The ‘windfall charge’ imposed on Spain’s four largest electricity companies risks having far more negative consequences than the infamous 2013 law that retroactively changed the country’s green energy subsidies, argues Christopher Jones.
Christopher Jones is a part-time Professor at the Florence School of Regulation, a centre of excellence at the European University Institute.
In 2013 Spain retroactively changed the promised subsidies paid to companies that had invested in green energy, taking investors by surprise. That measure backfired because companies felt they could no longer trust the government and stopped investing in new green energy projects.
When they tentatively restarted some years later, investors had to pay sizeable risk premiums to finance Spanish energy projects. The result was that the clawback tax no doubt cost Spanish citizens more than the government gained because of higher electricity prices due to increased investment costs and lower investments in new green energy.
This unfortunate experience led the EU – with Spain’s agreement – to adopt a law prohibiting such ex-post changes in renewable support schemes.
Instead of learning from past mistakes, Spain is now not just repeating it – it is imposing another ‘windfall charge’ that will have far more negative consequences for Spain than the 2013 law.
Natural gas prices have skyrocketed recently, largely due to Chinese demand. This has led to a peak in electricity prices, which has been seen across Europe.
Uniquely in Spain, protected customers pay an electricity price linked to the short-term market, and their bills have been increasing. To deal with this, the Spanish Government is imposing a new windfall charge on the four largest electricity companies, for sales of renewable and nuclear electricity, on the grounds that they do not pay the high gas price. It will mainly use this money – expected to be around in the order of €5 billion – to lower the cost of Spanish electricity bills.
This is a seductive idea, based on the assumption that the electricity companies are making high profits because they do not have to pay the current high cost of gas but benefit from high electricity prices. However, there are a number of reasons why this is wrong and will actually hurt Spanish citizens.
First of all, most of the electricity sold in Spain – 88% in fact – is not actually sold via the daily market, but is sold on fixed-price contracts. The prices for such contracts were set before the price rise, and so the Government is actually penalising companies for profits they are not making. The companies will have no choice but to declare ‘force majeure’ for these contracts and increase the price.
Second, this charge will, once again, kill confidence in investing in green energy in Spain. It could not have occurred at a worse time if Spain is really committed to dealing with climate change and meeting its EU and global greenhouse gas commitments.
Just as in 2013, risk premiums will increase for those still brave enough to invest – this is the second time Spain has imposed a windfall charge on investors. The cost of decarbonising Spain’s economy over the next decade and more has just gone up and significantly. Citizens and industry will pay the cost over many years.
Investors are like elephants – they do not forget.
The law also faces a number of legal problems, both at the Spanish and European level, in terms of European law requiring that electricity market are not distorted and that players are treated in a non-discriminatory manner (as a result of the charge renewable electricity in Spain has already been taken out of the merit order and spot market), illegal subsidies – as the measure patently discriminates in favour of smaller electricity companies, investment protection, and in terms of its compatibility with EU climate policy.
It makes absolute sense to protect vulnerable customers when electricity prices peak, and other EU countries are in the process of adopting such measures.
The Spanish approach, however, distorts the electricity market, makes climate goals far more difficult and expensive to achieve, and will probably cost citizens more in terms of higher electricity prices over the long term. It merits a rethink.