Spain doubles down on €3BN green levy

Companies still recall the four-year construction standstill that followed the move in Spain to retroactively cut subsidies for wind and solar operators in 2013. It took years for the government to win back the trust of investors.

Now the government is dismantling their confidence again.

Last month, Spain approved a charge on wind farms and other non-polluting power plants because it said operators were earning “windfall profits” because of the high wholesale electricity prices.

High gas prices have been driving up electricity prices. The government said this was unfair to consumers, so operators will now face charges of between €40/MWh and €80/MWh at projects until at least March 2022. The total cost of this levy to electricity companies is an estimated €3bn.

The problem for is that this doesn’t reflect how the energy market works. Electricity from most of these wind projects is sold at pre-agreed prices in fixed-term contracts that were agreed before the current crisis.

These deals give energy sellers and buyers the confidence that they need to make long-term investment decisions. It helps protect sellers against low wholesale power prices; and it protects buyers from high wholesale power prices, which is just the sort of protection they need today.

This means wind farm operators are not receiving the high electricity prices seen in recent months, and so hitting them with an extra tax is a mistake.

Non-existent windfalls

WindEurope argues that a wind farm that has fixed revenues at €35/MWh would now be running at a loss if its operator had to take a hit of €40/MWh or more. It argues the “windfall profits” that Spain thinks wind operators are making simply don’t exist.

WindEurope also warns that operators will stop production at wind farms while this additional levy is in place, to reduce their losses, and that cutting production in this way will only exacerbate the high electricity prices that Spain wants to tackle.

Finally, it says this sends a message to infrastructure investors that Spain is happy to change the rules after firms have invested. It’s like the dark days of 2013 to 2017 all over again.

Spain’s Association of Electric Power Companies (AELEC) is making a similar case as WindEurope about the damage that the government is doing. It is highlighting the “absurdity” that wind farm owners, as well as operators of other non-polluting plants, now face negative net income.

But AELEC has had little success with this argument.

Last weekend, Spain’s Deputy Prime Minister Nadia Calvino dismissed the concerns of energy companies that the levy was a tax on non-existent windfalls; that it put their investments at risk; and that it was potentially in breach of European Union law as it distorted the market.

She made the comments before a meeting of eurozone finance ministers on Monday. The EU will rule if the levy breaches EU law this month.

She said: “It is essential that this increase in wholesale prices is not fully passed on to the customers and to the companies and therefore we must use all possible legal instruments to reduce the elements of the energy bill.”

Mothballed projects

The change is also set to delay construction on some projects until utilities get more clarity.

For example, Spanish giant Iberdrola last week paused tenders for goods and services related to the construction of projects that would be affected by the levy. It said it needs to evaluate the economic viability of the affected projects.

Iberdrola is currently building around 1.8GW of wind and solar projects in Spain – and stressed that not all of this would be affected by the levy, as many projects are backed by government support mechanisms – but the move still feels significant. If Iberdrola is delaying construction then others will too.

In 2019 and 2020, a total of 4GW of wind farms were commissioned in Spain to take the country to total installed capacity of 27.5GW.

You need only compare that to the moribund period from 2013 to 2017, when just 336MW was commissioned in during five years, to see how far Spain has come. It’s been a fantastic turnaround until now.

Now Spain looks committed to undoing that progress. It must change tack.