relation whatsoever to the amount of power they generate). This payment based on investment (in €/MW of installed capacity) is supplemented, in the case of solar plants, by a return on operations payment (in €/MWh produced).
The principle driving this economic regime is that the payments received by a renewable energy producer should be equivalent to the costs that they are unable to recover on the electricity pool market where they compete with non-renewable technologies. This economic regime seeks to allow a “well-run and efficient enterprise” to recover the costs of building and running a plant, plus a reasonable return on investment (project investment rate of return) over a regulated standard investment cost for each type of plant defined by the government.
The reasonable return is calculated as the average yield on Spanish government 10-year bonds on the secondary market in a 24-month period preceding the new regulatory period, plus a premium based on the financial condition of the Spanish electricity system and prevailing economic conditions.
This return can be revised every six years at the end of each regulatory period. The first regulatory period commenced on July 14, 2013, the date on which Royal Decree-Law 9/2013 became effective, and will end on December 31, 2019. The values of parameters used to calculate the payments can be changed at the end of each regulatory period, except for a plant’s useful life and the value of a plant’s initial investment. The Spanish government initiated its review of the rates of return on investment and return on operations with the publication of a draft of the law on December 28, 2018. This document includes several options for the plants affected by the Royal Decree-Law 9/2013, that would set the new reasonable return in between 7.09% and the existing 7.39%.
If the proposal is amended in the Spanish Parliament, and payments for renewable energy plants are revised to lower amounts in the next regulatory period starting on January 1, 2020 until December 31, 2025, this could have an adverse effect on our business, financial condition, results of operations and cash flows. As a reference, assuming our Spanish assets continue to perform as expected and assuming no additional changes of circumstances, with the information currently available we estimate that a reduction of 100 basis points in the reasonable rate of return on investment set by the Spanish government could cause a reduction in our cash available for distribution of approximately €12 million per year for the whole Spanish portfolio. This estimate is subject to certain assumptions, which may change in the future.
Additionally, the high electricity market prices experienced in recent years, which are also expected in 2019, are generating a future liability for our renewable plants in Spain, given the regulated price bands mechanism that reduces the risk of our plants from market prices fluctuations. Prices in Spain have been significantly above the regulated bands and any extra revenues received due to this situation will have to be returned through a reduction of the return on investment payment on future years. The current expected reduction in revenues due to this effect will be €7 million distributed through the life of all the assets of the Spanish portfolio.
There are other parameters, such as achieved market prices forecast, load factors and standard operational expenses, that could be updated on the regulatory review taking place in 2019, and that could therefore have a negative impact on the return on investment payment and the return on operations payment during the following years.
Revenues in our Portuguese wind farms are affected by regulation and government incentives.
Our wind farms in Portugal are operated under the remuneration scheme of Decree Law 339-C/2001, as well as the amendments to Decree Law 51/2010 and Decree Law 35/2013.
The remuneration scheme consists of a feed in tariff (expressed in €/MWh), which consists of a fixed component, variable component and an environmental component. Remuneration also depends on a “z” coefficient, which varies depending on the facility’s annual production. This remuneration is also updated according to monthly fluctuations in inflation.
The remuneration scheme of the wind farms is maintained for 15 years at a fixed price, which may be extended by an additional seven years with a variable price that has cap-and-floor system (Decree Law 35/2013).
The Portuguese government has approved charging the Energy Sector Extraordinary Contribution Tax (“CESE”) to renewable energy generators in 2019. The CESE has been in place since 2014. It was originally approved as an extraordinary tax that would remain in place for no longer than one year, and it only applied to non-renewable energy operators. Since then it has been extended every year. All of our wind farms in Portugal will be affected by the CESE tax for 2019, for an expected total negative impact of approximately €1 million.