1 The liberalization of the Spanish electricity system and its effects on its environmental performance Luis Jesús Sánchez de Tembleque Pedro Linares

2 THE LIBERALIZATION PROCESS IN SPAIN Description Results ENVIRONMENTAL IMPACTS OF THE ELECTRICITY SYSTEM ONTO THE LIBERALIZATION PROCESS ENVIRONMENTAL POLICY APPLIED FOR THE SPANISH ELECTRICITY SECTOR Description Adaptation to the liberalized framework Success of the environmental policy TRENDS DETECTED IN THE ENVIRONMENTAL IMPACT OF THE LIBERALIZED ELECTRICITY SECTOR

3 THE LIBERALIZATION PROCESS IN SPAIN OBJECTIVE to lower electricity prices because of competition forces. - Protocol: Ministry of IndustryUtilities - Electric Power Act 54/97 General framework of the liberalized electric sector. Two types of activities: LIBERALIZEDREGULATED GenerationTransmission RetailDistribution Economic management Technical management

4 ¶Installed power

5 ¶Electricity production

6 - Peninsula: thermal (50-46%), nuclear (35%) and hydroelectric (15-19%). 4 main electricity generation companies:ENDESA IBERDROLA UNIÓN FENOSA HIDROCANTÁBRICO 10 new generation companies in Islands: thermal. - Two generation regimes: GENERAL REGIME: Production > 50 MW (except bilateral contracts). OFFERGenerators Pool-based systemEligible costumers DEMANDDistributors Suppliers Pool price: marginal price determined on the basis of a merit order. Obligation to bid. Three negotiating sessions. Description: electricity generation.

7 Description: general regime. DISTRIBUTION 2,648 € TRANSMISSION 579 € RETAILING 251 € MARKET 6,523 € PRODUCTION 9,480 € TOTAL CHARGES 12,985 € 7 INSTITUTIONS 27 € END CONSUMER Market prices Regulatory charges INCENTIVE Domestic Coal 255 € CAPACITY 830 € Non Peninsular 130 € INCENTIVE CHP&Renewables 712 € Stranded Cost 447 € EXTRA NUCLEAR COSTS 583 €

8 Bilateral Contracts System Operator Market Operator Contracts for Differences Ancillary Services Market Daily Market Management of Technical Constraints Futures Market (Standardized products) Physical Contracts Market Operator in co-operation with System Operator SCHEDULED ENERGY Wholesale Electricity Market Intradaily Market Description: general regime.

9 ECONOMIC OPERATION Management of standardized power transactions MARKET OPERATOR TECHNICAL OPERATION Supervision and control of system security & quality of bulk supply SYSTEM OPERATOR Description: general regime.

10 Intradaily Market Market of Ancillary Services Restrictions Management Daily Market of Generation / Demand + Bilateral Contracts + International Exchanges Basic Daily Program Feasible Daily Program Final Daily Program Management of Ancillary Services End of programming Time Description: general regime.

11 SPECIAL REGIME: Cogeneration Self-generators Production <= 50 MW Others forms Renewable energy producers Not obliged to bid. Remuneration: wholesale market price plus a premium or economic incentive. PLAN FOR THE PROMOTION OF RENEWABLE ENERGY SOURCES: to cover at least 12% of the Spain´s total energy demand with renewable energies by the year Description: electricity generation.

12 Description: special regime.

13 Description: special regime.

14 Description: special regime.

15 Description: special regime.

16 The liberalization process has been speed up recently, the treshold for eligible customers was lowered: INITIALLY: 15 GWh / year consumption. All consumers regarded as qualified by NOW:1 GWh / year consumption. All high voltage customers regarded as qualified by July All consumers regarded as qualified by January Description: opening of the market time schedule.

17 System based on regulated third party access. The access fees for the transmission and distribution system: are regulated. are determined on the basis of voltage levels and use of the network. reflect all the costs of the system operation. are approved by the Government. are maximun amounts to be charged. TRANSMISSION:Above 220 kV. Planning is mandatory. Responsible for the tramsmission system operation: MARKET OPERATOR (OMEL) SYSTEM OPERATOR (REE) DISTRIBUTIONBelow 220 kV. Companies are designated by the Government in each zone. Captive customers provided by the distribution companies. Description: access to the transmission and distribution network.

18 UNBUNDLING: Management unbundling: complete legal separation of the entities engaged in the three regulated activities. The integration into a holding of companies is allowed. Unbundling of accounts and creation of Chinese walls. Obligation to disclose information. Description: access to the transmission and distribution network. REGULATORY AUTHORITIES. Ministry of Economy National Electric Regulatory Comission PUBLIC SERVICE OBLIGATIONS Security of supply PUBLIC SERVICEMARKET Universal service

19 SPANISH STRANDED COSTS CTC regime to compensate to each plant due to an expected decreased of the electricity price in the market to estimated 6 PTA/kWh. calculates the maximun amount of compensation. regulated tariff. has a cost yearly recovered in transmission fees. Remuneration of capacity reserves to be paid for ensuring that utilities cope with whatever demand of electricity. Charge to compensate for the abandonment of nuclear plants. CHP SUPPORT MECHANISMS to promote Renewable electricity Demand side management schemes Description: transitional regimes.

20 Mechanisms designed are functioning correctly. Decisions based on the market signals. Quite positive Demand has been covered satisfactorily. Power plants are producing based on their economic costs. Eligibility is enlarging very rapidly. lower electricity prices Other changes more competition have not been realized yet due to: change in technology Large degree of concentration of electricity production (ENDESA+IBERDROLA=80%). CTC protect to a certain existing firms. Small capacity of international interconnections. Large increase increase in the special regime production. Results. STRUCTURE AND ORDER REMAIN AS BEFORE THE LIBERALIZATION PRICES ARE ALSO MORE OR LESS STABLE INCREASE COVERED BY SPECIAL REGIME ENERGY NO SPACE FOR NEW INVESTMENTS

21 ENVIRONMENTAL IMPACTS OF THE ELECTRICITY SYSTEM ONTO THE LIBERALIZATION PROCESS The mayor aspects of the liberalization process wich may affect the environmental impact of the electricity system are those affecting GENERATION: CHANGES DUE TO LIBERALIZATIONEFFECTS Change in risk allocation.Change in the technology portfolio towards low private cost and less capital intensive technologies (natural gas combined cycles). Change in dispatch and plannig criteria. Chage in the role and capabilities of the regulator. To promote different technologies depending on the national energy policy. Change in the increase of demand.Its impact will depend on the changes in the technology portfolio. In the short term: specific impact will improve and general impact will get worse. In the long term: liberalization may worsen even the specific impact, UNLESS REGULATION INTERNALIZES SOCIAL COSTS. In Spain that aspects are:Natural gas combiend cycle power plants. Old coal power plants (CTC´s, subsidies). Hydro and nuclear (CTC´s).

22 ENVIRONMENTAL POLICY APPLIED FOR THE SPANISH ELECTRICITY SECTOR. Description. The spanish environmental policy applied to the electricity sector is composed by: COMMAND AND CONTROL LEGISLATION The most used instruments. Two types: Emissions control (certain SO 2 and NOx limits). Inmission control (regional and local authorities). Nuclear facilities have specific legislation. ECONOMIC INCENTIVES attempt to internalize external benefits into the price/cost of certain technologies. CHP and RENEWABLE ELECTRICITY DEMAND SIDE MANAGEMENT SCHEMES guarantee of supply INDICATIVE PLANNING to detect efficient assignment of resources Liberalized electricity systemauthorization procedure Planning provides information at no cost and detect market ineficiencies. OTHERS INSTRUMENTS

23 ADAPTATION TO THE LIBERALIZED FRAMEWORK. Environmental policies don´t interfere the liberalization, but changes are expected. SUCCESS OF THE ENVIRONMENTAL POLICY. Command and control legislation and economic incentives have had a significant success in spain, specially renewable electricity promotion. TRENDS DETECTED IN THE ENVIRONMENTAL IMPACT OF THE LIBERALIZED ELECTRICITY SECTOR Decrease of atmospheric pollutant from large power plants: SO 2 :low sulfur fuels, new technologies, desulphuration plants. NOx:different level of annual hydro electricity. CO 2 :bellow european averages. The liberalization is recent, changes might be expected from: Market development. Modifications in the environmental policy. ENVIRONMENTAL POLICY APPLIED FOR THE SPANISH ELECTRICITY SECTOR. Description.

24 ¶Air pollutant emissions Energy

25 ENVIRONMENTAL POLICY APPLIED FOR THE SPANISH ELECTRICITY SECTOR.

26 ENVIRONMENTAL POLICY APPLIED FOR THE SPANISH ELECTRICITY SECTOR.