A NEW SECURITY OF SUPPLY MECHANISM FOR THE IBERIAN MARKET

The design for a new regulatory framework for the Spanish electricity system - at the time one of the most advanced in the world - was polished off with reasonable success in a matter of a few months back in 1997. This initial scheme worked suitably in the early years, establishing the foundations on which the system would develop, with significant increases in efficiency on the one hand and the appearance of new actors on the other.

Although it was not explicitly stated in the law, the documents that reflected the previous discussions and agreements between the regulator and the industry foresaw that the new framework would need to be significantly revised five years later. Unfortunately, this revision did not take place. After this initial drive, in which the de-regulation of generation activity was the center of the debate, the regulatory developments were mainly focused on other issues, namely on the regulated activities (transmission and distribution) as well as, for instance, the Special Regime scheme. On the wholesale and retail sides, the regulatory developments were confined to the introduction of a series of small patches whose outcome has been the present regulatory gridlock in the Spanish electricity market.

Although tardily and at a much slower pace than the situation required, reform of the original model has finally been undertaken. This process began with a White Paper commissioned by the Ministry of Industry, Tourism and Trade, followed by an (overly) long discussion period, in turn disrupted by large-scale capital operations - primarily the takeover bid for Endesa - and now appears to finally be translating into major changes. These include the institution of auctions for the purchase of power intended for regulated consumers (to be known in the future as ''power supply of last resort'') and stipulations requiring Endesa and Iberdrola to hold auctions offering virtual power plant capacity. One of the initial provisions, which was controversial from the outset and has remained unchanged to date, was the 'capacity guarantee mechanism' in place since the market first saw the light in 1998. The proposal for reform formulated by the White Paper was followed more than a year later by a proposal put forward by the Council of Iberian Energy Market Authorities in response to the commission received from the Spanish and Portuguese governments at the Portuguese-Spanish summit held in November 2006. This process culminated in September 2007, when the Spanish government published a Ministerial Order establishing a new mechanism for capacity payments, which in fact has very little in common with the Regulation Council's proposal. This article discusses the highlights of the proposal put forward by the Iberian Market Regulation Council for a security of supply mechanism for the Iberian electricity system. This design was developed by the authors of this article as part of a partnering project between the Pontifical University of Comillas' Institute for Research in Technology and the Spanish National Energy Commission (CNE, the Spanish initials for Comisión Nacional de Energía), within the framework of close cooperation between the two Iberian countries' respective electricity market regulators, the CNE and the Portuguese Energy Services Regulatory Authority (ERSE, for Entidade Reguladora dos Servicios Energéticos).

Section II below describes the backbone around which the proposal was structured, the context in which it was developed, and the regulations in force in the two systems. Section III discusses the fundamentals that delimit the scope of the proposal, while Section IV deals with some of the major implementation details. Finally, we briefly outline the main characteristics of the new security of- supply design the Spanish government sketched in the Ministerial Order previously mentioned.