España : June 18, 2010

The Spanish Government is planning to raise electricity tariffs from 1 July of this year.  While it has not been confirmed, the level of the increases based upon information released so far, it is going to be painful.  The increases are already on top of those increases from 1 January and will affect all regulated tariffs as well as distribution and transportation rates applied to the liberalized market.

There are number of reasons for the increases.  First, Spain implemented significant reductions in the electricity tariffs back in 1997 and only applied very limited increases through 2004 – typically less than 2 percent per year.  This reduction in pricing coupled with the modest increases helped make the country more competitive for industry while creating what we call the “Déficit de Tarifa”.  Under this arrangement, distributors were forced to buy the commodity at open market prices while only charging the consumer the lower regulated price.  The Government promised to pay the distributors the difference in price within the next 15 years.  The amount to be repaid increased significantly during 2005, 2006 and 2008 as free market pricing was at high levels leading to a repayment of approximately €16 billion.

Another reason for the increase stems from Spain’s pro-active approach towards renewable energy.  In order to promote renewable programs, the Government undertook an aggressive campaign in subsidizing this type of energy.  As a result, Spain reduced its reliance on nuclear and coal generation with renewable energy now accounting for approximately 30 percent of the country’s total demand for electricity.  The subsidies for renewable energy have dramatically grown from zero just a few years ago to over €6 billion in 2009.  With renewable subsidies accounting for nearly 40 percent of the total fixed cost of the distribution and transportation system, more non-subsidy cash is required.

Other reasons for the increases include the recently enacted subsidy for the national coal industry as well as promoting investment in more cost-effective electricity sources.  Ironically, the Government last year declined to extend the life of the country’s nuclear facilities, which are considered by some as the most cost-effective means of generation.

Not including the upcoming increases, the Government has increased regulated tariffs by more than 50 percent since 2004. Needless to say, the increases will not be welcomed by Spanish consumers who, along with increased prices for electricity, will also be dealing with increased VAT charges as of 1 July.