The future of gas infrastructure remuneration in Spain

The European Union (EU) has adopted ambitious decarbonization targets for 2050.

Renewable electricity and electrification are the key drivers, but are not sufficient on their own to meet the targets. A number of countries expect decarbonized gas (e.g. renewable hydrogen and biomethane) to be part of a future decarbonized energy system.

Within that context, this paper examines proposals, recently issued by Spain’s energy regulator (CNMC), to define the methodology for remunerating gas distribution and transmission networks, and LNG regasification terminals. Their proposals would reduce significantly the remuneration of these activities. Bearing in mind the objective of decarbonization, this paper analyzes key features of the proposals and concludes with recommendations. We suggest:

• Adoption of a common methodology for remunerating new investment in gas and electricity infrastructure assets. The Regulatory Asset Base (RAB) approach is a suitable methodology, especially for high-risk investment to integrate hydrogen.
• CNMC reconsideration of its proposals for existing assets. The aim should be to ensure that, even if remuneration is reduced to some extent, investors will still be compensated adequately and that the companies will continue to support the investments needed to digitalize processes, deliver natural gas and eventually deliver renewable gas where it is economic to do so. This is an important signal for current and future investors whose investments will be regulated by the CNMC.
• Clarification of the methodology for remunerating renewable gas facilities. If renewable gas (especially hydrogen) requires access to regulated gas networks, the CNMC methodology must provide suitable incentives to invest in network expansion and upgrading, as required, as well as to maintain natural gas operations. Even if no decision is made in the short-term regarding hydrogen, it would be prudent to leave the door open, by making the regulation compatible with future decisions involving hydrogen development.
• Consideration of potentially stranded assets. The CNMC and the Government should coordinate over the remuneration of infrastructure assets when national policy decisions may lead to the stranding of these assets.
• Decarbonization of the energy system as a whole. The CNMC and the Government should consider how best to promote the decarbonization of the energy system as a whole, rather than its individual parts, and what role is to be played by regulated networks and by unregulated initiatives in competitive markets, especially for the development of hydrogen systems.

By: David Robinson , Jonathan Stern