The revenue cut to hydroelectric and nuclear energy might jeopardise investments for the energy transition

AleaSoft, June 2, 2021. The measure that the Government will approve to cut benefits, or rather increase costs, of hydroelectric and nuclear power plants may have unwanted consequences at the mid‑ and long‑term. According to AleaSoft, a regulatory change of this scope will increase concern among investors about the insecurity it will generate and might jeopardise the investments necessary for the energy transition.

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The intention of the Government is cutting the so‑called windfall profits, the profits fallen from the sky, to the oldest hydroelectric and nuclear power plants that are considered amortised. The objective is lowering the cost of the electricity bill by making hydroelectric and nuclear power plants also pay the costs of the CO2 emission rights, responsible in part for the current increase in European electricity markets prices, although they do not emit CO2 nor greenhouse gases.

A negative message to the investors

According to AleaSoft, this announcement will have a very negative impact on the investors’ interest in renewable energies. For the energy transition, for the renewable energy capacity targets of 2030, for the environmental targets of 2050, in the next thirty years trillions of Euros will be needed in investments, and the regulatory uncertainty that a measure like this introduces is a bad sign for the investors.

The intervention in the markets with laws and decrees was already seen to have negative consequences at the mid‑ and long-term. What is needed to stimulate investment are strong markets and regulatory stability.

Endangering the energy transition and the price of the electricity bill

In addition to jeopardise the investments needed to finance the energy transition, revenues are being cut to two non‑CO2‑emitting technologies. The hydroelectric energy is a renewable technology that, moreover, is completely manageable, a privilege that wind and photovoltaic energy do not enjoy, for example.

The other affected plants are the nuclear power plants. Their closure is planned as of 2028 and in a staggered manner until 2035. An orderly and progressive closure of the nuclear energy capacity is very important so that it can be offset by the increase in renewable energy capacity without causing an increase in CO2 emissions.

This law proposed by the government would further increase the costs of production and sale of the nuclear energy, which, although popularly facilities are considered already amortised, are high costs that can endanger the viability of these plants. An early closure of the nuclear power plants would undoubtedly lead to an increase in CO2 emissions at the short- and mid‑term, having to replace their production with combined cycle gas turbine power plants. This, in addition, would cause an increase in electricity market prices and, consequently, an increase in the price of the electricity bill.

On the other hand, the insecurity that a measure like this causes in renewable energy investors is worrying. For example, a photovoltaic energy investor may think that in the future it is possible that they will also end up charging him part of the CO2 costs under a pretext similar to windfall profits. So he will think twice when investing in Spain and will look for and find options in other European countries that give him more security.

Collateral problems

The simple announcement of a law of this type already has visible consequences. Just after the government’s announcement, the Spanish companies that own the affected hydroelectric and nuclear power plants registered significant falls in the stock market. This is a reflection of the insecurity caused in the investors in the face of the legal and regulatory insecurity.

Additionally, if a law of this type is finally approved, the companies will claim before the courts. Therefore, many years of lawsuits can be expected, which would only worsen the image of regulatory insecurity in Spain and the confidence of investors.

Problem and solution

The problem of the high prices is common to all European countries and the solution must be taken by all governments since the electricity market to which the Iberian electricity market belongs has the same rules for all electricity agents of Europe. High CO2 emission rights prices can be controlled by limiting speculation as much as possible. This is the only possible solution to maintain the confidence in the European electricity market.

On the other hand, according to AleaSoft, the most fair and logical solution to the increase in the price of the final consumer’s electricity bill is precisely the one that does not punish the producer nor the consumer. Taxes are the most noticeable aspect. The clearest example is the 7% tax on the sale of electricity, the IVPEE. This is a tax that damages producers in Spain compared to generation facilities in other European countries. This, in addition to making the energy price more expensive in the market and, consequently, in the final consumer’s bill, causes energy imports to increase in Spain.

Any regulatory change that affects the production costs of hydroelectric and nuclear power plants will cause a new comparative grievance with its European competitors, and in an interconnected electricity market like the European one (in fact, it is a single market with the same rules for all countries) that can be very detrimental to their competitiveness.

According to AleaSoft, the definitive approval of this law is unlikely to happen, and in the event that it did, it would end up being repealed sooner or later. So it is most likely that this whole situation will end up meaning a loss of time and a degradation of the image of the country, the energy sector and the energy transition.

The next AleaSoft’s webinar

This and all the aspects that affect the European energy markets are analysed in the webinars that are organised monthly at AleaSoft. The next event will take place on Thursday, June 10, and it will be entitled “Prospects for energy markets in Europe. PPA and their importance for large consumers. Vision of the future”. In it, in addition to the usual analysis of the evolution of the energy markets, there will be the participation of Fernando Soto, Director‑General of AEGE, to talk about the PPA for the large consumers and the impact of the Statute of the electro‑intensive consumers. The part of the vision of the future will focus on the decarbonisation of the industrial sector and the role that green hydrogen will play in the energy transition.

Source: AleaSoft Energy Forecasting.
Long term forecasting

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