Within the framework of the Paris Agreement of 2015 and the European Union’s Green Deal, Spain has been and is currently implementing efforts to secure the total decarbonisation of its economy by 2050. As an interim step, the European Commission has established the goal of reducing net greenhouse gas emissions in the continent by at least 55% by 2030.
With these objectives in mind, Spain has recognised the need to transform its major economic sectors, Nonetheless, the energy sector is currently facing a number of challenges. Overcoming them will help to increase Spain’s attractiveness as a recipient of international investment.
Current context
Stability and predictability are both factors crucial to the growth of the sector. But despite the Spanish government’s efforts in this direction, the current context presents structural and concurrent challenges that have impacted certainty within the sector.
One such challenge is posed by geopolitical factors (including the downturn in the global economy and natural gas reserves during 2021 due to issues including Covid and the war in Ukraine).
Spain adopted several temporary measures as part of its efforts to mitigate this upturn in prices. In 2021, through Royal Decree-Law 17/2021, the wholesale market remuneration for electricity generation facilities using technology that does not emit greenhouse gases was reduced by an amount proportional to the greater income obtained by those facilities. The “Iberian exception” was subsequently implemented by means of Royal Decree-Law 10/2022. This temporary measure applied to Spain and Portugal. Following its introduction, electricity generators using natural gas were obliged to offer electricity at a fixed natural gas reference price.
Additionally, decreasing dependence on Russian fossil fuels and market prices meant diversifying energy supply sources and routes to accelerate the development of renewable energy, improving energy efficiency and the interconnection of gas and electricity networks. As a result, Spain managed to mitigate the impact of gas prices in the electricity market.
In this context, the promotion of renewable energy projects translated into (i) higher numbers of renewable energy producers in the market; (ii) higher volumes of energy sourced from renewable energy generation technology; but the atomisation of the market and low prices have led to the cannibalisation of players in the renewable energy production market, who are competing for lower returns.
Moreover, reduced energy demand (especially driven by the delocalisation of industrial activities from Spain) has exacerbated this phenomenon. Prices have reached new lows, particularly in the Spanish wholesale market. The same applies to the futures market, with prices diminishing due to the surge of renewables, the cannibalisation in the sector and lower demand.
These ups and downs in electricity prices have led to price volatility in the market, with investors seeking alternatives to gain stability in their investments – one of the reasons slowing down the decision-making process behind the financing of electricity generation facilities.
These factors should be analysed together with another phenomenon: electricity generation facilities experiencing the curtailment of their production capacity in Spain because of the electricity system's congestion.
Nevertheless, and although the current landscape presents several challenges, for the market’s players there are reasons for optimism.
Looking ahead
The challenges outlined above have been the catalyst for various attempts to try to tackle market and infrastructure inefficiencies.
One example is energy storage technology. This provides the sector with several solutions to the aforementioned challenges: (i) energy storage technology has the potential to relieve the grid’s congestion by storing excess energy and only injecting it into the grid once there is enough absorption capacity, which, in turn, relieves the curtailment of electricity generation facilities; and (ii) when functioning as energy producers (inputting stored energy into the grid), energy storage technologies will not be able to benefit from price speculation, as the energy they inject will have to conform to a schedule pre-approved by the Spanish National Markets and Competition Commission (once that schedule has been definitively approved ). This would ease the cannibalisation that the market is currently experiencing. In this regard, Spain is currently working to further the development of energy storage technologies.
Therefore, there are grounds for optimism regarding storage technologies' sector-correcting potential.
Capacity auctions represent another measure that would alleviate the electricity system’s congestion. Whilst Red Eléctrica de España clearly needs to upgrade its infrastructure to accommodate the energy produced by existing and new renewable energy generation facilities, capacity auctions have the potential to be an effective instrument in terms of correcting the grid’s capacity inefficiencies.
Continuing with the possible solutions to current challenges, it is worth mentioning power purchase agreements ("PPAs") and their role in the sector. PPAs have become key to sector price stability and the financing of renewable energy projects. They represent a private-sector adjustment to the current context by creating certainty in an unstable market through private contractual initiatives.
In a context of unpredictable and volatile prices, PPAs secure a fixed long-term return for producers, making them an appealing instrument for investors, financiers, developers and consumers (the latter also motivated by PPAs' greenness and its capacity to help them reach their ESG goals). Consequently, there are reasons for optimism regarding the presence of PPAs in the sector.
All the above, together with the need: (i) to continue analysing a potential reform of the marginalist market at European level; and (ii) for a clear commitment from the Spanish government to implement appropriate industrialisation policies, like the promotion of data centres (high-intensity consumers) in Spain, thereby boosting energy demand, would help to stabilise the sector and improve its attractiveness by increasing demand, prices, and, thus, profitability for investors and producers.
Lastly, some other promising upcoming alternatives could prove key to achieving the total decarbonisation of the economy in Spain by 2050. Green hydrogen is one such alternative, as it positions itself as one of the main instruments capable of guiding Spain towards this target, as it is a clean, renewable and storable energy source (although this technology needs further development). Another promising source of energy is biomethane – easy to use, store and transport, equivalent efficiency and energetic power to natural gas, renewable, and less polluting than natural gas. Prior to its upgrading into biomethane, biogas also offers several advantages over traditional energy sources because of its versatility of use, the ability to use excess production as fertiliser and its low-polluting nature.
All in all, the energy sector in Spain requires incentives to maintain the level of investment in clean technologies, increase their attractiveness and secure a general improvement in the grid's efficiency, at the same time as boosting energy demand. PPAs, storage technologies and grid efficiency measures will play a crucial role in the future of the sector, and energy sources like green hydrogen, biomethane and biogas must be further developed to exploit their full potential.
Article published by Leaders Leaders.
Authors: Gonzalo Olivera and Ignacio López Sol
