Spanish coal royal decree: An energy security measure

Abstract

National governments sometimes introduce policies that modify energy markets to achieve other social and political goals. These policies, created with the best of intentions, often have unintended consequences. Here we present a case study of one such policy, the Royal Decree in Spain that mandates the use of the Spanish-Indigenous Coal (IC). The Royal Decree 134/2010, subsequently modified by the Royal Decree 1221/2010 (RD1221), introduced into the Spanish electricity market a new mechanism for security of supply. The justification for the mechanism, which incentivizes the use of the IC to avoid the closure of the generation units that use this type of fuel, was to increase, or at least to keep, energy independence. The Decree regulates the IC bid price into the day-ahead market, and also requires a minimum level of generation from these sources and mandates, as needed, reductions in generation from non-IC sources, excluding nuclear. We apply a unit commitment model to quantify and analyze the impact of RD1221 on the Spanish electricity system, in particular the resulting productions and prices within the daily market and the effect on total CO2 emissions. We show, depending on the amount of production mandated and on the cost of competing non-IC generators, that this mechanism can in fact increase CO2 emissions significantly, as well as the market price of electricity. Furthermore, cases in which the impacts of this Decree are smaller are those in which it is not necessary; i.e., the indigenous coal is competitive on its own.