How not to reform an electricity sector

Some weeks ago, the Spanish government unveiled its package to reform the electricity sector with the main objective of ending the tariff deficit. This arises as the difference between the regulated costs of the electricity firms and the revenues obtained through regulated tariffs paid by consumers. Its volume, 28 billion euros by the end of 2012, highlights the main regulatory problems of the Spanish electricity sector. The tariff deficit is the result of bad past regulation (controlling the prices without reflecting underlying costs) and constitutes an enormous distributive problem. According to experts Natalia Fabra and Jordi Ortega, the remuneration of renewal energies has been the scapegoat of the tariff deficit. Fabra argues that “the reform places the burden of the cost of adjustment mainly on renewal energies and consumers, and leaves untouched conventional energy despite the fact that its over-remuneration is in the origin of the tariff deficit. The new legislation does not define a regulatory framework that is able to face the challenges of the electricity sector.” The new regulation alters the remuneration of investments in renewals that have already been made. The reform leaves intact the current electricity market and the remuneration of conventional energies (nuclear, hydro, coal and natural gas).  Truly reforming the electricity sector amounts to solving together efficiency issues (allocative efficiency and energy efficiency), income distribution and environmental challenges. Europe has given too much discretion to member states, as argued by another expert, Juan Delgado, and Spain keeps using this discretion in a way that is inefficient, distributionaly regressive and environmentally reckless. Final prices should be related to real costs by introducing capacity markets and incentive regulation of the network elements. A reasonable reform should favour the entry of new competitors and the integration of European markets and commit to objectives of financial and environmental sustainability and energy efficiency. The process of reform has been characterized by debates behind close doors and ministerial disputes. Transparency has been absent, as opposed to what happens in countries with better regulatory systems, where a a white paper, stakeholder participation, and input from an independent regulator (for example evaluating the alternatives) would have been conventional. However, at the same time, the Spanish government is abolishing the independent energy regulatory agency.