On recent November 4, Royal Decree 96/2020, of November 3, was approved, which regulates the economic regime of renewable energies (REER) for electricity production facilities, which establishes a framework for the auctions that want to be carried out carried out by the Government to guide and control the deployment of renewable energies in Spain with an eye to the objectives presented in the National Integrated Energy and Climate Plan (PNIEC) 2021, of the Ministry for the Ecological Transition and Demographic Challenge.
Said publication must be related to that of Royal Decree-Law 23/2020, of June 23, which approves measures in the field of energy and in other areas for economic reactivation (hereinafter, “RDL 23/2020 “), Which offered a” window “until September 25, 2020 to withdraw access and connection guarantees without the risk of their execution, and established different administrative processing milestones, the first of which must be met before of December 25, 2020, is the request and admission of the prior administrative authorization. All of which will give rise to a good number of projects with access and connection that will not be built for various reasons (lack of compliance with administrative milestones, lack of funding, low profitability …).
With this background, one of the first sensations that one has when delving into RD 960/2020 is that many questions have been left open that will be fixed in the different calls. In fact, there are so many open questions that different auctions could be very similar to each other, the most common characteristic being that they will always be “pay as bid”. This means that the main parameter of the auction is at what price the energy will be paid to the producers who are awarded.
Regarding the term that the facilities will enjoy the REER, it is established between 10 and 15 years, and can be exceptionally extended to 20 years. At this point, in almost all the information published it seems to be taken for granted that the term to be proposed will be 20 years, but it is something that remains to be determined by convocation.
The regulation also proposes the establishment of a calendar of calls for at least five years in view with annual update, with indicative deadlines, expected capacity and planned technologies, which is very interesting since it avoids the avalanches of projects in the auctions, since you can plan to go to successive auctions.
On the other hand, a maximum price is established above which offers would be discarded and a possible minimum price to discard offers that are too low. The minimum price may not exist in the different calls, but the possibility of its inclusion may have a dissuasive effect on reckless casualties, which is very favorable.
It must be understood that, since the auction will be awarded in order from those who have bid the lowest to the most expensive until they cover the assigned power quota, there may be a temptation on the part of some promoters to launch at unrealistically low prices to make sure you enter.
Two interesting mechanisms are also introduced, which mean that the successful bidders are not totally isolated from what happens in the market.
The first of these mechanisms consists of modifying the price obtained from the auction by means of a formula so that the final price that is perceived is between the auction price and the resulting market price. This mechanism may or may not be introduced in the calls, but at least its inclusion is foreseen.
The second mechanism of exposure to the market is the inclusion of the charge exemption price. This is a price that is initially set at € 0 / MWh but that may be set at another value per call and is a price such that, in the event that the market goes below it, the facilities under the REER would not charge. the auction price but the market price. This implies that there would be no protection in the event of extremely low prices.
Of course, and as has become customary in the sector, attending the auction will entail the deposit of guarantees (in an amount still to be determined) to ensure that those who are awarded have an incentive to comply with the offer made.
So far the auction model seems reasonable, although it may be more or less liked depending on what each one thinks about the need or suitability of guiding the market through this type of mechanism. The real problem lies in the way in which the internal operation of the winning plants and the resulting liquidations is foreseen.
The published Royal Decree is extremely similar to the proposal that was originally published and that was widely criticized from many aspects and from many directions, the report published by the National Markets and Competition Commission (CNMC) being especially interesting and complete. It is striking that, despite the obvious defects of the original proposal, the final text seems to have ignored practically all of the comments received, which I think is quite serious. It must be taken into account, however, that RD 960/2020 needs a specific development through ministerial order and specific resolutions regarding each singular auction where some of the aforementioned defects could be softened.
Without wanting to go into excessive details, the main criticism that can be made to RD 960/2020 is that the operation proposed in it facilitates speculative operations in the electricity market, something that practically everyone who works in this area has noticed at first glance. It also complicates the operation of the facilities attached to the REER considerably, which can particularly damage the smaller facilities.
If the drawbacks described are not enough, there could be a much greater drawback, which is the virtual decoupling of the prices for buying and selling energy in the market. Applying the settlement system proposed in RD 960/2020, the matching price would be determined in the same way as is currently done, but the result of settling the REER is reflected on the energy purchase units, which for practical purposes implies that the price that energy buyers observe moves above or below the matching price in a direction and amount that cannot be determined a priori.
On the one hand, this implies that, in the event that market prices fall below those resulting from auctions, consumers will have to pay that difference, so the cost reduction is not passed on to the final consumer.
On the other hand, this decoupling between the price observed from supply and demand implies that price coverage loses effectiveness regardless of the mechanism used (futures markets or PPA). This can cause a reduction in their liquidity, since they lose a large part of their usefulness, exposing marketers to greater risks, which in all probability will turn into worse prices for end consumers.
What seems inexplicable is that all these risks have been clearly noticed by several agents as a result of the published proposal and the Ministry has chosen to turn a deaf ear.
Ultimately, if we understand that auctions are necessary, which is debatable in an already functioning market, the chosen format probably achieves the goal of providing long-term price signals. Of course, it does so at the cost of generating a significant distortion in the operation of the electricity market and facilitating speculation in that same market.