Joint letter on CO2 clawback mechanism

Object: Draft law to reduce the remuneration of non-emitted CO2 in the electricity market

Dear Executive Vice-Presidents,
Dear Commissioner,

Following the letter sent to you on 8 June 2021, we are compelled to come back to you as the Spanish Government has relaunched the legislative procedure on the draft law for a new regulation on the electricity market that will reduce the revenues of non-CO2 emitting generation facilities installed before 2003 (the “CO2 Mechanism”).

The declared aim of the CO2 Mechanism is to contain, on a permanent basis, the impact of higher CO2 emission allowance prices on Spanish consumers, by clawing back “excessive revenues” that have allegedly been earned by certain non-CO2 emitting facilities.

According to the economic analyses that accompany the draft law, the CO2 Mechanism would have an economic impact of 1,600 million euro per year. In total, the measure would affect around 85 TWh/year, which represents around 50% of non-emitting generation. As stated above, this is not a temporary measure. On the contrary, it will be imposed on a permanent basis.

As we described in the previous letter, the draft law seriously undermines investment incentives for decarbonised electricity generation. The measure reduces the commercial revenues of certain non-emitting companies, whilst the EU rules in place and the Emissions Trading System rules are precisely aimed at rewarding such companies for their low-carbon forms of generation and discouraging the use of carbon-intensive production methods.

Furthermore, the CO2 Mechanism goes against the latest Commission Communications on REPower EU, which says that windfall profit measures should not affect the carbon price signal from the EU ETS. Annex 2 of the Commission Communication COM (2022) 108 final says: “long-term price trends resulting from structural market developments and the carbon price signal from the EU ETS should not be affected. This is so as not to interfere with longterm price signals that contribute to the coverage of fixed and investment costs, incentivizing investments in capacity needed for a decarbonised and reliable power system”.

Setting aside the fact that this windfall profit measure is not admissible in essence as it goes against the ETS, its actual design is also contrary to the aforementioned Commission Communication as it fails to exclude the energy sold under fixed-price contracts that are not profiting from the CO2 price: “the measure should not be retroactive and should only claw back a share of profits that were actually made. Thus, it needs to take into account that generators may have sold part of their production forward at a lower price… Energy which has not profited from higher electricity market prices because it was already sold forward should be exempted from claw back measures”.

Likewise, the CO2 Mechanism is discriminatory, since it will only apply to non-emitting generation plants commissioned before October 2003. The Spanish Government´s thinking here is that plants commissioned after this date will have had a “legitimate expectation” about the CO2 price which they will have factored into their investment decisions. Quite apart from this highly questionable reasoning, this overlooks the huge investments the pre-2003 generation facilities have made since 2003 which will of course have factored into the CO2 price. This different treatment is discriminatory and creates a selective advantage in favour of plants commissioned after October 2003.

In addition, the CO2 Mechanism will jeopardise the aim of the Commission Communication on REPower EU COM (2022) 230 final, with regard reducing EU dependence on fossil fuels by fostering investments in clean transition.
Investments in wind, PV, storage, and other renewable sources over the next decades will require billions of Euros from the private sector. These investments happen because companies believe that they can make a fair return on them. This measure fundamentally harms that investment incentive and creates additional risk for investors.

It is important to note also that this permanent measure, originally proposed before the current crisis, would now apply on top of other market intervention measures adopted recently by Spain, that are also meant to reduce the electricity price for consumers. The coexistence of these measures would structurally damage the badly needed non-emitting generation, whose costs are already raising on the back of various reasons market interventions. This would have the effect of favouring fossil-based power generation.

Bearing in mind that this CO2 Mechanism is foreseen to be adopted next July, we urge the Commission to enter in a dialogue with the Spanish Government and to express its concerns over a draft law that is contrary to the EU framework, including the various Commission Communications, that are aimed at incentivising the decarbonisation, by guaranteeing legal certainty and stability for investors.

We are at your disposal for any further clarification that you may need.
Yours faithfully,