Holtrop S.L.P. blog

This is the second article in our series on the administrative obstacles that developers of renewable energy projects in Spain face when seeking approval for their projects.

At the end of our last article, we posed two questions regarding the requirement to place a financial guarantee prior to commencing the application process. Firstly, assuming the application is successful and the guarantee is cancelled, the effective application fee is €0. How then do the authorities recover their costs? Secondly, is it fair or desirable to require an entity that voluntarily desists with an application to forfeit the entirety of the guarantee?

In this article, we explore these questions.

The obvious answer to the first is that the authorities take a cut of the revenues derived from the electrical system. Red Eléctrica de España, for example, charges an ‘operations fee’ of approximately 1.05% of the final cost of electricity provided (the final fee will depend on the precise nature of the consumer and their location in the grid). This fee is charged to every consumer of the electricity, and is designed to cover REE’s costs incurred in operating the transportation network. This means that consumers are, in part, subsidizing the costs that REE has incurred in processing connection applications – both successful and unsuccessful. Similar fees are charged by the operators of the distribution networks (which, as we discussed in our earlier article, follow broadly the same administrative rules as REE).

If we were using a ‘user pays’ model, the obligation to pay for the application costs would properly fall upon the owner of the plant whose application has been processed. The current system clearly results in certain entities – for example, households and other end users – subsidizing the costs of both authorities and producers through higher electricity prices. Similarly, one would assume that the bank guarantees forfeited by unsuccessful applicants go some way in compensating the authorities for the costs involved in the application process; also resulting in a violation of the ‘user pays’ principle (unless in the unlikely event that the amount of the bank guarantee equates exactly to the amount of costs incurred in processing the unsuccessful application). At a conceptual level, then, we need to more to the second question: why should end users and unsuccessful applicants be required to subsidize successful applications?

One possible answer is that only sufficiently-qualified entities should be making applications in the first place. If a guarantee is executed against an unsuccessful applicant, this is an indication of that applicant’s unsuitability. Whilst we can understand this argument – and indeed, in some cases it is probably fair – it fails to take into account situations in which a project starts off being viable but later, for reasons unrelated to the applicant, ceases being so. In these circumstances the project owner has to decide whether to keep going with a sub-optimal project or accept the loss of the guarantee. Given the guarantee represents a lot of money, it is logical to expect that various projects continue with the application process even though they are not optimal. This is clearly a perverse outcome caused by the current system.

Another answer is that end users are the ones actually consuming energy, so they should be responsible for bearing the costs of the application processes for successful applicants. Although we have some sympathy for this line of thought, it neglects to consider that the producers themselves make money (sometimes, lots of money) from the production of electricity. This money ultimately comes from end users. Why, then, should the end user be required to pay not only for the product, but also for the producer’s costs incurred in creating that product? A fairer solution would be to make the project owner solely responsible for paying the application costs, costs which they can then recover through the operation of their plant. Going one step further, producers will already recuperate their costs from consumers via the sale of their energy on the wholesale market; why, then, should producers not have to cover their own application fee costs?

In our next article in this series, we explore the application processes in two other jurisdictions and ask whether these models could work in Spain.