The International Energy Agency (IEA) recently released the Evaluation report about Portugal and its Energy Policy performance. The present article summarizes this document, focusing on the overall performance and the future steps suggested by the EIA.
Portugal is a leader and a pioneer when it comes to renewable energy and energy efficiency matters. Recent data from the International Energy Agency shows that 61% of the electricity consumed in 2014 came from renewable sources, mostly from hydro and Eolic power plants. Nevertheless, Portugal lacks fossil fuels, such as coal, oil or gas, the raw materials that compose the remaining 39% of the country’s energy mix. This means that the dependency on fossil fuels costs the country between 8 and 10 billion €, figures that have to decrease to achieve the 2020 goals.
Portugal generated in 2014, 52 TWh of electricity, which more than half came from renewable sources putting this small country in the top five of the IEA member countries with more renewable share in energy mix.
The main success driver for this incredible achievement in the path towards reducing fossil fuel dependency was the growth of wind power, which increased from an installed capacity of only 1 063 MW in 2005 to 4 726 MW in 2013, and the projected forecast (in order to achieve the UE energy targets) is to reach 5 300 MW by 2020.
However, counterintuitive as it may seem, this revolution in the Portuguese energy mix, alongside the governmental incentives to implement other renewable technologies like solar, biomass and oceanic waves, ends up being highly costly for the final consumer, once the feed-in tariffs systems ended up showing the electricity bill.
The effect over the tariff deficit
Tariff deficit are shortfalls of revenues in the electricity system that arise when the tariffs for the regulated components of the retail electricity price are undervalued by the energy companies. In 2014, the accumulated Portuguese tariff deficit corresponded to 3.1% of the GDP with an amount, roughly 4.69billion €, of which the subsidies to the renewable electricity played a significant role.
The Portuguese tariff deficit escalated in 2007/2008 due to the mismatch between the wholesale electricity price and the real price. In 2008 the implied wholesale price was set at 50 €/MWh and the real price was 73 €/MWh. In 2009, thanks to the influence of the renewable generation, the prices returned to lower levels, preventing a tariff deficit.
However, the great support to both renewable energy and legacy energy sources (in particular the thermal electricity generation), through subsidies under a “special regime” contributed for the rise of the tariff after 2012. These subsidies also include power guarantee incentives and the compensation for the early termination of former long-term power purchase agreements (CMEC).
The goal of the Portuguese government was to eliminate the regulated tariffs by the end of 2017. However, this intention was discard pointing for 2020 as a new limit. To achieve that, the first package of measures was introduced in 2012, concentrated on feed-in tariffs in wind-power generation and small hydric plants, on feed-in tariffs and conditions for co-generation, on revision of investment incentives for hydropower (power guarantee) and on renegotiation of specific elements of the CMEC scheme. The expected savings with this first package of measures were 2 billion of Euros by 2020.
A second package was proposed in 2013, which, together with the previous package, was projected to reduce the debt by 2020 in 700 million Euros more. Most of the measures suggested in this package were focus on renewable energy supply, including a modification of the remuneration regime for public domain hydro terrains.
A third package was proposed in 2014 aiming for an additional contribution of the debt payment in 50 million euros. This package was focused on competitiveness improvement, and balance of economical distribution surplus between different stakeholders. From this package born the idea of the Iberian gas market, the MIBGAS, which initiated its activity in late 2015 in order to progress towards a more oil independent energy markets as well has bring more transparency to the gas contracts in the Iberian Peninsula.
In spite of all the measures and actions taken by Portugal to eradicate the tariff deficit, the IFM doubts that all the measures are sufficient to achieve that objective.
Portugal, alongside Spain, forms the best region to invest and produce electricity from renewable sources, especially from wind and solar. However, the Iberian Peninsula is far from the large consumption centers in Central West Europe and, due to a deficient interconnection with the rest of Europe, only 2.4% of total capacity is connected to France. To achieve the European targets, joint efforts between Portugal and Spain and between Spain and France have to be made in order to grow from the current level to 10% by the of 2020 and 20% in 2030.
Locally, Portugal and Spain exchange capacity is set at 2.6 GW which will increase to 3 GW during by the end of 2017, this interconnection improvement, sideway with the common Iberian electricity market (MIBEL), allows the price coupling between countries more than 85% of the times, approaching the European energy market prices.
In March 2015 was signed the Madrid Declaration, in Madrid, where a pact was signed between Portugal, Spain, France and the president of the European Commission to highly prioritize the need of new and urgent interconnections projects to cut the distance between the Iberian Peninsula and its renewable energy potential and the major energy consumers European countries. This achievement can lower the energy prices as well as cut the energy fossil power plants used as backup plants, consequently, decreasing the dependency on carbon, gas and coal.
From the Madrid Declaration, June of 2015 was signed a memorandum added to the Declaration to create a High-Level Group for South-West Europe interconnections. From this summit, a new interconnection appeared which is already at the implementation phase, and will increase from 2.8 GW to 5GW the interconnection capacity of the Western Interconnection. Besides this project, two more projects were presented to the EU by this consortium, one connecting País Basco or Navarra in Spain and Cantergit in France and one between the Spanish region Aragón and Marsillón in France. The goal is to achieve 8 GW of capacity by 2020.
It is unquestionable the effort made by Portugal to achieve and surpass the European Union Energy goals for 2020. The numbers of renewable sources in the energy mix and the reduction in the CO2 emissions puts Portugal in the TOP ten more energy sustainable countries of Europe. However, this achievement had a costly impact in the country’s economy and, more important, in the population lifestyle.
The lack of a sustainable plan and a bad management of the investments allocated to the energy sector in the early 2000s, led to a problematic situation once that, an increase of consumption from renewable energy in the country, contributes for a rise in the regulated tariff, since part of the tariff paid by final consumers is used to pay the energy producers in the special regime. On the other hand, more use of renewable energy implicates a less cost of fossil fuels imports like gas and coal.
Other problematic situation is the contracts between the government and ordinary regime suppliers like the CMEC contracts. Those contracts obligate the government to pay all the earnings those suppliers in this situation lost by entering in the free energy market. Those earnings are inserted in the regulated tariff of the years after, until the end of those CMEC contracts which will cease part in 2021 and part in 2026.
The main suggestions highlighted by the International Energy Agency are:
· Ensure that the new deadline for the phase-out of regulated tariffs is maintained and guarantee the access of all costumers to the liberalized market.
· Keep joining forces and develop a key transmission infrastructure, to foster a market integration and allow that renewable energy surplus can reach the bigger energy consumer markets in Europe.
· Supervise and adjust the new renewable energy power installations, especially wind power plants to avoid unnecessary over capacity in the system already oversized.
· Ensure the implementation of all measures to eliminate the tariff deficit by 2020 and continue to identify further potential cost-saving measures in the energy sector.
· The suggestions made by IEA intend to ensure that all the goals set for 2020 and 2030 are achieved. However, the Portuguese government has to be really careful and certain about the next steps in order to minimize the impact of the consumer contribution as well as to assure a future less dependent in fossil fuels.
Jorge Seabra | Energy Consultant