Tackling overcapacity next big thing for Spanish energy market

A pending decree aimed at tackling overcapacity in Spain’s electricity generation sector has been heralded by a cross-section of market participants as the next potential power market game changer.

One market analyst said: “This is the most powerful piece of new legislation that could be introduced in the market. There is a serious need to cut back Spain’s excess capacity.”

Under the proposals operators of combined-cycle gas turbine (CCGT) power plants would be offered incentives to mothball their facilities.

A decision is expected by January at the latest, according to market analysts. The Spanish energy ministry was not available to comment on the progress of the proposal.

One power trader said it would be a bullish move for the Spanish power market because, by mothballing capacity, the volume of back-up supply would be slashed.

CCGTs can only sell their electricity to the grid once that produced by renewable resources has been exhausted. The volume going into the system therefore fluctuates depending on the availability of renewable electricity.

And despite the falling overall share of the generation mix held by CCGTs, they are still very necessary at specific times. For example, on 4 December, 27% of Spain’s electricity came from wind or solar resources, while CCGTs accounted for 17% of total output, according to transmission system operator REE.

Yet some market sources remain less convinced of any potential to influence wholesale prices.

Some said, although it would reduce costs and therefore improve efficiency in the electricity market, it would not affect forward curve prices because the CCGT usage rate is so low.

Four days before the 17% share of output was recorded, renewables accounted for 49% of consumption while CCGTs contributed just 7%, according to the REE data.

Change in direction

Should the move be approved, the legislation would mark a change in direction in Spain, where the government currently offers a capacity payment to these facilities to keep them open, even during periods of low demand.

Spain’s 37 CCGTs account for just over a quarter of the country’s total installed capacity, yet in 2013 just 10% of electricity output was produced by this source. The share of the generation mix for January – November 2014 is one percentage point lower.

Spanish utility Endesa confirmed in its latest financial report it would take advantage of this new legislation, should it pass, by mothballing at least one 400MW CCGT in its portfolio, and a second of the same capacity would also be considered.

The move would tackle Spain’s overcapacity. As things stand total generation capacity in Spain is more than double demand – there is 108GW of installed capacity in the country, while peak demand is 44GW.

This situation is said to have arisen as a result both of the financial crisis which reduced demand, and strong government support for renewables. Madrid introduced a number of incentives for the producers of, and investors in, renewable energy in Spain resulting in a surge in the installation of renewable power generators.

One Spanish power trader added: “I’m not surprised to hear the government is thinking of doing this. Spain is hugely overcapacity, it’s not necessary to keep all these underused facilities open.”

One gas trader shared this sentiment, adding that it could help reduce the high electricity sector tariff deficit, which stands at €30bn. Claire Wilson