Article by Antonio Morales* and Rosa Espín

The Spanish Government has passed a Royal Decree temporarily suspending pre-allocation registration as well as abolishing financial incentives for new energy production projects from cogeneration, renewable energy sources and waste.

While the Government is planning a reform in the electricity industry to avoid tariff deficit, i.e., differences between income from access tolls and regulated activity costs, it has decided to suspend, on a temporary basis, financial incentives to build new energy projects. This situation has been brought about by, both the global economic crisis and financial difficulties in the electricity industry. Measures taken to date, have not been effective in correcting this deficit, thereby making overall sector development more difficult, and creating obstacles for the continuation of policies to promote electric power production from renewable energy sources.

The Government is maintaining its commitment to renewable energy as an essential part of "Spain's Energy mix". In 2011, a very high percentage of installed power was renewable, covering 33 percent of electricity demand and making Spain a leader in this type of energy. However, the current payment system is not sustainable with the reduction in demand as a result of the financial crisis. The Government noted that until the system is reformed and progress is made to words as renewable energy payment framework which promotes the efficient allocation of resources, the current payment system is suspended.

This measure will not affect either ongoing energy projects or those already registered with Pre- Allocations Registry. Further, it will not jeopardize either energy supply or the achievement of the European Union's renewable energy targets. However, it will affect projects that have not been registered under the Special Regime when the Royal Decree comes into force, similarly those projects under the Ordinary Regime which have not obtained administrative authorization from the relevant Spanish Authority, when the Law comes into force, will be affected.

In the same way, those projects not registered in the Pre-Allocation Registry to the date when the Law comes into force may withdraw their registration application, in which case any bank guarantee will be returned in full. In addition, the bank guarantee for those registered projects which, in within two months of the Law coming into force, opt not to carry out the project, will be returned.

The purpose of this new Royal Decree is to temporarily end a payment system that involves very high costs for the electricity industry, thereby causing the tariff deficit to continue increasing. The Law does not have retroactive effect, meaning that it will not affect ongoing energy projects already authorized financial incentives or those projects that have already been registered.

*This Client Alert was prepared with assistance from Natalia Cabeza, paralegal in the Madrid office.

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