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For the Spanish Government, A Carbon Price Isn’t Enough

Spain has chosen to pick winners and losers in the energy industry

By guest author Paige Lambermont
July 28, 2021

New draft legislation that was approved in Spain, but will not be ready for final approval until sometime next year, would reduce the revenue of hydropower, nuclear power that was commissioned before 2005, as well as a few wind units from the same period. 

This latest action makes clear that to the Spanish government at least, a price on carbon isn’t just about carbon, it’s about picking winners and losers in the energy economy. Because their price on carbon made oil, gas, and coal more expensive, nuclear and hydro became the most affordable of the reliable options. 

The country instituted its €14.63 per ton of CO₂e in 2014, but a price on carbon alone is not enough to overcome the problems of renewable wind and solar, especially intermittency (generation occurring when the sun shines and wind blows rather than at a constant and controllable rate).

Under the guise of protecting consumers from “windfall” profits to nuclear and hydro, the real aim of this draft legislation is to choose which low carbon energy sources benefit the most from the institution of a carbon tax. Although nuclear and hydropower do not emit carbon dioxide and are, along with wind, the least carbon intensive of all energy sources, many governments and advocacy groups prefer other energy sources. 

In reality, 90 percent of the one billion dollars this bill covers would go not to consumers, but to help cover costs of renewable energy sources. The remaining 10 percent would help reduce the costs of low income consumers’ energy bills. 

The consumer protection claim is that the draft regulation would reduce power bills by 4 to 5 percent, but it is clear that the overall emphasis is not this selling point in reality.

Wind energy advocacy groups are upset about the regulation as well. WindEurope, a trade association, said about the plan that “[m]oving goalposts always risks undermining investment”. They rightly pointed out the contradiction in creating a policy that would invest in new renewable power capacity, at the cost to already existing renewable and low-carbon energy infrastructure.

This policy is a poor one even for those who broadly support carbon taxes because it undermines the aim of taxing carbon. As WindEurope went on to say, “[i]t contradicts how CO2 emissions trading is meant to work and how it’s meant to interact with energy markets”. Carbon tax opponents and supporters can both agree that this policy proposition makes little sense in attaining its stated goals. 

Fitch Ratings, a company that does financial market analysis, stated the problems of this draft legislation succinctly,  “We believe such political intervention is negative for the Spanish utilities sector as it challenges the EU-wide marginal cost market design, reduces the competitiveness of Spanish capacity affected by the proposal, and diminishes the predictability of the Spanish energy regulatory framework for investors.”

This draft regulation would for the most part, transfer money from successful energy enterprises to less successful ones. It fails to attain its own goals because the capacity that it is reigning in is the exact type of power that an energy system attempting to decarbonize should be seeking out: low carbon-intensity baseload. 

Reliable baseload power, sources with consistent output overtime that grid operators know will be there when it’s needed is essential to a well functioning power system. This draft legislation instead uses the guise of consumer protection to encourage the development of new intermittent sources over the maintenance of existing baseload ones. 

It is generally bad policy for the government to prefer some companies over others in the marketplace, but it is especially poor policy when that preferential treatment incentivizes technology that would hurt the overall grid. Spain’s new energy policy will fail at its stated goals and worsen energy security in the nation, almost certainly. 

This piece was produced by Paige Lambermont, a Policy Associate at IER