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The Spanish Electricity Act stipulates that all parameters for determining the reasonable rate of return for renewable power plants may be revised in every regulatory period (every 6 years). This means that also the value that determines the appropriate rate of return for the remainder of the lifetime of the power plants may be revised.

The second regulatory period starts on 1 January 2020 and expires on 31 December 2025. Therefore, on 28 December 2018, the Spanish Ministry for the Ecological Transition (Ministerio de la Transición Ecológica) presented a bill proposing the reasonable rate of return for the 2020-2025 period. The financial yield is calculated based on the Spain 10-Year Government Bond Yield and increased by the amount of difference, if any.

For renewable power plants, combined heat and power (CHP) systems and waste-to-energy plants, the reasonable rate of return for the 2020-2025 period is 7.09%, and 5.58% for electricity generation installations with additional remuneration in the non-mainland territories (TNP).

The methodology used to calculate the reasonable rate of return for power generation was proposed by the National Commission on Markets and Competition (CNMC; the Spanish network regulator) and is based on the weighted average cost of capital (WACC).

The most important thing about this draft, however, is that it is intended to amend the Electricity Act. The bill proposes an amendment where, during the next two regulatory periods, i.e. until 31 December 2030, the currently applicable reasonable rate of return (i.e. the rate determined for the first regulatory period) for all renewable power plants, CHP systems and waste-to-energy plants (entitled to remuneration), which already applied before the effective date of the Act (Real Decreto-Ley) 9/2013, could not be changed and the power plant operators would have to maintain this reasonable rate of return.

Currently, the reasonable rate of return for power plants installed before the effective date of the Act (Real Decreto-Ley) 9/2013 is 7.389% and 6.503% for power plants generating electricity outside mainland Spain.

The owners of such power plants are however entitled to waive their specific rate of return and apply the generally applicable reasonable rate of return instead. This applies subject to change during every regulatory period (every six years). If they decided to waive the specific rate of return, they would have to notify this decision to the competent authority (Dirección General de Política Energética y Minas) before 1 January 2020.

Nevertheless, the allowances and financial compensation to be paid to the owners of the power plants based on court or arbitration decisions after the effective date of the Act (Real Decreto-Ley) 9/2013 and its implementing provisions would be deducted from the amount corresponding to the difference between the amount of the remuneration payable under the reasonable rate of return scheme “frozen” until 31 December 2030 and the amount they would have received if they had waived this reasonable rate of return.

This means that foreign investors with favourable arbitration decisions or with ongoing arbitration proceedings may choose between:

• applying the reasonable rate of return of 7.38%. In this case, the allowance or the compensation will be deducted by 31 December 2030, unless the owner decided to waive it.
• waiving this reasonable rate of return and applying the reasonable rate of return of 7.09% over the 2020-2025 period.

This measure aims to help avoid disputes with foreign investors under the Energy Charter Treaty (ECT).