Back A report by Albert Banal Estañol concludes that the regulatory framework for the Spanish natural gas industry is not compatible with EU climate policy

A report by Albert Banal Estañol concludes that the regulatory framework for the Spanish natural gas industry is not compatible with EU climate policy

The report by the professor of the UPF Department of Economics and Business, commissioned by the European Climate Foundation, was presented on 21 September in Madrid during the course of “The winter of gas” conference. The paper includes a comparison with France and the United Kingdom and proposes a series of improvements targeting policymakers and regulatory authorities.

21.09.2022

Imatge inicial

Albert Banal Estañol, UPF professor with the Department of Economics and Business and deputy director of the master’s degree in Economic Analysis: Economics of Energy, Climate Change, and Sustainability of the Barcelona School of Economics (BSE), is a co-author of the report “Towards Net-Zero? Gas Infrastructure and Investment Regulation in Spain” .

This report, drafted by Albert Banal-Estañol together with Olivier Massol, a professor of energy economics at the IFP School in Paris, commissioned by the European Climate Foundation, was presented on 21 September in Madrid, at “The winter of gas” meeting, addressing the media.

“Largely underutilized Spanish gas infrastructures are the result of past malinvestments that end up being paid for by the consumer”

The work (full English version and summary and conclusions in Spanish available on this website) was written in 2021, before the war in Ukraine. It analyses current investments in gas infrastructures and whether the current regulatory framework applicable to the Spanish natural gas industry encourages over-investment in natural gas infrastructures and under-investment in low-carbon gas infrastructures. It also examines whether this regulatory framework is compatible with long-term EU climate policy goals.

“Largely underutilized Spanish gas infrastructures are the result of past malinvestments that end up being paid for by the consumer. The current regulatory framework for gas was established during an expansion phase of demand and emissions and therefore needs to be adjusted so as to ensure a reduction in emissions to meet the goal of zero net emissions”, Albert Banal Estañol notes. Moreover, the UPF professor believes that “The current regulatory framework of the Spanish natural gas industry encourages overinvestment in natural gas infrastructures such as MidCat and is not compatible with the objectives of the EU’s long-term climate policy”.

In this regard, the report shows that decisions concerning investment in liquefied natural gas (LNG) plants and transboundary pipelines agreed to during the first decade of the new millennium, when an increase in domestic demand was predicted that never materialized, inflated the value of regulated assets, which are used to determine the allowed revenues of operators, the rates of access to the infrastructure and, therefore, consumer rates. Operational LNG regasification plants account for almost one-third of Europe’s LNG import capacity, but the utilization rates are among the lowest in the continent.

For this reason, according to Albert Banal Estañol, “Spain must learn from (and avoid) the mistakes of the past. Overinvestment may occur again, this time for renewable gas assets. There is still a great deal of uncertainty about the role that green hydrogen and biomethane will play in the future and for which applications they will be most valuable. First, regulators should be careful, possibly adopting a “no regrets” approach, for example, prioritizing investments in infrastructure for renewable gas linked to industrial clusters.

Comparison with France and the United Kingdom

The study by Albert Banal Estañol also includes a comparative assessment of the current gas infrastructure and regulatory framework in Spain compared to France and the United Kingdom, as these countries also have major transport, interconnection and LNG infrastructures. Thus, the conclusions of the report indicate that Spain is lagging behind in the application of these two countries’ best practices.

In addition, the study reveals that France and the United Kingdom have achieved infrastructural objectives through more balanced risk-sharing between private investors, government and consumers. This differs from Spain, which has transferred an overly high risk to the end consumer: 40% of Spanish energy bills are now tolls for facility maintenance.

Recommendations for a more transparent and balanced system

Finally, the report by Albert Banal Estañol sets out some recommendations for policymakers and regulatory authorities. Some of the main ones are the need to modify the decision-making process used to adopt or approve investment decisions in infrastructure, a process that ought to be far more transparent and, therefore, accountable; improve the balance of risks between private investors, the government and consumers, with the systematic preparation of broader economic and environmental studies, to avoid outcomes like those of the Castor project.

Other measures it proposes are that investment projects should be subject to major scrutiny, and that the remuneration of natural gas infrastructure could at least be differentiated from that of new infrastructures, and that some form of supervision should be implemented to assess the decision to classify an asset as blocked - for example, in the form of an expert committee - and to oblige this committee to publish its findings.

Albert Banal Estañol warns that regulators need to act with caution, for example, by giving priority to investing in infrastructure for renewable gas in industrial clusters. The coming policy steps must aim to reduce emissions as quickly and effectively as possible”, he concludes.

 

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