choice and clarity on prices, but increase the volume of gas trading in Spain – something that Ayala sees as a real opportunity. “The fact that there are now new investors focused on setting up the hubs is really important as it means it’s something pending.”
More importantly, from an international perspective, with strong connections to gas sources in North Africa, this proposed gas exchange could make Spain a viable gas alternative to Russia or the Middle East – an extraordinary alternative for Europe.
For all the comparatively small deficit and untapped potential, law firms still think this proposed gas reform won’t completely escape public scrutiny. “It will certainly not be as controversial as the power sector reform,” says Valle, “but domestic and incremental market players in the gas industry active in the transmission and distribution business will always be seen to be against any change in the regulatory framework seeking to reduce the remuneration of such regulated activities”.
The hope is that whatever the end reform looks like, long-term legal certainty can be found if new regulations are mixed with economic sensibility. “As long as the Government passes a framework that assures certain economic stability and reduces the deficit for the gas and power sectors,” says Ayala, “I think that investors will be confident in this new reform.”