High electricity prices are choking Portuguese growth

Portugal is set to begin phasing out support for utilities generating renewable power, a top government official said, as Lisbon tackles high electricity prices that are hampering efforts to bolster its struggling economy.

The secretary of state for energy, Jorge Seguro Sanches, told Reuters there will be no abrupt changes to contracts or legislation, while the eight-month old government will keep promoting renewable energy and push for power links with central Europe and Morocco in north Africa to develop energy exports.

The subsidies will gradually end as contracts start to expire in 2017 but he said the government would not tear up existing deals as neighbor Spain did.

“Investors have to feel secure about their investment, so we do not change the rules halfway through the game,” he said in an interview, ruling out the cancellation of generous guaranteed prices for producers in existing contracts.

“But when contracts end, they go to the market … I’m not approving any extensions of subsidies,” he said.

Renewable power technologies have become more cost-efficient and investment in many projects has already paid off, which means that market prices are often significantly lower than the current subsidized prices, he said, expecting consumers to benefit from the switch to market terms.

The Atlantic coastal country has for over a decade been one of the global pioneers in the mass use of renewable energy, especially wind, but the initial high costs of the new technology meant the state had to subsidize utilities under long-term deals, which ended up in the consumers’ light bill.

Also inflating that bill is legacy support to thermal power plants. Data from Portugal’s power market regulator ERSE shows that producer overheads that end up being subsidized make up about 25 percent of the final price of electricity.

HIGHEST PRICES IN EUROPE
High energy prices weigh on the competitiveness of Portuguese companies and on disposable incomes of the population in a challenge to the indebted country that is trying to avoid a new economic slowdown after just two years of meager growth.

A July study by VaasaETT global energy think-tank showed that out of 29 European capitals, Lisbon has the highest residential electricity prices adjusted to consumer purchasing power parity, a third higher than the average in the study.

Faced with similar problems, Spain has in the past few years slashed subsidies written into renewable power contracts, hitting producers’ returns, especially in solar, who laid off tens of thousands and filed legal complaints against the state.

Sanches said that such a move involving existing power contracts was out of the question in his smaller economy, which cannot afford to lose any energy investment.

The first major contract expires in September 2017. The Sines coal-fired plant run by the country’s main utility, EDP, has a 1,200 megawatt capacity – a sizeable chunk of Portugal’s total installed capacity of some 18,000 MW.

Also in 2017, the first wind power contracts with a total capacity of 60 MW and cost compensations, known as feed-in tariffs, switch to market prices. The next big batch comes in 2020 when nearly 1,100 MW in wind power contracts expire, with smaller volumes to follow until 2027.

Sanches would not provide any specific targets for subsidy cuts, saying only that in his mandate he aims to reduce the fixed component of energy costs and increase the market-driven variable.

Fixed costs, that include subsidies, now make up over half of some 6 billion euros in total energy costs a year.

The government is already licensing 180 MW in solar power investment projects that will work at market prices thanks to new technologies, which Sanches called “a paradigm shift because such projects can now live on their own, without subsidies”.

For more sustainability news, go to the Thomson-Reuters website:

http://sustainability.thomsonreuters.com/

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