Spain extends ban on charging power customers for value of CO2 rights

Spain’s cabinet has extended an order that prevents power producers from charging customers for the value of CO2 emissions permits that are granted to them by the government at no cost.

The policy, previously established for 2006, was extended, unexpectedly, on December 7 to cover the period 2008-2012. In reaction, shares of Spanish power producers lost value December 10 because the ruling will reduce anticipated revenues from generation based on internalized CO2 emissions reduction prices.

Under Spain’s energy market rules, power producers are assigned free CO2 emission rights. That has had the effect of raising wholesale market prices as the companies have transferred the value of the CO2 rights to final prices, thereby charging end users for something the government has given away.

Under a formula still to be announced, the Industry Ministry is to reduce a utility’s revenue by the value that has been assigned to the CO2 emission rights.

The ruling will be applied to hydroelectric and nuclear power plants as well as thermal ones. Those technologies do not generate emissions, and therefore are not granted CO2 permits. However, they have been adding the theoretical cost of permits into their prices because the wholesale price paid for any type of generation is based on the most expensive generator needed to supply demand each day.

Other renewable energy sources have a special price regime and will not be affected.

JP Morgan said the risk to earnings estimates was on the downside, particularly in 2008, “because the utilities have already sold forward circa 30 percent of their output and hence cannot raise prices in those volumes to offset the hit.”

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