Spain and Portugal’s cost-cutting ‘energy island’ plan gets EU approval

Spain and Portugal reached an agreement with the European Commission Tuesday to slash electricity prices on the Iberian Peninsula, under an exemption allowing them to separate it from the price of gas.

Spain and Portugal's cost-cutting 'energy island' plan gets EU approval
Portuguese Prime Minister António Costa (L) and his Spanish counterpart Pedro Sánchez during a press conference in 2020. (Photo by PATRICIA DE MELO MOREIRA / AFP)

According to Madrid, around 40 percent of households should benefit from the system, and between 70 and 80 per cent of companies will be affected.

“We have reached a political agreement with the Commission”, said the Spanish Minister for Ecological Transition Teresa Ribera, at a press conference in Brussels with her Portuguese counterpart Jose Duarte Cordeiro.

The deal, which should come into force in the next few days, will help “strengthen the protection of Spanish and Portuguese consumers… who have a higher level of exposure to the evolution of the wholesale market,” she said.

At the end of March, the European Union authorised Spain and Portugal to take “exceptional measures” to reduce the price of gas used to produce electricity and to alleviate household energy bills, which are particularly high in the two countries.

The cost of energy has risen sharply in recent months in Spain and Portugal because of European electricity market rules, which force producers to sell their energy at the price of the most expensive technology — currently gas-fired power stations.

For months, Madrid and Lisbon have been fighting against this system, which was deemed unsuited to the energy situation on the Iberian Peninsula.

But several European countries were opposed to a reform, saying they feared the impact on competition within the EU.

The Iberian exception was approved in view of the two countries’ “particular situation”, as they have “energy mixes composed mainly of renewable energies and very few interconnections with the European market”, Commission President Ursula von der Leyen said.

What is an energy island?

Spain and Portugal are in a strategically advantageous position in that they’re not as dependent on Russian natural gas as many of their European neighbours, importing most of it from Algeria and other countries.

Spain is also the country with the largest gas storage and regasification capacity in Europe and together with Portugal is a renewable energy leader in terms of solar, hydraulic and wind power. Their energy markets are more self-sufficient and extremely well connected between both nations.

This has led the two countries that form the Iberian peninsula (as well as tiny Andorra) to be referred to as an “energy island” by Spanish Prime Minister Pedro Sánchez and his Portuguese counterpart António Costa, as a simplified way of describing why their countries should (and now have been) temporarily released from the EU’s common market rules.

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‘Impossible to keep track’: Spain’s big gamble on green hydrogen

Major green energy projects are sprouting up across Spain as it seeks to position itself as world leader in this sector, but experts have urged caution over costs and demand uncertainty.

'Impossible to keep track': Spain's big gamble on green hydrogen

Spanish firms are ramping up production of emissions-free fuel and ploughing investment into green energy projects, despite fears over the high price of production.

“Everything is going very fast,” said Miguel Ángel Fernández, technical director at the Spanish National Hydrogen Centre, a public research centre based in central Spain.

“There are so many projects, it is impossible to keep track of them all.”

Most hydrogen is currently produced using polluting fossil fuels but so-called “green hydrogen” is made entirely using renewable energy such as wind, solar and hydropower.

While fossil fuels emit harmful greenhouse gases when they burn, hydrogen only emits water vapour.

Madrid launched a €1.5-billion ($1.7-billion) plan in in 2021 to support green hydrogen projects, using a European Union Covid recovery fund.

Spain is now home to 20 percent of the world’s green hydrogen projects — second only to the United States.

Last year Spanish energy giant Iberdrola started operating what it says is the largest green hydrogen plant for industrial use in Europe, in the former mining town of Puertollano.

The plant uses 100 megawatts of solar panels to produce green hydrogen, which is stored in huge white storage tanks.

The initial goal is for it to provide 10 percent of the energy needed by a neighbouring factory belonging to fertiliser maker Fertiberia.

This will prevent the release of 48,000 tonnes of planet-warming carbon dioxide per year according to Iberdrola.

From Andalusia to the Basque Country, green hydrogen megaprojects are multiplying in Spain, a leading country in this promising sector. It’s still a risky bet while the economic model for this ‘energy of the future’ remains to be found. (Photo by Valentin BONTEMPS / AFP)

If the pilot project works, Iberdrola will launch a “much more important second phase” to meet 100 percent of the fertiliser plant’s energy needs, said Javier Plaza, head of Iberdrola’s green hydrogen division.

Rival Spanish energy firms such as Cepsa and Repsol have in recent months launched similar projects.

In Spain’s sunny southern Andalusia region, three billion euros is being invested to create a “green hydrogen valley” where two large factories will produce 300,000 tonnes of green hydrogen per year from 2027.

In the northern region of Asturias 15 solar power parks will be built by 2030 to enable the annual production of 330,000 tonnes of green hydrogen.

Rafael Cossent, research associate professor in energy economics at Madrid’s Comillas Pontifical University, said there was an “effervescence” in the sector putting Spain in a leading role in green hydrogen production.

This is partly due to Spain’s abundant sun and wind power capabilities, he added.

The Spanish Hydrogen Association estimates there are currently 50 green hydrogen projects under development in the country.

Spain could potentially produce enough green hydrogen to cover its own needs and export to northern Europe, the association argues.

A major drawback for green hydrogen, however, has been the high cost of producing it.

Green hydrogen is made by using renewable energy such as wind, solar and hydropower. (Photo by ANDER GILLENEA / AFP)

While the price of the renewable energy used to make it has come down due to technological advances, green hydrogen has still not proven itself to be economically viable.

Massive use of green hydrogen will also require “complex transformations” by vehicles and industrial plants which make future demand for the fuel uncertain, said Cossent.

A green hydrogen economy will need a robust transportation infrastructure to transport it — which Spain is currently lacking.

The government is counting on a planned underwater pipeline between Barcelona and Marseille, dubbed H2Med, which is expected to transport some two million metric tonnes of hydrogen annually.

Hydrogen is difficult to contain without leakage however, making it challenging to store and transport, so delays to the pipeline are widely expected.

But the giants of the green hydrogen market are undeterred.

Iberdrola’s Plaza said it is important to get into green hydrogen early because “whoever starts first has the advantage”.

“We are talking about a long-term race,” he added.