Spain’s Power System Slashes Debt in 2015

Spain’s power sector, which has been shaken financially in recent years owing to plunging power demand, posted its first electricity tariff surplus in 14 years at the end of 2015. The National Markets and Competition Commission said on March 7 that the surplus of €550 million put the country’s debt at about €25 billion at the end of 2015—a 7% decrease from a year earlier.

Spain’s government has been operating the power system at a loss since 2000. The deficit expanded beginning in 2008 due to regulated costs—or so-called “access costs.” These include grid costs, subsidies for renewables and co-generation, and compensation for higher electricity costs on Spain’s islands. The government’s reluctance to increase fees paid by power customers to match subsidies for renewables led to a massive investment in the then-fledgling renewables sector, but it also caused an explosion in costs from €1.2 billion in 2005 to €8.4 billion in 2012.

The country’s five main vertically integrated energy utilities bore the financial burden until Spain’s Supreme Court ruled that those companies were entitled as creditors to recover costs imposed on them by regulation. In 2010, to avoid a huge one-off compensation—which would have dealt a major blow to Spain’s already teetering finances—the country set up the Spanish Electricity Deficit Amortisation Fund to turn the utilities’ rights into fixed-income securities.

Meanwhile, to lower the deficit, Spain has suspended support to almost all new renewable energy installations since early 2012, added new taxes on power generation since 2013, and limited increases in access fees. Also in 2013, it embarked on a more radical electricity reform, revising feed-in-tariffs with a plan that guarantees a yearly rate of return for investors.

While power prices in Spain have soared by more than 60% over the last few years, the country is on track to cut cumulative electricity tariff debt to below 100% of regulated revenues by 2019, as Antonio Tena, an executive with rating agency Moody’s Investors Service, observed in March. “The current legal framework strongly protects the commitment to reach electricity system sustainability. Ongoing surpluses would significantly contribute to the system’s deleveraging. Legal reforms are starting to yield results in taming electricity tariff deficits,” he said.

The renewables sector is also thriving. This January, investors purchased 500 MW of wind power and 200 MW of biomass power at auction without financial support. Spanish wind turbine maker Gamesa has reported a jump in sales, and ACCIONA posted a net profit increase of 12.1% in 2015 compared to the year before. Iberdrola, one of Europe’s largest power companies, also saw a modest 5% surge in underlying earnings for 2015.

But the volte-face on energy policy has been anything but a boon for some of Spain’s other power companies. Earlier this year, Spanish engineering and renewable giant Abengoa SA reported a €1.2 billion loss for 2015, after posting a €125.3 million profit a year earlier. In March, it signed a debt-restructuring agreement to avoid becoming Spain’s biggest-ever corporate bankruptcy, though it was still forced to file for protection in the U.S. under chapter 15, which governs cross-border insolvencies. The company, which has 250 projects across 50 countries (Figure 1), has been saddled with debt from a rapid global expansion. For now, the Seville-based company doesn’t expect the deal to materially affect operations in the U.S., where it holds stakes in the federally backed Solana and Mojave solar thermal plants.

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1. No smoke, all mirrors. Despite financial troubles, Spanish renewables firm Abengoa started commercial operation of Africa’s first solar tower this February. The 50-MW Khi Solar One plant installed in South Africa uses first-of-its-kind “super-heated” tower technology, which enables production at maximum capacity for two hours without sun. It also has a unique dry cooling system. Courtesy: Abengoa

Sonal Patel, associate editor