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The impact of the Iberian Exception regulated by Royal Decree-law 10/2022

Royal Decree-law 10/2022 (“RDL 10/2022”), in force since May 15th, 2022, establishes a temporary mechanism for adjusting production costs to reduce electricity prices in the wholesale market, which we will review with special focus on the impact it will have on photovoltaic installations.

About the Adjustment Mechanism

First of all, it should be noted that despite RDL 10/2022 has entered into force, the mechanism will not be applicable until the Ministerial Order that collects the Authorization of the adjustment mechanism by the European Commission is published. Among the conditions set by the Commission is the reform of the design of the regulated tariff (Voluntary Price for the Small Consumer).

  • ¿What does Adjustment Mechanism consist of?

In order to limit the impact that rise in natural gas prices is having on the wholesale electricity market, a production cost adjustment mechanism has been set up for installations that make use of marginal fossil technologies.

It is a temporary mechanism, with a duration of 12 months, with an application deadline of May 31st, 2023.

The adjustment consists of the difference between the gas reference price (initially set at 40€/MWh until reaching 70€/MWh) and the effective price of the natural gas spot market on each day (registered in MIBGAS).

  • ¿Who does the Adjustment Mechanism affect?

On the one hand, the production facilities in peninsular territory that are likely to receive the aforementioned adjustment are the following:

    • Electrical energy production facilities corresponding to combined cycle plants.
    • Installations corresponding to conventional generation technologies that use coal as fuel.
    • Electrical energy production facilities belonging to group a.1 of RD 413/2014, that is, cogeneration plants that use natural gas or petroleum or coal derivatives as the main fuel.

However, those facilities whose energy is covered by a bilateral contract with physical delivery, duly registered, will not receive the adjustment for the energy declared therein.

On the other hand, the cost of the adjustment mechanism will fall on that Iberian demand that benefits directly from it, either because it acquires energy at a price directly referenced to the wholesale market value or because it has signed or renewed a contract taking into account the beneficial effect of the mechanism.

Exceptions to the payment of the cost are also foreseen in the following cases:

    • Storage, both batteries and pump consumption.
    • Auxiliary generation services.
    • Energy acquisition units that have term hedging instruments, provided that they have been signed before April 26th, 2022 and their subjection is declared within a period of 5 business days from the entry into force of RDL 10/2022.
  • Impact on photovoltaic installations

The main impact on photovoltaic installations and on the wholesale electricity market is the reduction in the market price. Due to the existing marginal design and the current situation, it has been observed that the last generation unit needed to supply the demand each hour was natural gas, acting as a marginal technology with frequently.

However, the adjustment mechanism should allow sufficient market prices so that inframarginal technologies can recover their investments and continue to attract new, more efficient and competitive renewable generation.

About other measures of special relevance included in RDL 10/2022

The following measures included in RDL 10/2022 are applicable from its entry into force, without need for approval by the European Commission.

  • Modification of RD 413/2014: Reintroduction of adjustment mechanism for deviations in the market price

Through RDL 10/2022, article 22.3 of RD 413/2014 is reformulated, specifically the adjustment mechanism for deviations in the market price.

Compared to the elimination of the mechanism included in RDL 6/2022 as of 2023, RDL 10/2022 does not eliminate, but it does modify the formula to include a new value that takes into account not only the average daily and intraday market price, but also the average price of some futures markets.

We must point out that, exceptionally, in the case of photovoltaic installations with power less than or equal to 10MW, the adjustment mechanism for deviations in the market price will continue to be calculated taking into account only the average annual price of the daily and intraday market, which by 2022 it is estimated to be €121.92/MWh (according to the recent Order proposal published by the Ministry for the Ecological Transition and the Demographic Challenge).

RDL 10/2022 introduces in the calculation formula a weighted average value of the price basket of electrical products, which replaces the previous “Average annual price of the daily and intraday market”.

The formula for calculating this new value is as follows:

Pcesta

Where:

Pmi: verage annual price of the daily and intraday market in year “i”, expressed in €/MWh.

Pfanuali: Average price of the annual future with settlement in year “i”, expressed in €/MWh. Calculated as the arithmetic mean of the reference prices of the annual futures contract with settlement in year “i” published by the organized electricity futures market, OMIP, in the six months prior to the start of its settlement. For the year 2023, the annual futures contract with settlement in 2023 negotiated from October 1, 2022 to December 31, 2022 will be considered.

Pftrimi,k: Average price of quarterly futures for quarter “k” of year “i”, expressed in €/MWh. Calculated as the arithmetic mean of the reference prices of quarterly futures contracts with settlement in quarter “k” of year “i” published by the organized electricity futures market, OMIP, in the three months prior to the start of their settlement.

Pfmeni,l: Average price of monthly futures for month “l” of year “i”, expressed in €/MWh. Calculated as the arithmetic mean of the reference prices of monthly futures contracts with settlement in month “l” of year “i” published by the organized electricity futures market, OMIP, in the month prior to the start of its settlement.

ai: Weighting coefficient, expressed as a percentage of one, applicable to the average annual price of the daily and intraday market in year “i”.

bi: Weighting coefficient, expressed as a percentage of one, applicable to the average price of annual futures for year “i”.

ci,k: Weighting coefficient, expressed as a percentage of one, applicable to the average price of quarterly futures for quarter “k” of year “i”.

di,l: Weighting coefficient, expressed as a percentage of one, applicable to the average price of monthly futures for month “l” of year “i”.

Capunti: Coefficient of real targeting of each technology, for the year “i”.

Applicable coefficients per year will be the following:

  • Modification of Electricity Sector Law: extension of the term to review remuneration parameters

In accordance with the modification of RD 413/2014 and the introduction of forward market prices in the adjustment mechanism for deviations in the market price, it is necessary to delay the deadline for updating the remuneration parameters in each regulatory period. Consequently, it is anticipated that the review of the remuneration parameters of the specific remuneration regime may be carried out until February 28 of the first year of each regulatory period.

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