Spanish trading split between reform upside, low spot

By Anna Crowley in London

Spanish power traders face an uncertain year ahead, with a new 7% tax on electricity generation expected by some to hike prices significantly in 2013, while consistently weak fundamentals in 2012 have led others to question the tax-related risk premium priced into power for Calendar 2013 delivery.

Day-ahead power prices were on average 4% lower in 2012 than in 2011 as industrial demand fell to new lows amid a manufacturing slowdown as Spain remained in the grips of economic crisis, exacerbated at times by strike action in protest at ongoing austerity measures. (See related chart: Spain day-ahead baseload (Eur/MWh): January 1 - December 31, 2012).

Preliminary consumption data from grid operator Red Electrica de Espana late December showed a 1.7% year-on-year fall in power demand in 2012, estimated at 252 TWh when adjusted for differences in temperature and working days.

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In the OTC market, Spanish day-ahead baseload prices averaged Eur47.55/MWh in 2012, compared with Eur50.03/MWh the previous year. On the OMIE spot exchange, the so-called pool price delivered slightly below OTC at a Eur47.26/MWh average.

With the exception of the Christmas period, the lowest prices during 2012 were recorded in late October and early November, with power for delivery on the November 1 public holiday closing at just Eur13/MWh OTC and Eur9.55/MWh on the OMIE exchange.

Traders late October spoke of a pressure to generate "at any price" amid plummeting industrial demand and healthy renewables supply.

"I think demand is so low that any plant that generates has to accept a low price," one trader said late October.

On the supply side, wind power production increased to cover 18% of total demand in 2012, according to Red Electrica, up from around 16% in 2011, making it the third-largest source of electricity after nuclear and coal-fired production.

Wind generation reached record highs on September 24, REE data show, covering 64% of total power demand at 03:03 local time (0103 GMT), surpassing the previous high of 59.6% on November 6, 2011.

In marked contrast with the Spanish prompt, the forward curve held its year-ago levels as the weak spot was offset by bullish political developments.

The 2012 average for year-ahead power was stable year-on-year at Eur52.34/MWh for Cal 13 baseload, against a Eur52.43/MWh 2011 average for Cal 12.

Despite this minimal movement in the year-ahead average, Cal 13 trading witnessed strong volatility during 2012.

The contract opened as the front-year at Eur51.75/MWh but fell below Eur50/MWh in late May, closing at an all-time low of Eur49.35/MWh May 30, as the low spot and macroeconomic pessimism weighed down on demand and price expectations for 2013.

But energy reform news in September saw calendar power surge 4% over just two trading sessions, advancing from Eur52.35/MWh before news of the power generation tax broke, to Eur54.45/MWh September 17.

The contract hit a new high of Eur55.40/MWh December 4, as the market learned that the amended reform to be passed by the Spanish senate would see the generation tax rise from the 6% outlined in the first draft of the bill to 7% in the final version.

Government reforms power sector

In bullish news for the Spanish power market, the country’s upper house December 13 approved the Sustainable Energy Law designed to wipe out the country's near Eur30 billion accumulated deficit in regulated revenues.

The Senate approved the law including amendments that pushed up the flat generating tax rate from 6% to 7%, but reduced a second levy on natural gas for "professional uses."

The law was then passed by the Spanish lower house, the Chamber of Deputies, on December 20 and will enter into force from January 1.

Separately, the Senate in December approved amendments to the country's budget which will see as much as Eur450 million each year diverted to renewable subsidies from the sale of CO2 permits, indirectly offsetting part of the generation tax for renewables producers.

The Sustainable Energy Law will bring in about Eur3 billion in 2013, according to government estimates, with a further Eur2.3 billion saved by transferring the financing costs of the tariff deficit to the country's Treasury and from auctioning emissions allowances.

The government targets a zero tariff deficit from 2013 and a progressive reduction of the legacy deficit -- the difference between regulated revenues and expenditure -- which was Eur24 billion at the end of December 2011.

The country’s Industry Ministry said in a draft document obtained by Spanish agency EFE mid-December that it expects the accumulated shortfall to increase by Eur3.4 billion for 2012.

Renewable feed-in tariffs were expected to have cost Eur8.4 billion in 2012, Eur1.4 billion more than budgeted, rising to more than Eur9 billion in 2013.

Generation tax threatens competitiveness: industry

The government's reform plans met widespread opposition after they were unveiled in September.

Generators complained the tax on generation would make them less competitive compared with foreign rivals and warned they could lose market share to producers in France who would be able to supply Spain with lower cost imports.

By the end of the year, the Cal 13 location spread between Spain and France was Eur7.20, Platts data shows, with Spanish Cal 13 at Eur54/MWh and France at Eur46.80/MWh.

This compares with a location spread of just 75 euro cent at the beginning of 2012.

Iberdrola warned on October 24 that Spain could move from having net power exports of 6 TWh/year to having net imports of 5 TWh/year as a result of the levy.

And industry and consumer groups have said that the rising cost of power could hit industrial production in the country, which has already been battered by a severe economic downturn and the financial crisis.

A vocal industrial lobby argued that consumers of natural gas would face double taxation for the fuel they use and the power they generate.

The government responded with a decision to reduce the levy on natural gas for "professional uses," offering some reassurance to gas-intensive industry.

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