Electricity law and regulation in Portugal

1. Overview

1.1 Introduction

1.1.1 In 2012 Portugal saw significant regulatory changes in the electricity sector. Apart from partial privatisation of the former incumbent Energias de Portugal, SA (EDP) and the transmission operator Redes Energéticas Nacionais, SGPS (REN), substantial modifications to the legislation regulating the sector were also approved in order to transpose the Third Energy Package and to comply with the commitments made by the Portuguese government in the context of the on-going financial aid programme (see further details in section 3.5 below).

1.1.2 In line with the requirements of the Third Energy Package, the Portuguese electricity sector is almost fully liberalised and fully privatised.

1.2 Structure of electricity market

1.2.1 On 8 October 2012 the government approved a new package of legislation (Decree-Law n. 215-A/2012 1 Decreto-Lei n.º 215-A 2012 (accessed 14 November 2014).
https://dre.pt/application/file/588990
 and Decree-Law n. 215-B/2012 2 Decreto-Lei n.º 215-B 2012 (accessed 14 November 2014).
https://dre.pt/application/file/588991
) to complete the transposition of the Third Energy Package, mainly by:

  • reinforcing the provisions regarding independence and separation of production and trade activities and the operation of transmission networks;
  • attributing a wider range of powers to the regulatory entity (namely the implementation of the penalties scheme to be exercised through a specific regime approved by law), reinforcing its independence in carrying out its regulating, monitoring and certifying functions; and
  • extinguishing the regulated tariffs for the sale of electricity.

1.2.2 In relation to transmission, Portugal has opted for full ownership unbundling of the transmission activity.

1.3 Key players

1.3.1 During the first quarter of 2012, the Portuguese energy sector also saw the privatisation of a significant part of the transmission operator’s share capital (REN) and of the incumbent’s share capital, a former vertically integrated company, which now develops, through its subsidiaries, generation, distribution and supply activities (EDP). Oman Oil Company S.A.O.C. and State Grid International Development Limited acquired 15% and 25%, respectively, of the share capital of REN. China Three Gorges International (Europe), SA, acquired 21.5% of the share capital of EDP.

1.3.2 Electricity suppliers entail not only Portuguese companies (EDP Comercial and Galp Power) but also several Spanish companies (such as Endesa, Iberdrola, Unión Fenosa, EGL Energía Iberia and Nexus Energía). Further, since July 2007 the Portuguese and the Spanish electricity markets form part of the Iberian Electricity Market (MIBEL).

1.4 Current issues and drivers

Given the recent period of change and reforms, stability of the regime is an issue in Portugal. The near future will show how the sector, which in the past was controlled by the State and only recently has been privatised, will function, and especially how the different operators will behave in this new context.

2. Sector Analysis

2.1 Generation

Structure of generation sector

2.1.1 The generation sector in Portugal includes traditional power plants, such as gas and coal fired combined-cycle power plants. The key power plants are Central Termoelétrica do Ribatejo (1200MW), Central Termoelétrica de Sines (1180MW), Central de Ciclo Combinado da Tapada do Outeiro (990MW) and Central Termoelétrica de Lares (884,5MW). The producers may sell their electricity through MIBEL or through bilateral contracts. According to the Regulatory Entity for Energy Services (ERSE), in February 2012, the electricity produced in Portugal totalled 3.673GWh, while the installed capacity was 12.053MW.

Energy mix

Portugal is a country with scarce non-renewable energy resources, as it does not have coal mines or oil or gas deposits. The primary and main sources of energy produced in Portugal are solid fuels, geothermal energy, hydropower energy and solar/wind energy.

The scarcity of energy resources has meant that Portugal has relied heavily on energy imports, including imports of primary sources of fossil fuels (coal, oil and natural gas). This has recently changed due to the development of indigenous energy sources. According to the Directorate General for Energy and Geology, the dependency rate has been decreasing since 2005 (from 89% in 2005 to 76.7% in 2010). In 2010, the percentage of imported energy in relation to total energy consumption was 49.1% for oil, 19.7% for natural gas and 7.2% for coal. According to the same report, renewable energy represents 22.8% of Portugal’s total energy consumption (please refer to section 5 Country Statistics).

2.1.2 Portugal has a great potential for renewable energy, such as hydro, wind, solar and biomass. In the last seven years, the number of renewable power plants has increased considerably, especially hydro and wind plants which were strongly encouraged by the government.

2.1.3 Suppliers of last resort (companies which have public service obligations, such as universal service) are obliged to purchase all electricity generated by renewable energy plants connected to the electricity grid. Special feed-in tariffs also apply in this situation.

2.1.4 The electricity generated by renewable energy sources can also be purchased in the market. In this case, the price is set by the market.

2.1.5 Electricity grid operators are required to prioritise electricity produced by renewable plants, except if produced by hydroelectric plants with an installed power of more than 30MW.

2.1.6 At the end of February 2013, the total installed capacity of renewable plants in Portugal was 10.844MW.

2.2 Transmission

Structure of transmission sector

The transmission network, which is above 110kW, is owned by REN which also operates the network.

2.2.1 Transmission activity is exercised according to a public service concession contract between the Portuguese state and REN. This contract exclusively governs all transmission activity on the mainland.

2.2.2 According to the public service concession contract, as well as the general laws regulating the sector, the network operator is obliged to connect all entities, including generators, to its network on a non-discriminatory basis, provided that the connection is technically and economically feasible and the applicant satisfies the requirements for the connection. The right of access to the transmission network is granted by entering into a written agreement regarding the use of the infrastructure. Pursuant to this agreement, the operator has a right to receive a payment for the use of its system. The payment is fixed in a form of a regulated tariff established by the Tariffs Regulation that is approved by ERSE.

2.2.3 The National Transmission Grid Development and Investment Plan for the period 2012-2017 foresees a gradual and phased expansion of the electricity network, taking into account the targets of security and quality of the service and the requests of connection to the grid made by the generators.

Cross border issues

The Portuguese transmission grid and the Spanish transmission grid are integrated. The requirements for the connection between the grids and the management of capacity are discussed and approved in the broad context of the functioning of MIBEL.

The congestion management is solved by the mechanism of market splitting. Whenever the interconnection capacity commercially available between the two countries is not sufficient to support the cross-border flow of energy that the matching of offers on the market determines, the current market rules determine that the Portuguese and Spanish market areas should be separated and specific prices found for each area.

2.3 Distribution

Structure of distribution sector

2.3.1 Distribution activity is performed in accordance with a public concession regime, which grants to the operators exclusive distribution in parts of the national territory. Currently there are eleven companies performing this activity on the Portuguese mainland, which directly own or explore their respective grid (equal to or below 110kW).

2.3.2 Access to the distribution grids depends on prior conclusion of an agreement for its use and payment of the tariffs published by ERSE in the Tariffs Regulation. Terms and conditions of the agreement are also approved by ERSE. Negotiations are conducted directly between the distribution network operator and the client using a standard form agreement approved by ERSE.

2.4 Supply

Structure of supply sector

2.4.1 The Portuguese electricity supply market has been fully liberalised since September 2006 and customers are free to choose their suppliers among the following: EDP Comercial, Galp Power, Endesa, Iberdrola, Unión Fenosa, EGL Energía Iberia or Nexus Energía. Whilst certain legal requirements dictate the terms of supply contracts, operating for the protection of consumers, the prices are set freely. At the end of October 2014 over three million consumers were in the liberalised market.

2.4.2 Certain consumer groups still have a protected status. Suppliers of last resort are obliged to supply household consumers until 2015 and after that date to economically vulnerable consumers (individuals that are in a situation of socio-economic deprivation as defined by law). Suppliers of last resort are also obliged to supply consumers whose supplier has been prevented from exercising its activity, and consumers who cannot choose between suppliers because there are no other suppliers in their region. Last resort’s supply tariffs are set by ERSE.

Key issues

2.4.3 One of the key issues of the Portuguese electricity sector is assessing how the market will function in the near future, i.e. if it proves to be sufficiently competitive and attractive for new suppliers and for consumers. Notwithstanding all the measures that have already been put in place (including measures to protect the consumers), it is not certain that the liberalisation of the market, as it was proposed by the European Union, will contribute to a real decrease in electricity prices or improvement of the quality of the services.

2.5 Energy exchange / trading

Structure of trading market

2.5.1 Trading companies can enter into bilateral contracts with buyers or, alternatively, purchase and sell electricity through MIBEL.

2.5.2 MIBEL is organised into a spot market and a derivatives market. The management of the spot market is the responsibility of the Iberian Energy Market Operator (Spanish division) (OMIE), while the Iberian Energy Market Operator (Portuguese Division) (OMIP), SGMR, S.A. is responsible for the management of the derivatives market.

2.5.3 Trading on the market is based on a daily auction, with settlement of energy at every hour of the following day. Trading also includes various intraday sessions, subsequent to the daily market auction.

2.5.4 On the spot market, transactions are executed through the participation of agents on the daily and intraday market that aggregate, through market splitting, the Spanish and Portuguese zones of MIBEL.

2.5.5 In September 2014 17.986GWh was traded on the spot market, of which 13.960GWh was energy acquired in Spain and 4.026GWh acquired in Portugal. On the derivatives market, 7.564GWh was traded in the same month

3. Regulation

3.1 Authorities

3.1.1 Regulation is exercised by the Directorate General for Energy and Geology (DGEG) and independent regulatory entities. At the latter level, alongside horizontal regulation – through the Portuguese Competition Authority (AdC) – there is also a specialised vertical regulation that is carried out by ERSE and by other entities (such as the Portuguese Securities Commission).

3.1.2 The DGEG performs a function of the Minister of Economy and is directly controlled by the Ministry. Its powers include:

  • issuing, amending and withdrawing licences for electricity generation and registers for electricity supply; and
  • supervising the security of supply.

DGEG decisions may be challenged by appeal to the Minister of Economy, who can change or even revoke DGEG decisions.

3.1.3 The regulation of access to the networks, quality of supply and determining prices and tariffs are attributed to ERSE who can also impose fines on energy companies for non-compliance with the laws and applicable regulations.

3.1.4 Although created by the government, ERSE is an independent administrative entity with administrative and financial autonomy and its own assets. ERSE’s board members are not subject to instructions or specific guidelines. Their independence is also guaranteed by the method of their appointment (done by a resolution of the Council of Ministers, following the Minister of Economy’s proposal of a number of people with adequate qualifications and recognised technical and professional competence) and the duration of their mandates (five years with one possible renewal).

3.1.5 There are also restrictions designed to safeguard ERSE’s independence from companies operating in the regulated sectors, in line with requirements of the Third Energy Package. The appointment to ERSE’s board of a person who in the past two years has been a member of a governing body of a company operating within the regulated sectors is forbidden. It is also forbidden to appoint to ERSE’s board a person who is or has been a worker or permanent collaborator with management duties within the natural gas and electricity sectors. Similarly, after the end of a board member’s mandate, a cool down period applies: they are prevented for two years from holding any position or providing any service to companies within the regulated sectors.

3.2 Key legislation

Decree-Law n. 29/2006, 15 February 2006 3 Decreto-Lei n.º 29/2006 (accessed 17 November 2014).
https://dre.pt/application/file/683951
, as amended by Decree-Law n. 215-A/2012, 8 October 2012 and Decree-Law n. 172/2006, 23 August 2006 4 Decreto-Lei n.º 172/2006 (accessed 17 November 2014).
https://dre.pt/application/file/540562
, as amended by Decree-Law n. 215-B/2012, 8 October 2012 set out the basic regulatory framework of the electricity sector, including renewable energy. There are also several regulations approved ERSE regarding tariffs, commercial relations between operators and clients, quality of service and electricity infrastructure.

The Statute of ERSE was approved by Decree-Law n. 97/2002 on 12 April 2002 5 Decreto-Lei n.º 97/2002 (accessed 17 November 2014).
https://dre.pt/application/file/303299
 and amended by Decree-Law n. 212/2012 on 25 September 2012 6 Decreto-Lei n.º 212/2012 (accessed 17 November 2014).
https://dre.pt/application/file/175586
.

3.3 Regulatory framework

3.3.1 Carrying out the various activities in the electricity sector also requires a number of government authorisations. Transmission and distribution activities are subject to a public concession contract, entered into by the state and the respective operators. Other activities usually require licences. Accordingly, generation activity is subject to licensing by the government (for plants with more than 10MVA or by DGEG (for plants with 10 or less MVA). Generation of renewable energy also depends on obtaining a licence or, less often, a previous communication, which is presented by the producer to DGEG prior the beginning of its activity and that has a more simplified procedure than a licence. Communications from the generator are only applicable in limited cases. These include power plants connecting less than 1MVA to the grid, where the power plants are not required to comply with the environmental assessment regime, power plants located outside the Portuguese maritime domain or power plants remunerated according to market prices and which are therefore not entitled to benefit from a feed-in tariff.

3.3.2 Suppliers have to be registered by DGEG before starting activity and suppliers of last resort need a licence from DGEG setting out the terms of supply.

Competition

3.3.3 In addition to the laws noted above, the standards applicable under European and Portuguese competition laws also apply to the electricity sector, in particular with regards to the restriction or distortion of competition and the abuse of a dominant position. In addition, Portuguese competition law also prohibits the abuse of economic dependence, an exploitative conduct by a non-dominant undertaking.

3.3.4 The AdC is charged with ensuring compliance with competition law. The legal framework also requires that the AdC works closely with and consults other regulatory authorities in areas where their supervisory powers overlap. The practice in the electricity sector is regulated and supervised by ERSE, which means there is much interaction between those entities.
AdC has such powers as would be expected under EU law to deal with breaches of competition law. It has the power to:

  • investigate and make non-binding recommendations; and/or
  • ex officio or following a complaint, to initiate proceedings against companies that may be involved in anti-competitive practices.

Where there is an anti-competitive practice, it may impose fines on the infringing undertakings, as well as remedies of a structural or behavioural nature.

3.4 Support schemes

3.4.1 Although created by the Government, ERSE is an independent administrative entity with administrative and financial autonomy and its own assets. ERSE’s board members are not subject to instructions or specific guidelines. Their independence is also guaranteed by the method of their appointment (done by a resolution of the Council of Ministers, following the member of the government responsible for energy matters’ proposal of a number of people with adequate qualifications and recognised technical and professional competence) and the duration of their mandates (six years).

3.4.2 In accordance with the memorandum of understanding on specific economic policy conditionality that Portugal, the European Central Bank and the International Monetary Fund established in May 2011, the Portuguese government supports wind power (onshore) generation with alternative remuneration schemes for investors. These schemes effectively give a wind power developer a guaranteed tariff over a five to seven year period after the initial period of the feed-in tariff. Accession to one of the four schemes (effective for five or seven years) attracts the payment of annual compensation for eight years (2013-2020) of EUR 5000 or EUR 5800 per MW of installed capacity, depending on the scheme chosen.

3.4.3 Other plants are supported by additional measures. There is a compensation mechanism – maintenance costs for contractual balance (CMECs) – in order to compensate for effects of the liberalisation of the sector, which abolished Energy Acquisition Contracts (CAEs). Pursuant to the CAEs, companies (conventional power) sold the electricity produced to the public gird and received a tariff with a fixed term to remunerate investment costs and a variable term to remunerate energy supply. CMECs are a compensation mechanism that allows recuperation of investment made, in circumstances where operation in a free market provides for lower cash-flows than those obtained through CAEs. The government has reduced the amounts of capacity payments pursuant to CMECs.

3.4.4 Finally, the Portuguese government offers support by way of a power guarantee to certain generators (renewable and conventional). This allows the allocation of incentives to energy provided by power plants for the National Electric System. This support system aims to guarantee the security of supply and the proper management of the plants’ availability.

3.5 Recent regulatory changes

3.5.1 To replace the absence of a penalty scheme since 2006, the legal framework for such a scheme in the electricity sector (Law n. 9/2013 7 Lei n.º 9/2013 (accessed 17 November 2014).
https://dre.pt/application/file/256926
) was published on 28 January 2013. This regime sets penalties for infringements of the laws and regulations of the electricity sector. The fines range from 2% to 10% of the previous year’s turnover for corporate entities.

3.5.2 The State Budget for 2014 included an extraordinary tax (of 0.85%, but there are lower rates for specific situations) to be levied against energy companies (generators, TSO and DSO) based on their assets.
This tax is intended to fund mechanisms that promote the sustainability of the energy sector, through the establishment of a fund that aims to contribute to the reduction of the tariff deficit and for the financing of social and environmental policies of the sector.

4. Country Statistics

4.1 Energy dependency rate 8 Source: Directorate General for Energy and Geology, 2013

4.2 Electricity in Portugal 9 Source: CIA World Factbook

Electricity 

million kW

Production (2011 est.)

49.92

Consumption (2010 est.) 

50.26

Exports (2012 est.)

2.873

Imports (2012 est.)

10.76

Installed generating capacity (2010 est.)

18.92

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