Spain’s proposal this week to give the government a veto on power plant closures is an extreme example of power market interventions in Europe, with capacity payments to prop up gas, coal and nuclear power, and the recently proposed “grid reliability” payments to coal and nuclear in the United States.

If handled poorly, such interventions will add to the cost of energy both directly, through the consumer or taxpayer cost of capacity and equivalent payments, and indirectly, by tending towards system over-capacity, while random government interventions will increase investor uncertainty.

This week, Spain made clear that it wants a veto on coal plant closures, which it is seeking to prevent, regardless of the wishes of the electric utilities that operate them.

The stated goal of the decree was to preserve the country’s security of supply. But Spain has generating over-capacity, with a capacity margin of around 30%, measured as the excess of supply above peak demand, far exceeding a prudent 10-15% margin for grid operators to insure against large power plant outages and the variability of wind power.

The coal decree seems more about securing votes, in an echo of the U.S. Trump administration’s support for coal.

Spain’s wide capacity margin is a result of other Spanish government interventions, and in particular the country’s capacity market, which pays for coal, gas and hydro power plants to remain on the system, regardless of whether they generate electricity.

We see three costs of such intervention.

First, there is the direct cost of the Spanish capacity market. IEEFA last year reported that capacity payments and payments for demand-response in energy-intensive industries totalled nearly €1 billion annually.

Second, the capacity market (as well as rules to prevent the closure of idle capacity) has led to over-capacity, where cleaner burning gas power plants are now all but idle, in favour of older, more polluting coal plants. For each of the past five consecutive years, Spain’s 25 gigawatts (GW) or so of combined cycle gas turbines (CCGT) have operated at below 20% capacity. Capacity payments propping up widespread idle generation represents poor value for money. And if the result is to favour coal over gas, there is an additional cost in SOX, NOX and CO2 emissions which contribute to air pollution and climate change.

Third, confused signals from government will cloud sound economic decisions by utilities. Last week, the Spanish utility Iberdrola announced that it wished to close its last two remaining coal power plants in Spain, stating that this would not undermine grid stability, given that Iberdrola operates some 5.7 GW of CCGTs there.

The government’s draft decree this week appeared to target the Iberdrola announcement.

Two weeks ago, we published a report arguing against the decision by Endesa, another Spanish utility (70%-owned by Enel), to invest some €400 million to extend the life of three coal power plants, Alcudia, Litoral and AS Pontes. We pointed out that Endesa’s CCGTs in the first half of this year ran at just 12% of their capacity. That was notwithstanding a 208% increase in CCGT output compared with the same period the year before.

In suggesting a re-think, we contrasted the poor financial performance of Endesa’s fossil fuel generation with the expected double-digit returns on its successful bid this year to build more onshore wind. And we pointed out that Endesa’s strategy of investing in old coal power plants did not fit with its parent’s (Enel Group) focus on renewables, digitalisation and customer services (see Chart below). Coal plant extensions may also ultimately run foul of an emerging trend towards coal phaseout in Europe. Several countries have announced such ambition: Britain has announced a firm coal power phaseout in 2025, Portugal in 2030, the Netherlands recently also in 2030, and most recently, Italy has proposed a phaseout in 2025/2030.

CHART. Generation profile, Enel, Endesa and Engie (% of TWh)

There is another side of the argument: by upgrading its coal plants, Endesa can preserve electricity supply market share. However, in view of the above we argue that it should reconsider these investments, to focus on growing the more future-looking side of its business. Political opposition of coal or other power plant closures will only weigh against any such careful consideration of strategic options.

  • Tags:
  • BREF ,
  • capacity markets ,
  • capacity payments ,
  • CO2 ,
  • coal ,
  • Endesa ,
  • Enel ,
  • grid ,
  • grid security ,
  • Iberdrola ,
  • NOx ,
  • power generation ,
  • renewables ,
  • SOX ,
  • Spain ,

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