SPAIN ORDERS SMALLER PRICE INCREASE FOR ELECTRICITY

c.2013 New York Times News Service

MADRID — The Spanish government decreed Friday that the country’s utilities could charge consumers only 2.3 percent more for their electricity next month after accusing utilities of manipulating a recent auction to win a price increase of 11 percent.

While meant as a good will gesture to consumers, the government’s unprecedented intervention underlines the fragile regulations of Spain’s electricity market and the conflicting interests driving its energy policy.

On the one hand, the government is concerned about forcing people to pay significantly more for electricity at a time when Spain has barely emerged from a two-year recession and is still struggling with unemployment of 26 percent and a credit squeeze. On the other hand, Prime Minister Mariano Rajoy is committed to trimming Spain’s ballooning energy deficit as part of broader efforts to clean up the country’s finances.

Spain’s energy deficit — the accumulated shortfall between the cost of power generation in Spain and what regulated rates bring in from consumers — has reached more than 26 billion euros (about $36 billion). For 2013, the government had targeted a full-year deficit of 3.6 billion euros. Instead, the shortfall reached 4.5 billion euros for the period to October.

Rajoy said at a news conference that containing energy costs was the “most complicated” issue his administration had faced since taking office two years ago. He said the decision Friday was “a transitory mechanism” that would be replaced in the second quarter by a new and “definitive mechanism” for auctioning electricity.

“It has been a decade of troubles in the Spanish energy system, but the situation has now reached a critical point,” said Fabien Roques, an energy consultant in Paris with Compass Lexecon. “Spain needs urgently to move away from ad hoc changes to a reliable system in which prices reflect costs and in which investors can also regain confidence.”

Alfredo Pérez Rubalcaba, the leader of the main opposition Socialist Party, said at a separate news conference, “I prefer a rise of 2.3 percent to 11 percent, but we still need to know what happened in this auction.” He added: “If there was manipulation, this should end up in court.”

The government and Spain’s electricity companies have been at loggerheads since the auction last week. To the utilities’ dismay, the auction result was annulled, with José Manuel Soria, the industry minister, further angering the sector by suggesting that auction participants had engaged in a “crude manipulation in order to modify prices.”

Responding to the accusations, UNESA, the association representing Spain’s electricity companies, said in a statement last weekend that “serious damage is being done to the reputation and economies of companies that perform a vital service for this country and employ 180,000 people.”

On Friday, UNESA said the government had set “an artificial price” that “does not resolve fundamental questions about the functioning of the system.” UNESA added that government intervention represented “an important risk for the liberalization” of the energy market.

The auction dispute comes amid a separate fight between the government and renewable energy investors over whether Madrid was entitled to cut subsidies for renewable energies. The cut has been particularly damaging for producers of solar power, many of which have struggled to refinance projects backed by Spain’s banks before the financial crisis.

In 2008 alone, Spain added 2,600 megawatts of photovoltaic capacity — more than five times what the government had targeted. The economy then tanked and the euro debt crisis began, leaving Spain with costly overcapacity.

In recent weeks, some international funds have begun legal proceedings against Spain’s overhaul of renewable energy subsidies before an arbitration panel administered by the World Bank. But the regulatory change has also hurt thousands of small investors, who supported the 60,000 solar installations built during the boom years.

Rosa Barcenilla, a lawyer who took a bank loan of about 60,000 euros to invest along with other members of her family in a solar park near Toledo in 2006, said, “The government has kept changing the rules since, in breach of the basic principle of legal security that should prevail in any state of law.”

Javier García Breva, one of Spain’s leading renewable energy experts, detailed in a newsletter this week how the auction dispute showed that Spain’s problems went beyond the renewable energy sector. The headline of his newsletter was “total electricity crisis.”