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It is important to describe current and future Spanish energy policy decisions in order to assess a set of policy pathways for Spain’s energy transition.

Elcano Royal Institute - MUSTEC Policy Briefs


It is important to describe current and future Spanish energy policy decisions in order to assess a set of policy pathways for Spain’s energy transition.


This paper describes and quantifies three different energy policy pathways for Spain’s energy transition: government-centred, represented by the socialist party (Partido Socialista Obrero Español, PSOE); market-centred, represented by the conservative party (Partido Popular, PP); and grassroots, represented by Unidas Podemos.


A recent MUSTEC, H2020 report1 describes the Policy pathways for the energy transition in Europe and selected European countries. It analyses current and potential future policy decisions in Germany, France, Spain, Italy, Switzerland and the European Commission, bundling them into sets of policy pathways that describe the energy transition trajectories of countries and the EU as a whole. Each pathway is centred around a certain logic: a worldview, or belief, about the type of policies that are (to its proponents) acceptable and beneficial, leading to a distinct type of electricity (and energy) future.

The paper takes the future as given. Current, past or future policy decisions may or may not be cost-optimal, or even useful, but we assume they are implemented, as the dominant political force in Spain (which, depending on the pathway, is the PSOE, PP or Unidas Podemos, respectively) deems it appropriate at a point in time. These pathways depend both on hard facts and ideological factors which are exogenous to the energy system (eg, fundamental views on market vs state, economic efficiency vs equity, etc). Because there are so many possible decisions, there are theoretically a myriad of decarbonisation pathways that could materialise between today (2019) and 2030, 2040 or 2050. In order to produce a meaningful and manageable analysis, it is key to reduce the number of possible energy-policy pathways.

This paper describes and quantifies three different energy policy pathways for Spain’s energy transition: a government-centred pathway represented by the PSOE, a market-centred pathway represented by the PP and a grassroots pathway represented by Unidas Podemos. There are for sure other political parties in Spain with interesting energy worldviews to analyse, but it could be argued that the selected ones are representative of the energy transition policy space. Additionally, PP, PSOE and Unidas Podemos have prepared law proposals,2 allowing a better specification and quantification of their pathways.

Each of the three decarbonisation pathways (government-centred, market-centred and grassroots) can include elements that would theoretically fall within two other decarbonisation pathways. For instance, the new socialist government’s Climate Change and Energy Transition Law proposal includes bidding and other market mechanisms but, on the whole, it tends to assume energy transition requires tough, mandatory measures such as phase-outs, deadlines, bans and ambitious targets. Similarly, Unidas Podemos sets the most ambitious decarbonisation targets and argues for state (and local) intervention, but its key differentiating factor lies in its grassroots-centred logic, focused on small-scale and local action, seeking decarbonisation through decentralisation of the energy system. Finally, the Popular Party self-stated market-centred logic is based on carbon pricing and letting the market identify the most cost-efficient way to meet energy and climate targets.

Nevertheless, the following pathways represent consistent, clear and the best specified set of alternatives for Spain’s energy transition. Their implicit strategies are presented as ‘narratives’ or ‘scripts’.3 They tell the story from the perspective of 2050, ie, looking back, of how medium and long-term decarbonisation targets were (hypothetically) reached through different means and policy measures, depending on the pathway Spain took (using the past tense, ie, as if they had materialised according to the draft legislative proposals of each of the parties). The three pathways are also presented in a quantitative manner with the support of their respective tables, with the dominant (government-centred) pathway including the key elements of Spain’s draft Integrated National Energy and Climate Plan (INECP) presented to the EC in February 2019.

The State-centred pathway: Partido Socialista Obrero Español(PSOE)

By 2050 Spain had achieved net-zero emissions, both economy-wide and, in particular, in the electricity sector, which was fully renewable. The government’s ‘Target Scenario’ materialised as envisaged in the INECP for 2021-30. The INECP operationalised the long-awaited Climate Change and Energy Transition Law that was finally approved in 2020, along with the development of a Long-Term Strategy and a Just Transition Strategy.

Several international and domestic factors drove Spain’s shift to a lower carbon development model. These included: (1) the entry into force and ambitious implementation of the Paris Agreement; (2) the adoption of increasingly stringent targets for renewables and energy efficiency in the EU; (3) the implementation of the EU’s Long-Term Strategy, that set out to achieve net-zero emissions by 2050; (4) the continued reduction in the cost of renewable energy technologies; (5) the banning (in sales and registration) by 2040 of internal combustion engine (ICE) vehicles in Spain’s main car markets (eg, the UK and France); and (6) an increasing concern for climate-change impacts by Spanish citizens, who ranked climate change as the top foreign-policy priority concern from 2016 onwards.4

A set of laws and policy measures guided the radical decarbonisation of the electricity sector, and of society as a whole, under tight government control. For the power system, this included decisions such as an orderly phase-out of nuclear power between 2025 and 2035, the phase-out of coal by 2030,5 a ban on new fossil fuel subsidies6 from 2020 onwards, the centrally planned phase-out of existing fossil-fuel subsidies, the banning of internal combustion engines in cars, mandatory low-emission zones in municipalities and mandatory renovations and building retrofitting.

By 2030 Spain’s economy had reduced its GHG emissions by 21% compared with 1990 levels. By 2050 Spain’s GHG emissions were 90% lower than 1990 levels, with the remaining 10% being offset by Spain’s carbon sinks, making the Spanish economy carbon neutral by mid-century, in alignment with the INECP and with the Spanish Climate Change and Energy Transition Law.

Overall, Spain’s INECP was initially considered very ambitious, even too ambitious for some energy and emission intensive sectors, as the implementation of Spain’s INECP meant a reduction of over a third of Spain’s 2017 emissions in little over a decade, an unprecedented decarbonisation effort for Spain. The INECP was, however, criticised by other sectors (mainly Civil Society Organisations, CSOs)7 as showing limited ambition compared to other EU countries that adopted more stringent emission reduction targets.8 Although the government initially set out to reduce its GHG emissions by 40% compared with 1990 levels by 2030, which would have aligned its ambition with most EU countries, it scaled down its ambition and settled for a 21% goal in its INECP, arguing it was a fair, achievable and balanced goal.

By 2030, the INECP’s 42% renewable energy target was achieved in Spain’s final energy consumption, supported by an electricity system that was largely renewable (74% of the electricity consumed in Spain). Among other measures, the objective was met through a steady stream of auctions that added at least 3,000 MW of new renewable capacity annually between 2019 and 2030. Throughout the 2021-30 period, 57,000 MW of new renewable capacity was added to the system, supported by auctions. Solar and wind were the bulk of the auctioned power between 2019 and 2030. During this decade, 5 GW of concentrated solar power (CSP) were auctioned and constructed, restarting the expansion of this technology in Europe.

The overall target for renewable capacity installed in Spain was determined by the INECP. The government took a technology-neutral approach to decarbonisation but the ‘Target Scenario’ materialised by 2030. That scenario considered the expected evolution in technologies and costs and strived for a cost-efficient realisation of the decarbonisation pathways. In the ‘Target Scenario’ Spain’s 157 GW of installed power capacity included, among other issues, 50 GW of wind, 44 GW of solar (37 GW of solar PV and 7 GW were CSP),9 27 GW were combined gas cycles, 16 GW were hydro, just under 7 GW of pumped hydro, 2 GW of oil and 3 GW were nuclear.10 The INECP envisaged a very significant uptake of renewables so integrating them into the system was key. In order to achieve integration, demand-side management measures were fostered to change consumption patterns. Additionally, storage capacity was increased, adding 3.5 GW of pumped storage and 2.5 GW of storage capacity in batteries.11

By 2050 Spain’s power sector was fully (100%) renewable. After the Climate Change and Energy Transition Law was approved in 2020, the integration of renewables in the power system continued to be supported by the Spanish government through priority dispatch, subject to the requirements and limitations enshrined in the Energy Union regulations.

Most new fossil fuel subsidies12 were banned by the Spanish government as of 2020. Given, amongst others, energy poverty problems, the government introduced Article 9 in the Climate Change and Energy Transition Law, allowing new fossil subsidies if justified on social grounds, to protect Spain’s economic interests or due to the lack of adequate technological alternatives.13 Initial concerns regarding these exemptions to new fossil fuels were assuaged as a robust control mechanism was put in place by the Spanish government to prevent loopholes through which undue subsidies could have been granted. Existing subsidies (consisting of tax exemptions and deductions) in 2017 (amounting to €2.3 billion for oil, €756 million for gas and €2.9 million for coal)14 were progressively phased out following the government’s calendar to do so. New exploration and extraction of hydrocarbons by conventional and new techniques such as hydraulic fracturing were also banned in Spain as of 2020. Existing permits for exploration and extraction of hydrocarbons were not extended.

Half of Spain’s coal power15 was phased out by 2020, with the rest having been phased out completely by 2030. Nine out of the 15 coal power plants in Spain were already closed in 2021 as the necessary adaptions to limit atmospheric emissions to comply with the Industrial Emissions Directive were not carried out. As regards the remaining coal phase-out, the government took a market-based approach, allowing power plants to burn coal until the drop in the cost of renewables and the price of a tonne of CO2 in the EU-ETS (€35 in 2030) pushed coal power out of Spain’s electricity mix.

The Spanish government furthermore divested (sold its shares and other financial instruments) from companies that extracted, refined or processed fossil fuels, following a divestment plan that was drafted by 2021, in accordance with the Climate Change and Energy Transition Law.16 Government divestment provided incentives for other social agents to follow suit.

The government reached an agreement with utilities so that nuclear phase-out became a reality in Spain by 2035, with nuclear power being phased out when nuclear power plants reached a maximum of 46 years in operation. The government’s initial plans of not extending nuclear power plants’ useful life beyond 40 years were adapted after negotiating with utilities. CSO’s that had historically advocated early closures (calling for nuclear power plants to be decommissioned after 40 years in operation, at most) implicitly accepted the phase-out agreement.

Overall investment needs for the implementation of the INECP in Spain for 2021-30 amounted to €236.12 billion, most of which were disbursed by the private sector. There were initial concerns about whether the private sector would indeed be able and willing to invest 80% of the needs for the INECP, but the private sector recognised the economic opportunity of the low-carbon transition and invested accordingly, meeting the government private-sector investment figures in 2021-30. Investments in energy efficiency amounted to €86.48 billion. Estimated investment in updating power networks and electrification to meet the 2030 decarbonisation goals amounted to €41.84 billion, with an overall investment in renewables of €101.63 billion. Concerns about a potential crowding-out effect were dispelled as empirical data showed large investments in low-carbon transition need not automatically lead to investment reductions in other economic sectors.17

Spain’s interconnections with France, Morocco and Portugal remained very limited until 2020, amounting to <5% of Spain’s generation capacity in 2019, half of which were interconnections to France. This made Spain the only European country that failed the EU target of 10% interconnection capacity in 2020. Hence, Spain developed new interconnections with Portugal (reaching 3,000 MW in 2030) and France (reaching 8,000 MW in 2030, up from 2,800 MW in 2019). A ratchet-up mechanism for interconnections, renewables and energy efficiency goals was included in the INECP for 2023, coinciding with the Global Stocktake enshrined in the Paris Agreement. Spain’s INECP’s target of reaching 15% interconnection of installed capacity in 2030, in alignment with the EU’s interconnection goal, was met. From 2019 Morocco was a net electricity exporter to Spain, but new rules were introduced to prevent coal and gas-generated electricity being exported to the EU. Meanwhile, increasing domestic demand in southern Mediterranean partners continued to put pressure on local installed capacity, including the deployment of renewables.

As for the transport sector and electric mobility,18 Spain banned the registration and sale of internal combustion engine (ICE) vehicles in 2040 as stated in the Climate and Energy Transition Law, despite initial resistance from the car manufacturers’ association. By 2050 only zero-emission privately-owned vehicles were allowed to circulate. By 2030, 5 million Electric Vehicles (EVs) were in use in Spain, with a significant impact on electricity demand. Charging infrastructure for EVs in Spain was small in 2018, but from 2020 onwards the Spanish Climate Change and Energy Transition Law required petrol stations across the country selling more than 5 million litres of fuel annually to present a project to install charging stations of ≥22 kW, reaching 9% of petrol stations across Spain. The Ministry for Ecological Transition regulated which petrol stations had to have charging points and when they had to be operational. For smaller petrol stations the deadlines for projects and operation of charging points was more flexible. Additionally, municipalities of ≥50,000 inhabitants established by law low-emission zones by 2023 (at the latest) and fostered the deployment of public and private EV charging points.

Spain’s INECP included a 32.5% energy efficiency goal vs. a trend scenario, in alignment with the EU goal for 2030. However, Spain achieved its ‘Target Scenario’ energy efficiency goal of 39.6% primary-energy intensity improvement in 2030 (3.6% primary-energy efficiency gains per annum from 2021 to 2030). Energy efficiency goals were achieved through reductions in both primary and final energy consumption (-16.16% and -6.22%, respectively) in 2030 compared with 2015 levels. Electricity consumption in final energy consumption increased 8,16% from 2015 to 2030 (from 19.951 ktoe to 21,579 ktoe), but electricity consumption in final energy consumption was reduced in the residential sector by 12% (from 6,025 ktoe in 2015 to 5,301 ktoe in 2030), essentially through improvements in the thermal envelope of buildings and improvements in district heating and domestic hot water (DHW). Energy efficiency goals achieved, in line with the government’s ‘Target Scenario’, were highly ambitious, as Spain’s energy efficiency improvements in 2000-16 period showed (see Figure 1 below).

Figure 1. Evolution of primary and final energy intensity, 2000-16
Figure 1. Evolution of primary and final energy intensity, 2000-16

In accordance with the updated Energy Efficiency Directive of 2018 the Spanish government increased energy efficiency in buildings by improving the thermal envelope of 1.2 million homes from 2021 to 2030, renovated heating, water heating and air conditioning in 300,000 buildings per year and renovated 3% of publicly-owned buildings. The government also promoted an increase in the use of renewable electricity sources in retrofitted buildings and new buildings. Demand-side response policies were actively developed by the government to nudge consumers into lower carbon consumption patterns that would allow a greater penetration of renewables and greater stability in the power system. Smart metering allowed raising awareness of energy consumption, helping consumers shift energy use in heating, cooling and domestic hot water. Financing mechanisms were fostered by the government to ensure retrofitting of the existing building stock and the construction of near-zero energy buildings. Subsidies were also given to low-income families to allow for retrofitting investments, based on energy savings audits and performance. Public-private partnerships were established to reach retrofitting goals.

Figure 2. Spanish State-centred dominant policy pathway according to Spain’s INECP ‘Target Scenario’ according to the PSOE government, 2016-50
ES: Dominant 2016 2020 2030 2040 2050
GHG reduction targets. Economy-wide (baseline year) 283 Mt CO2eq 327 Mt CO2eq -21% (1990)   -90% (1990)
ETS sector reduction targets 229 Mt CO2eq (European annual emission allocation)

219 Mt CO2eq (European annual emission allocation)

Non-ETS sectors emission reduction targets (baseline year)   -10% (2005) -38% (2005)    
GHG reduction targets (electricity sector)          
Renewables targets (energy; % of final energy consumption)   20% 42%    
Renewables targets (electricity; % of final energy consumption) 39%; 108 TWh; 49 GW   74%   100%
Intermittent renewables 57 TWh; 28 GW 36.3 GW 87.3 GW ≥ 2030 ≥ 2040
Wind onshore 49 TWh; 23 GW 27.9 GW 50.3 GW    
Wind offshore Included above Included above Included above    
Solar PV 8 TWh; 5 GW 8.4 GW 37 GW > 2030 > 2040
Dispatchable renewables 51 TWh; 21 GW     ≥ 2030 ≥ 2040
Biomass 5 TWh; 1 GW 1.6 GW 2.4 GW    
Hydro 40 TWh; 14 GW 15.8 GW 16.3 GW    
CSP 6 TWh; 2 GW 2.3 GW 7.3 GW 2030 2040
Other renewables (year of data when different to column heading) 1 TWh; 0.2 GW (2015 0.2 GW 0.3 GW    
Net traded renewables (year of data when different to column heading) -3 TWh (2015) 11 TWh 6.7 TWh    
Nuclear 59 TWh; 7.4 GW 7.4 GW 3.2 GW 0 0
Fossil fuels 108 TWh; 48GW 45.1 GW 32.5 GW    
CCS 0 0 0 0 0
Lignite 0 TWh 0 0 0 0
Hard coal 36 TWh 10.6 GW 0 0 0
Gas 54 TWh 31.2 GW 30.2 GW    
Petroleum 16 TWh 3.4 GW 2.3 GW    
Other non-renewables 1 TWh 0 0    
Battery     2.5 GW    
Pumped Hydropower 3.3 GW 4.4 GW 7.9 GW    
Other storage          
Cross-border interconnection NTC < 5% of installed capacity 10% of installed capacity 15% of installed capacity    
Electrification of additional sectors          
Total heating demand incl. non-electric heating          
Heating with electricity (energy supplied by heat pumps)

4.1 TWh
353 ktoe

7.6 TWh
651 ktoe

47 TWh

Total cooling demand incl. non-electric cooling          
Cooling with electricity          
Electric mobility    

22% RES (electrification & biofuels)
5 million EV

>> 2030 Ban on ICE sales & registrations >> Ban on ICE circulation
EV chargers (year of data when different to column heading) 4,974 (2017) > 2017 >> 2020 >> 2030 >> 2040
Gross electricity consumption (year of data when different to column heading) 232 TWh (2015) 234 TWh 251 TWh    
Final energy consumption (year of data when different to column heading) 84,542 ktoe (2015) 88,994 ktoe 79,279 ktoe    
Source: the authors

Market-centred pathway: Partido Popular19

By 2050 Spain had achieved an 80% decarbonisation of its economy in a manner that was economically efficient, hence not only meeting international commitments but also in a way that was ‘beneficial to our families and companies’. To achieve this, the government, to the extent possible, avoided interfering with market rules except where necessary to correct market failures associated with environmental externalities and where international climate commitments were at stake. Hence, the few measures taken were market-based, such as a carbon tax (for the non-trading sector), the EU emission trading scheme and auctions for renewable power, leading to efficient levels of decarbonisation.

While all types of actors were enabled to carry out the transition, the private sector and particularly large corporations remained important players over the entire period given their ability to engage in large and cost-efficient investments. Besides renewable generators (especially utility-scale plants with lower specific generation costs), nuclear and fossil fuels with CCS played an important role in the energy transition towards a decarbonised economy. Increasing the interconnection capacity always ranked high in the agenda as a pre-requisite for a cost-optimal exchange of electricity and balancing in the internal European electricity market.

Spain has always followed the trajectory prescribed by the EU, neither lagging behind nor rushing ahead, in order to achieve a coordinated, cost-efficient decarbonisation of Europe together with the other EU Member States. Hence, the Spanish economy is expected to be 80% decarbonised by 2050 (compared with 1990), following the accomplishment of a 26% reduction of emissions in the non-trading sector by 2030. The key enabler to this was the implementation of the National Strategy for a Low-Emission Economy by 2050, which guided the transition to a low-carbon economy. Among other measures, this strategy was based on cost-efficient measures to increase energy efficiency and deploy a mix of low-carbon technologies leading to a cost-optimal mix of renewables, nuclear power and fossil fuels with CCS.

In order to make use of the most cost-efficient decarbonisation measures, the Spanish government did not define specific renewable energy or electricity targets beyond the 2030 renewable energy target (32% renewable energy); in the electricity sector, this led to the deployment of the renewables with the lowest system cost both in Spain and abroad (to the extent allowed by the interconnectors). Already in the period before 2018, renewable electricity deployment was promoted through technology-neutral auctions and the relative increase in competitiveness through carbon price measures.

While there was no specific target for intermittent renewables, PV and onshore wind power became the main pillars of the Spanish system given the lower cost compared to other renewables and the technology-neutral design element of the renewable auctions. Similarly, dispatchable renewables-biomass (with and without CCS) hydropower and CSP never had explicit targets and their expansion occurred at the time and location where they proved cost-efficient from a system perspective as a way to balance PV and wind power.

Similarly, both physical imports or statistical transfers of renewables (through cooperation) were important measures both for balancing the Spanish power system and to meet the EU-mandated renewables targets in a cost-optimal manner. This was further supported by the expansion of new interconnectors. The latter was one of the key Spanish priorities, both to facilitate the completion of the internal electricity market and to allow increased electricity trade, including cross-border renewables trade under the cooperation mechanism. To this end, the government both met and exceeded the EU-mandated interconnector targets.

Nuclear power continued to play a non-trivial role in the Spanish power system, as the old reactors extended their economic lifetime provided their technical characteristics allowed operation in safety conditions. Yet fossil-fuelled CCS and renewables were expanded to become the main pillars of decarbonising the Spanish power system . Consistent with the focus on cost-efficiency, there was no mandated closure of any power station, including coal power; however, the increasing carbon price (within the EU ETS) gradually forced older coal/lignite power stations off the market from the 2020s onwards. The government also promoted gas interconnections in order to strengthen the European internal gas market through access to the gas pipelines from North Africa and LNG.

Several measures were aimed at promoting the deployment of distributed generation and electric self-consumption. As a result, an increased use of decentralised batteries followed. The increased penetration of renewable energies required an increase in the use of electricity storage technologies in the form of grid-scale batteries and pumped hydropower installations.

In the residential, institutional and commercial sectors, various measures were put in place to improve and promote energy efficiency, zero emission buildings, distributed generation, electricity self-consumption, low emission heating and cooling systems, and smart metering. A sustainable transport sector was promoted with a special boost to rail transport. The promotion of the use of electric vehicles was limited by the expansion of a network of charging points, enabling but not directly supporting an expansion of the EV fleet. When it comes to public procurement, public tenders for new vehicles only allowed for alternative-fuel vehicles, except for those vehicles that could not perform public duties or for unjustified economic costs. Electrification of other sectors was pursued to the extent that it supported a cost-optimal decarbonisation of society as a whole, but no specific targets or support measures for heating were introduced.

Figure 3. Quantification of the Spanish market-centred minority policy pathway as described by the Partido Popular, 2016-50
ES: Market 2016 2020 2030 2040 2050
GHG reduction targets (economy-wide) 283 Mt CO2eq 10% (GHG-2005) Non-ETS 26% (GHG-2005) > 2030 80% (GHG-1990)
ETS sector reduction targets 229 Mt CO2eq (European annual emission allocation) 219 Mt CO2eq (European annual emission allocation)      
Non-ETS sectors emission reduction targets   10% (GHG-2005) 26% (GHG-2005)    
GHG reduction targets (electricity sector)          
Renewables targets (energy; % of final energy consumption)   20% 32%    
Renewables targets (electricity; % of final energy consumption) 39%; 108 TWh; 49 GW > 2016 > 2020 > 2030 > 2040
Intermittent renewables 57 TWh; 28 GW        
Wind onshore 49 TWh; 23 GW > 2016 > 2 020 > 2030 > 2040
Wind offshore Included above > 2016 > 2020 > 2030 > 2 040
Solar PV 8 TWh; 5 GW > 2016 (mainly centralised) > 2020 (mainly centralised) > 2030 (mainly centralised) > 2040 (mainly centralised)
Dispatchable renewables 51 TWh; 21 GW > 2016 > 2020 > 2030 > 2040
Biomass 5 TWh; 1 GW        
Hydro 40 TWh; 14 GW        
CSP 6 TWh; 2 GW        
Other renewables 1 TWh        
Traded renewables          
Physical import of renewables (cooperation)   > 2016 > 2020 > 2030 > 2040
Statistical transfer of renewables (cooperation)   = 2016 2016 2016 2016
Explicit trade of CSP or hydropower          
Nuclear 59 TWh 7 GW = 2016 = 2016 = 2016 = 2016
Fossil fuels 108 TWh; 48 GW        
CCS 0 > 2016   > 2030 > 2040
Lignite 0 TWh ≤ 2016 ≤ 2016    
Hard coal 36 TWh ≤ 2016 ≤ 2016    
Gas 54 TWh ≥ 2016 ≥ 2016 ≥ 2016 ≥ 2016
Petroleum 16 TWh        
Other non-renewables 1 TWh        
Battery   > 2016 > 2020 ≥ 2030 ≥ 2040
Pumped Hydropower   > 2016 > 2020 ≥ 2030 ≥ 2040
Other storage          
Cross-border interconnection NTC   ≥ 10% of yearly power production ≥ 15% of yearly power production ≥ 2030 2030
Electrification of additional sectors          
Total heating demand incl. non-electric heating          
Heating with electricity          
Total cooling demand incl. non-electric cooling          
Cooling with electricity          
Electric mobility          
EV chargers   > 2016 > 2020 > 2030 > 2040
Gross electricity consumption 275 TWh        
Final energy consumption          
Source: the authors.

Grass-roots-centred pathway: Unidas Podemos 20

Spain almost achieved a full decarbonisation of the entire economy by 2050. In the electricity sector, this was achieved through strict phase-out policies for fossil-fuel power and emphasising the role of citizens and communities in building up a new and renewable power system. The needs of the citizens were at the core of all climate and energy policies, supported by institutions such as the State Climate Change Agency and the Citizen Climate Change Commission. Through active policy, citizens were empowered to have a more pro-active role by supporting the decentralisation of the energy system and encouraged to become prosumers. The re-communalisation of electricity provision was approved in subsequent local referendums following the example of Barcelona Energy in 2018, when a public metropolitan electricity operator started supplying renewable electricity to the city so that, over time, control over the entire system became communal.

Regarding interconnections and EU cooperation mechanisms, the emphasis is on decentralisation and re-communalisation instead of cross-border mega-projects and further market integration. As a consequence, by 2050 interconnections remain at the 2030 15% goal or slightly higher while virtual and physical cooperation mechanisms remain marginal: the maxim was and remains ‘Spanish renewables for and by Spanish citizens’. Another key aspect of the Unidas Podemos strategy was an emphasis on energy efficiency: the targets of 40% less primary energy demand by 2030 and 50% less by 2050 (compared to 1990) were achieved in part with efficiency measures and in part through electrification of additional sectors, primarily transport.

When it comes to greenhouse emissions, compared with 1990 levels, in 2030 emissions had fallen by 35%, by 70% in 2040 and by 95% in 2050. This was accomplished through the combination of reducing primary energy consumption (40% less energy consumed by 2030 and a 45% reduction of energy consumption by 2040 compared with 1990 levels) as well as the strong deployment of renewables to fill the gap of the phased-out fossil and nuclear generators. The transition was facilitated by two broad energy programmes: (a) the Energy Efficiency National Plan that targeted the housing, transport and industrial sectors; and (b) the Renewable Energies National plan that focused on deployment of renewable power generation (solar, wind, geothermal, small hydropower and low-emitting biomass).

To implement these plans, 1.5% of GDP was mobilised annually over 20 years, comprising both public and private resources, to drive the necessary investments in generation and infrastructure. For example, a Green Finance Fund for mitigation and adaptation was created and the Law for Energy Transition also provided funds for a fair transition in part raised through new environmental taxes and the abolishment of subsidies and tax exemptions for the fossil-fuel industry and for consumption. New measures to prevent oligopolistic practices (including vertical integration) in the electricity market were implemented to prevent large energy corporations concentrating too much power and to support the small-scale actors entering the system. Finally, measures were put in place to decouple the ownership and management of the distribution system. Aligned with a grassroots political party ideal, both plans were implemented in a way that ensured most electricity generation and distribution phases remained in the hands of public entities (especially municipalities), consumers or small enterprises and not large corporations.

With respect to renewable power, the power system has been 100% renewable since 2045, following the achievement of the interim renewable power target of 80% in 2030. Besides targeted support measures for small renewable power plants, the municipalities granted soft loans through the Green Finance Fund (Fondo de Financiación Verde). Furthermore, there was a green procurement strategy by which all public administrations were obliged to consume 100% renewables on their premises so as to reduce the life-cycle environmental impacts of energy use. Finally, the government divested funds from fossil-fuel related companies to incentivise private consumers to invest in renewable energy through subsidies.

Intermittent renewables, especially PV, experienced a great expansion as a result of the support measures included in the Renewable National Plan, including dedicated support for onshore wind power (> 6 MW). A special emphasis was put on special support mechanisms for investments in renewable generators smaller than 1 MW. Furthermore, a new regulatory framework was implemented already in 2018 and maintained since, to support self-consumption, which included the following features: (a) self-consumption was not taxed; (b) electricity fed into the electricity system was remunerated in a fair manner by the distributor company; and (c) quick and simple administrative procedures were established. Consequentially, all renewables grew continuously from 2018 onwards, but decentralised PV grew particularly fast.

As for dispatchable renewables, research, development and innovation plans were specifically designed for the development of new dispatchable technologies, including measures to improve the flexibility of renewables. As the performance of these technologies improved, their deployment grew from 2020 on. As a result, a diverse fleet of dispatchable renewables was deployed over time, including both CSP, hydropower and biomass. When large hydropower plants private ownership came to an end, they became state-owned. As a result, the role of large hydropower plants changed from providing bulk power to being providers of back-up capacity to complement variable solar PV and wind-power generation. Similarly, the growing biomass power fleet was used mainly to balance the system, and not merely to generate bulk energy.

Accompanying the rise of renewables was the decline of nuclear and fossil power. Following the phase-out decisions in 2019, all nuclear and coal power plants were shut down progressively until the last power plants were closed in 2025. The existing gas power stations were allowed to continue operating beyond 2025 insofar as they provided back-up capacity to the system and contributed to guarantee supply. Throughout the whole period, fracking was forbidden and  natural gas production in Spain was practically banned; further, as CCS was not supported, there was no expansion of CCS stations at any time. In all these phase-out cases (especially nuclear and coal plants), the abandonment of the plants followed a fair transition approach for workers so that they have found new employment opportunities.

Given its focus on small-scale, local and distributed electricity, Unidas Podemos limited the development of new interconnection capacity to the minimum necessary to support the further deployment of renewables in Spain (in accordance with EU targets). Instead of developing new transmission infrastructures, Unidas Podemos supported the development of micro- and other local networks, minimising the need for transmission. Consequently, there was no explicit trade with renewables, dispatchable or fluctuating, and Spain has not made use of cooperation mechanisms.

In order to support the balancing of fluctuating renewables, and to minimise the need for further electricity grids, the government supported early on the development and deployment of new storage technologies. This included both batteries and hydrogen, initially through R&D support and later on through deployment support, so as to keep the power system stable and minimise the need for new national and cross-border grid infrastructure. Through various support measures (such as the provision of special tariffs), the law for the energy transition and climate change supported the electrification of certain consumptions such as industrial, heating and transport.

As to the decarbonisation of the transport sector, Unidas Podemos: (a) promoted the use of bicycles in many ways (for example, by facilitating bicycle access to other public transport modes); (b) revised public transport services provision contracts; and (c) promoted electric vehicles. Thanks to the various support measures in place, Spain achieved a 25% share of EV in sales of new cars by 2025, 70% of new cars were EV by 2030 and all new vehicles were EVs by 2040. Furthermore, a programme was developed to promote the use of electric vehicle chargers.

Figure 4. Quantification of the Spanish grassroots-centred minority policy pathway as described by Unidas Podemos, 2016-50
ES: Grassroots 2016 2020 2030 2040 2050
GHG reduction targets (economy-wide) 283 Mt CO2eq   35% (1990) 70% (1990) 95% (1990)
ETS sector reduction targets 229 Mt CO2eq (European annual emission allocation) 219 Mt CO2eq (European annual emission allocation)      
Non-ETS sectors emission reduction targets   10% (GHG-2005) 26% (GHG-2005)    
GHG reduction targets (electricity sector)   > 2016 45% 60% 100%
Renewables targets (energy; % of final energy consumption)   > 2016      
Renewables targets (electricity; % of final energy consumption) 39%; 108 TWh; 49 GW > 2016 80%   100% (by 2045)
Intermittent renewables 57 TWh; 28 GW > 2016 > 2020 > 2030 > 2040
Wind onshore 49 TWh; 23 GW > 2016 > 2020 > 2030 > 2040
Wind offshore Included above = 2016 = 2016 = 2016 = 2016
Solar PV 8 TWh; 5 GW >> 2016 (mainly decentralised) >> 2020 (mainly decentralised) >> 2030 (mainly decentralised) >> 2040 (mainly decentralised)
Dispatchable renewables 51 TWh; 21 GW > 2016 > 2020 > 2030 > 2040
Biomass 5 TWh; 1 GW > 2016 > 2020 > 2030 > 2040
Hydro 40 TWh; 14 GW > 2016 > 2020 > 2030 > 2040
CSP 6 TWh; 2 GW > 2016 > 2020 > 2030 > 2040
Other renewables 1 TWh        
Traded renewables          
Physical import of renewables (cooperation)          
Statistical transfer of renewables (cooperation)          
Explicit trade of CSP or hydropower          
Nuclear 59 TWh 7 GW   0 (by 2025) 0 0
Fossil fuels 108 TWh; 48 GW        
CCS 0        
Lignite 0 TWh << 2016 0 (by 2025 0 0
Hard coal 36 TWh << 2016 0 (by 2025 0 0
Gas 54 TWh < 2016 < 2020 < 2030 < 2040
Petroleum 16 TWh < 2016 < 2020 < 2030 0
Other non-renewables 1 TWh ≥ 2016 (Waste) ≥ 2016 (Waste)    
Battery   > 2016 > 2020 > 2030 > 2040
Pumped Hydropower          
Other storage   > 2016 > 2020 > 2030 > 2040
Cross-border interconnection NTC   ≥ 10% of yearly power production ≥ 15% of yearly power production = 2030 = 2040
Electrification of additional sectors          
Total heating demand incl. non-electric heating          
Heating with electricity          
Total cooling demand incl. non-electric cooling   > 2016 > 2020 > 2030 > 2040
Cooling with electricity   > 2016 > 2020 > 2030 > 2040
Electric mobility   3% EV (by 2020), 25% EV (by 2025) 70% (EV) 100% (EV)  
EV chargers   >> 2016 > 2020 > 2030 > 2040
Gross electricity consumption 275 TWh        
Final energy consumption          
Source: the authors.


The pathways described, depicted in this paper as if they had materialised, are not the only ones proposed by political parties for Spain’s energy transition. However, they illustrate the continuum of options in the energy transition policy space and constitute the best-specified set of energy transition alternatives for Spain. As expected, they do not represent ‘pure’ State, market or grassroots-centred closed models, but rather ‘scripts’ for energy transition with different combinations of elements present in other logics. For instance, the socialists’ State-centred logic includes auctions, the Popular Party’s market approach includes some command and control measures, and the Unidas Podemos’ grass-roots approach comes with significant State intervention. Nevertheless, they constitute coherent, all-encompassing alternative stories on how to achieve the energy transition in three different ways, following three distinct decarbonisation logics and leading to three very different (more or less) climate-friendly energy futures.

For the Socialist Party, the decarbonisation of the Spanish power system is driven by targeted measures enacted by the government, in addition to having economy-wide decarbonisation targets for 2030 and 2050. Some of the key measures included a mandatory and gradual nuclear phase-out between 2025 and 2035, a largely market-driven coal phase-out ahead of 2030 (fostered by EU regulation), banning internal combustion engines and (most) new fossil fuel subsidies, a gradual phase out of existing fossil-fuel subsidies, mandatory deployment of recharging infrastructure for EVs and mandatory retrofitting of buildings, among others. Interconnections were promoted by the government in this pathway, in line with EU requirements, to prevent blackouts during dry years and to support the expansion of renewables.

Under the Popular Party’s market-centred logic, the Spanish energy transition is mostly driven by private actors under an economy-wide decarbonisation target. The government took a few high-level, strategic decisions to ensure the alignment with EU energy and climate objectives and ambition and, whenever needed, the government used market-based instruments (carbon tax, technology neutral auctions for renewables, etc) to correct market failures and get the transition going. The government also put a special emphasis on increasing interconnections as a way to transition to an integrated and cost-efficient EU electricity market.

Unidas Podemos is aligned with the grassroots logics. The key for enabling the Spanish energy transition is empowering citizens and local communities as the main actors of the transition strategy, while progressively abandoning fossil and nuclear technologies. As a result, a highly decentralised small-scale and smart local community-owned power system was achieved. New technologies were developed as a result of R&D programmes (technology push) as well as market pull policies (support policies in the form of subsidies and other incentives). Regarding interconnections and cooperation mechanisms, the local and community logic has limit interconnections to compulsory EU targets and intra-EU renewable exchange remains small.

Despite the differences across energy transition pathways Spain embraced a low(er) carbon development model from 2020 to 2050. The acrimonious political debate that had stalled the drafting and passing of the Climate Change and Energy Transition Law between 2011 and 2019 was finally resolved in 2020. The response from the EC, and from civil society, to Spain’s draft INECP made its content the benchmark across political parties that avoided defaulting on Spain’s energy and climate commitments, albeit relying on different policy instruments to ensure targets were met. This meant a more command-and-control (CAC) based approach from socialist governments, more use of market-based instruments (MBIs) by conservative governments and greater emphasis on both CAC and moral suasion, coupled with bottom-up initiatives, from left-wing governments.

However, the INECP had to be strengthened over time to align Spain’s targets to the goals of the Paris Agreement. Key elements in robust climate laws were gradually included in Spain’s climate actions by governments from across the political spectrum. Among these elements were an independent committee on climate change à la UK, national and sectoral carbon budgets, parliamentary oversight of climate and energy goals, transparent and regular stakeholder engagement, and the requirement to disclose exposure to climate risks by investors and asset managers, following France’s lead.

Natalia Caldés

Gonzalo Escribano
Elcano Royal Institute | @g_escribano

Lara Lázaro
Elcano Royal Institute | @lazarotouza

Yolanda Lechón
CIEMAT | @YLechon

Christoph Kiefer

Pablo del Río

Richard Thonig
Institute for Advanced Sustainability Studies | @RThonig

Johan Lilliestam
Institute for Advanced Sustainability Studies | @JLilliestam

European Commission. H2020 The MUSTEC project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 764626.

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1 Lilliestam, J., R. Thonig, L. Späth, N. Caldés, Y. Lechón, P. del Río, C. Kiefer, G. Escribano & L. Lázaro Touza (2019), Policy pathways for the energy transition in Europe and selected European countries, Deliverable 7.2 MUSTEC project, Deliverable 1 SCCER JA IDEA, ETH Zürich, Zürich.

2 Grupo Parlamentario Popular en el Congreso (2019), “Proposición de Ley de Cambio Climático y Transición Energética”; Ministerio para la Transición Ecológica (2019), “Anteproyecto de Ley de Cambio Climático y Transición Energética”; Grupo Parlamentario Confederal de Unidos Podemos-En Comú Podem-En Marea (2018), “Proposición de Ley sobre Cambio Climático y Transición Energética”.

3 Lawrence Freedman (2013), Strategy: a History, Oxford University Press, chapter 38.

4 It should be noted that increasing concern about climate change affected policies and implementation across the three decarbonisation pathways (State-centred, market-centred and grassroots).

5 It should be noted, however, that the socialist government did not mandate a coal phase-out by 2030 but rather relied on EU legislation and on market factors (continued cost reductions in renewables, price of the tonne of CO2 of €35 in 2030) that forced coal out of the Spanish electricity mix. The INECP, however, stated that phasing out coal was key to achieve the decarbonisation goals. Hence the Spanish government reserved the right to undertake ‘any appropriate measures deemed necessary’ to meet the RES electricity target (74% by 2030).

6 Article 9 of the current draft proposal for the Climate Change and Energy Transition Law presented by the socialist government states that new fiscal benefits for fossil fuel products will only be allowed under special circumstances detailed below.

7 ‘[CSOs] can be defined to include all non-market and nonstate organizations outside of the family in which people organise themselves to pursue shared interests in the public domain. Examples include community-based organisations and village associations, environmental groups, women’s rights groups, farmers’ associations, faith-based organisations, labour unions, co-operatives, professional associations, chambers of commerce, independent research institutes and the not-for-profit media’ (UNDP, undated).

8 Czech Republic (-30%), Germany (-55%), Ireland (-40%), France (-40%), Latvia (-40%), Lithuania (-40%), Hungary (-40%), the Netherlands (-49%), Portugal (-45%), Romania (-50%) and Sweden (-63%).

9 Most of the new CSP capacity (5 GW) had nine hours of storage capacity as modelled in Spain’s PNIEC.

10 Note that nuclear phaseout took place in 2025-35, which explains the 3GW of nuclear in 2030.

11 See page 42 of the INECP.

12 Defined in Article 9 of the draft Climate Change and Energy Transition Law as fiscal benefits and other support mechanisms or measures that foster the use of fossil fuels.

13 The potential loophole in the drafting of Article 9 (effectively allowing fossil fuel subsidies to continue) gave rise to several comments in the public consultation process prior to the passing of the Climate Change and Energy Transition Law. These comments were taken into consideration by the government to ensure appropriate monitoring of subsides, effectively restricting new fossil fuel subsidies to vulnerable families and small-scale farmers whose livelihoods could be significantly affected by higher fuel prices.

14 These figures are available from page 206 of the INECP and are based on information provided by Spain’s tax agency.

15 Which amounted to 10,4 GW of installed capacity in 2018. See IIDMA (2019), ‘Un oscuro panorama. Las secuelas del carbón’, (accessed 18/V/2019).

16 See the second additional provision of the draft Climate Change and Energy Transition Law for further details.

17 Pollit & Mercure (2018) argue that Computable General Equilibrium (CGE) models assume crowding-out effects as a result of climate policies. The authors argue that macro-econometric models based on non-equilibrium economic theory do not necessarily lead to crowding out effects and can even serve as an economic stimulus.

18 Whose emissions amounted to 25% of total emissions in 2015 and 48% of of diffuse sector emissions in 2017.

19 Partido Popular (2015), ‘Seguir avanzando. Programa electoral para las elecciones generales de 2015’, Partido Popular, Madrid; Partido Popular (2018), ‘Proposición de Ley sobre Cambio Climático y Transición Energética’, Grupo Parlamentario Popular en el Congreso, Boletín Oficial de las Cortes Generales, Madrid; Público (2018), ‘El PP es el único partido que está a favor del “fracking”, del almacén nuclear y del “impuesto al sol”,(accessed 07/V/2019); SNE (2015) ‘El Partido Popular promete mantener las centrales nucleares y terminar el ATC’, Sociedad Nuclear Española (SNE), (accessed 07/V/2019); Partido Popular (2019), ‘Elecciones generales, autonómicas y municipales 2019. Programa electoral’, Partido Popular, Madrid.

20 Podemos (2018), ‘Proposición de Ley sobre Cambio Climático y Transición Energética’, Grupo Parlamentario Confederal de Unidos Podemos-En Comú Podem-En Marea, Boletín Oficial de las Cortes Generales, Madrid; Podemos (2019), ‘Programa de Podemos para un nuevo pais. Programa Electoral elecciones 2019’.

<![CDATA[ France’s Iran policy indicates INSTEX will not undermine sanctions ]]> 2019-04-25T05:07:28Z

Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives.

The US re-imposition of sanctions against Iran on 4 November 2018 prompted vociferous official protests from its European allies, particularly France, Germany and the UK, who remain signatories to the Iran Nuclear Deal . Among these so-called E-3 nations, France positioned itself as the leader of the European opposition to the new US position towards Iran. Despite the initial defiant tone from Paris and its advocacy for an alternative financial mechanism to evade sanctions, France has not acted to undermine the US objective of bringing economic pressure to bear on Tehran by limiting the revenue-earning capacity of Iran’s oil and natural gas industries. France’s actions indicate that the E-3’s implementation of the INSTEX alternative trade channel to Iran will, likewise, not be used to thwart US policy towards Iran, at least not at the outset.

“France’s actions indicate that the E-3’s implementation of the INSTEX alternative trade channel to Iran will, likewise, not be used to thwart US policy towards Iran, at least not at the outset”.

The re-imposition of sanctions resulted from US President Donald Trump’s 8 May 2018 withdrawal from the Iran Nuclear Deal. Formally known as the Joint Comprehensive Plan of Action (JCPOA), the 2015 agreement between Iran and the P5+1 nations (the permanent members of the UN Security Council plus Germany) exchanged a reduction in international sanctions on Iran for Tehran limiting its nuclear development programme. The Trump Administration’s renewed sanctions target Iran’s petroleum and shipping industries and place limits on financial transactions with the aim of crippling the country’s oil and natural gas exports.

Among the E-3 nations, France’s response was the most openly adversarial. ‘Europe refuses to allow the US to be the trade policeman of the world’, declared France’s Minister of Economy and Finance Bruno Le Maire in response to the new sanctions regime. Vowing to protect the EU’s ‘economic sovereign’, Le Maire threatened to make the EU’s currency, the euro, as strong as the US dollar, starting with the creation of a Special Purpose Vehicle, an alternative trade channel to the SWIFT system that would be immune to US scrutiny.

Despite the strident tone from the French government, French firms have been forced to comply with the new US sanctions against Iran’s energy sector, since Washington refused to grant France a sanctions compliance waiver such as it had given to eight other nations. As a result, France’s largest energy company, Total, was forced to withdraw from a US$4.8 billion development project in Iran’s massive South Pars natural gas field. Total is highly vulnerable to punitive action under the US sanctions as 90% of its financing operations involve US banks and the company also maintains US$10 billion in capital in US assets. Total, Europe’s largest refiner, did not seek a waiver to continue crude oil purchases from Iran and France’s Iranian oil imports had already ceased in September 2018 anticipating the new sanctions. While France constituted only 6.3% of Iran’s 2017 export market, the loss of French purchases will represent a US$2-3 billion annual revenue shortfall for Iran, if the Islamic Republic cannot find an alternative buyer under the new sanctions regime.

Like the cessation of French oil imports from Iran, French car manufacturers in Iran have suspended their operations. Following the initial defiant tone emanating from Paris, Renault's then CEO Carlos Ghosn vowed in June 2018 to defy US sanctions and maintain its operations in Iran. One month later, Renault reversed its decision, following its French rival PSA Group, manufacturer of Peugeot and Citroen, which had already suspended its operations in Iran.

“Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives”.

In light of these emerging realities, in the run-up to the new sanctions regime the French President Emmanuel Macron struck a more conciliatory tone about the re-imposition of sanctions on Iran during his September 2018 address to the UN, suggesting that US economic pressure on Iran combined with the continued EU engagement with the country would serve to limit Tehran’s military capabilities while preserving the power of the reformist elements in the Iranian government. Speaking to reporters, the more circumspect Macron explained that ‘Perhaps because we’re able to keep this multilateral framework [the JCPOA], avoid the worst and act as a mediator, while the US sanctions create pressure and reduce the amount of money available for Iran’s expansionism, that can accelerate the process we want’.

France’s attitude has also been moderated by the discovery of Iranian covert operations on French soil. On 2 October 2018, France publicly accused Iran of being behind the failed plot to bomb a 30 June 2010 rally near Paris organised by the exiled opposition group, the National Council of Iran. The Macron government eventually expelled an Iranian diplomat allegedly linked to the plot.

In addition, France has also looked askance upon Iran’s efforts to enhance its long-range missile capability. Condemning a failed Iranian satellite launch that allegedly employed technology applicable to ballistic missiles, Paris threatened Tehran with sanctions if it does not reign in its missile development programme. Declaring on 16 January 2018 that ‘The Iranian ballistic programme is a source of concern for the international community and France’, the French Foreign Ministry issued a formal appeal to Iran to cease its testing: ‘We call on Iran not to proceed with new ballistic missile tests designed to be able to carry nuclear weapons, including space launchers, and urge Iran to respect its obligations under all UN Security Council resolutions’.

UN Security CouncilResolution 2331 formally enshrines the terms of the JCPOA that includes a call upon Iran to refrain for eight years from developing ballistic missiles capable of delivering nuclear weapons. In a response to criticism from France and other Western nations over the satellite launch, Iran’s then Foreign Ministry spokesman Bahrem Qasemi claimed ‘Such (space) capabilities have civilian nature and are by no means in violation of any of the international regulations in this area’.

France’s exhortation came a week after talks in Tehran between Iranian diplomats and envoys from the E-3 nations as well as from Denmark, the Netherlands and Belgium resulted in the Iranian side storming out of the meeting. In response, the EU imposed its first sanctions on Iran since 2015. Although largely symbolic, the measure was designed to send a clear signal to Tehran about EU member states’ concerns over both the missile programme and Iranian operations on European soil. On 25 January the French Foreign Minister, Jean-Yves Le Drian, a prominent advocate for an alternative EU-Iran trade channel, threatened Tehran with more significant sanctions if the negotiations on Iran’s ballistic missile programme makes no progress. In response to Le Drian’s remarks, Qasemi firmly stated, ‘Iran’s missile capability is not negotiable, and this has been brought to the attention of the French side during the ongoing political dialogue between Iran and France’.

“The use of INSTEX for the sale of humanitarian items will not undermine US goals”.

Iran apparently was able mollify Paris’s concerns, aided by its Deputy Foreign Minister Seyed Abbas Araghchi’s 4 February 2018 meeting with the Secretary-General of France’s Ministry of Foreign Affairs, Maurice Gourdault-Montagne. The February meeting in Paris was the first of the two biannual ministerial-level meetings established to improve bilateral relations between France and Iran. As a result of the progress in relations, France appointed Phillipe Thiebaud its new Ambassador to Iran on 6 March, followed two days later by Iran’s appointment of Bahrem Qasemi as its own Ambassador to France.

Iran’s undisclosed accommodation of France’s concerns seems to be tied to the E-3’s creation of the new payments channel, the Instrument for Supporting Trade Exchanges (INSTEX), based in Paris to enable European businesses to conduct financial transactions with Iran without US scrutiny. Although the details have not been made public, the system involves parallel payments within a particular EU state and within Iran. On 15 March 2018 the head of the Central Bank of Iran announced the creation of the Special Trade and Finance Institute (STFI) in Tehran to operate in parallel with INSTEX, following the 12 March meeting between E-3 representatives for INSTEX and their Iranian counterparts in Tehran.

To Tehran’s chagrin, France and the other two E-3 partners have made the operation of INSTEX contingent upon progress in the negotiations on Iran’s missile programme and Iran joining the Financial Action Task Force (FATF) designed to stop money laundering and terrorist financing. Ayatollah Sadeq Amoli Larijani, the Chairman of Iran’s powerful Expediency Discernment Council, described the terms as ‘denigrating conditions’. Furthermore, the E-3 has also said that INSTEX will be used only for Iranian purchases of food, medicine and medical equipment, and is holding out the possibility for wider use of the trade channel as an incentive for increased cooperation from Tehran.

The use of INSTEX for the sale of humanitarian items will not undermine US goals. While France and the other two E-3 nations continue to uphold the JCPOA, their lack of investment in the development of Iran’s oil and natural gas industries means that Iran will have a hard time maintaining its oil production and satisfy an increasing demand for natural gas and petrochemicals. Iran will not see the financial dividends that it had anticipated when entering into the deal. With insufficient oil, gas and petrochemical revenues, Iran’s economy will become increasingly fragile. The Iranian government’s predicament of needing to satisfy domestic consumer demands while simultaneously financing bloated state and military institutions could result in an economic collapse and therefore induce Tehran to return to the negotiating table.

Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives. Until France and its two E-3 partners decide to use INSTEX as a channel for investments in Iran’s oil and gas sectors, US sanctions will continue to exert increasing economic pressure on Tehran. The recent history of France’s Iran policy indicates that INSTEX will not be used to undermine US sanction in the near future.

Micha’el Tanchum
Fellow at the Truman Research Institute for the Advancement of Peace, Hebrew University, and non-resident affiliated scholar with the Center for Strategic Studies at Başkent University in Ankara, Turkey (Başkent-SAM) | @michaeltanchum

<![CDATA[ Blackouts in Venezuela: why the power system failed and how to fix it ]]> 2019-04-20T11:05:38Z

When the lights went out on 7 March many Venezuelans would hardly have been surprised. Electricity rationing has become routine over the past decade. However, this blackout quickly proved to be different to most.

When the lights went out on 7 March many Venezuelans would hardly have been surprised. Electricity rationing has become routine over the past decade, especially in the early months of the year when reservoir levels are low (because of overdependence on hydropower), and large-scale power failures are commonplace despite the country’s vast energy resources. However, this blackout quickly proved to be different to most, affecting all 23 states and lasting for longer than any other (more than five days in most of the country), aggravating a humanitarian situation that was already dire. At least 26 people perished in hospitals, where dialysis machines and ventilators for premature babies failed. People rushed to leaking drainage pipes to collect water as water pumps failed, and looted hundreds of stores as food rotted without refrigeration, including more than 4.4 million pounds of meat in the first two days alone. Public transport and communication systems collapsed, closing most schools and businesses. Early estimates place economic losses above US$875 million.

“A lack of transmission-line maintenance may have been the immediate trigger for the power outage, but it is a symptom of almost two decades of government mismanagement that has debilitated Venezuela’s power sector”.

Venezuelan energy experts were quick to dismiss the explanation of the disputed President, Nicolás Maduro: that the US perpetrated a cyberattack on the Guri hydroelectric complex, which supplies 80% of the country’s electricity. They say that the plant’s operating systems are not connected to the Internet and physical entry would be almost impossible. It now seems clear that wildfires overheated one of the main transmission lines that carry power west from the Guri Dam to most of Venezuela’s population, causing the others to become overloaded and crash. According to two engineers, routine brush clearing beneath power lines ceased three years ago.

A lack of transmission-line maintenance may have been the immediate trigger for the power outage, but it is a symptom of almost two decades of government mismanagement that has debilitated Venezuela’s power sector, draining its reserves of both human and financial capital and nudging it towards collapse. With wages that scarcely cover their daily bus ride to work, almost half of Corpoelec’s skilled employees have left the country, according to the Executive Secretary of Venezuela’s electricity industry union.

Electricity rates have been frozen since 2002 in an economy facing hyperinflation, and consumers pay only 20% of the real costs of producing power, delivering Venezuelans the lowest electricity prices in Latin America. This has encouraged waste (Venezuela has the highest per capita electricity consumption in the region) and wiped out revenue, initiating a vicious cycle of underinvestment and financial deterioration. Corpoelec, the overburdened state power monopoly created when all private power companies were nationalised in 2007, recovered just 30% of its operating costs in 2010.

The failure to invest in grid maintenance and payment collection has led to further revenue declines as transmission and distribution losses (mostly caused by theft) soared to 35% in 2014 –over twice the Latin American average and almost six times the OECD average–.

Caracas sought to diversify away from hydropower and increase generation from other sources after a major drought in 2010 led to rolling blackouts and a nationwide restriction of work schedules to save power, but that effort has also largely failed. The country lacks an adequate pipeline network needed to bring natural gas to power plants, forcing it to overuse diesel in thermal power plants (which can run oil or natural gas), which damaged them. As a result, many of the country’s thermal plants are shut down due to lack of maintenance. According to an internal Electricity Ministry report, power generation was operating at around one third of capacity in October 2018. US sanctions affecting fuel imports since January have further restricted Venezuela’s access to diesel imports.

“Stopping future blackouts will require a short-term fix but also a restructuring of the power sector”.

Meanwhile, part of Corpoelec’s remaining funds have been siphoned out by networks of corruption. Examples abound. In an expedited process to construct thermal power plants in 2010, PDVSA and Corpoelec paid millions of dollars in no-bid contracts to political connections, according to The Wall Street Journal. Another report concluded that up to 50% of expenditure on thermal, hydroelectric and wind projects in 2003-13 was in excess of the costs of equivalent projects elsewhere. The Tocoma Dam, whose cost was quoted at around US$3 billion in 2005, has already devoured more than US$10 billion and produced no electricity. Its construction has been stalled since 2015.

Given the profound problems facing Venezuela’s power sector, such blackouts will inevitably continue. Indeed, on 25 March much of the country was dark once again and on 31 March Maduro announced 30 days of electricity rationing. Stopping future blackouts will require a short-term fix but also a restructuring of the power sector. This process will have to begin with a thorough assessment of the state of Venezuela’s power infrastructure, as statistics about the national power system have not been published for eight years. In the short run, to guarantee reliable electricity access Venezuela will need to import fuel to supplement hydropower, for example in the form of a floating storage and regasification unit to provide natural gas for generation, as well as power generators. In the long run, the country should return to the pre-Chavista model in which generation and distribution were privately managed, largely by regional companies. An independent national electricity system operator alongside an electricity regulatory body should coordinate and oversee private generators, creating a decentralised, diversified and efficient power industry with adequate capital for investment. Finally, while poor consumers’ ability to pay must be considered, Venezuela’s excessive fuel and electricity subsidies create an unsustainable strain on public finances and perverse incentives for high consumption and thus cannot continue in the long run.

“However, further rationing regimes, like that declared by Maduro on 31 March, will only aggravate the country’s astonishing economic contraction (…)”.

Protesters in Caracas and around the country are rightfully demanding the restoration of their most basic services: clean water, food, transport and light; and the destruction of Venezuela’s electricity system has brought economic activity to a virtual standstill at times, halting everything from steel and oil production to small family businesses. Non-governmental organisations on the ground continue working to alleviate the suffering brought on by Venezuela’s collapse. However, further rationing regimes, like that declared by Maduro on 31 March, will only aggravate the country’s astonishing economic contraction when they are not accompanied by a recognition of the systematic lack of available capacity and a proposal to resolve this problem.

Lisa Viscidi
Program Director, Energy, Climate Change & Extractive Industries, Inter-American Dialogue | @lviscidi

Nate Graham
Program Assistant, Energy, Climate Change & Extractive Industries, Inter-American Dialogue.

<![CDATA[ Legislating for a low carbon and climate resilient transition: learning from international experiences ]]> 2019-03-11T08:06:24Z

The study in particular aims to contribute to the current debate in Spain on a draft climate change and energy transition law, as well as aid other countries currently working on climate legislation

Read the Executive Summary (835KB - PDF)

Leer resumen ejecutivo Legislando para una transición baja en carbono y resiliente al clima: aprendiendo de las experiencias internacionales (664KB - PDF)


The objective of this working paper is to inform policy experts, legislators and decisionmakers on the recent trends in climate change policy-making around the world and to draw lessons learnt from the experiences with designing and implementing climate change legislation. The study in particular aims to contribute to the current debate in Spain on a draft climate change and energy transition law, as well as aid other countries currently working on climate legislation.


Introduction and acknowledgements

Executive summary

Part 1. Drivers and global trends in low carbon and climate resilient transition
1. Key drivers of the low carbon and climate resilient transition
2. Global trends in legislating for low carbon transition
3. Building blocks for climate legislation and national governance frameworks

Part 2. Case studies on climate and energy transition laws and executive frameworks
4. The UK’s Climate Change Act of 2008
5. Mexico’s General Law on Climate Change and the Energy Transition Law
6. France’s Energy Transition for Green Growth Law
7. Climate change frameworks in China, Chile, Germany and the US

Part 3. Learning from experiences with climate and energy transition laws and executive frameworks

Recommendations for Spain and other countries for designing framework legislation on climate change

Introduction and acknowledgements

The objective of this working paper is to inform policy experts, legislators and decisionmakers on the recent trends in climate change policy-making around the world and to draw lessons learnt from the experiences with designing and implementing climate change legislation. The study in particular aims to contribute to the current debate in Spain on a draft climate change and energy transition law, as well as aid other countries currently working on climate legislation.

The report is structured in three parts. Part 1 provides an overview of the overall drivers for low carbon and climate resilient transition and the global trends on climate action and identifies the key building blocks of the climate governance frameworks that are important in the design of climate legislation. Part 2 reviews country experiences with designing and implementing climate change and energy transition laws and the executive frameworks in Chile, China, France, Germany, Mexico, the UK and the US. Part 3 draws lessons learnt from the comparative analysis of the case studies on the key elements of a comprehensive climate change law and provides recommendations for policy-makers. Through comparing the insights from each of the case studies the paper draws conclusions on the key considerations that should be addressed in the development of framework climate change and energy transition legislation.

The analysis draws on the latest existing studies assessing the experience with and performance of the legislative instruments in question complemented by assessing the texts of the laws. In this context the study has benefited from the author’s previous work on the UK’s Climate Change Act in collaboration with Sam Fankhauser and Jared Finnegan, and on Mexico’s General Law on Climate Change in collaboration with Sandra Guzman. The case study on France draws upon a recent an in-depth analysis conducted by Andreas Rüdinger.

The author is grateful to several policy experts who have kindly provided contributions on Chile’s climate change policy through informal interviews; to Gonzalo Escribano, Lara Lázaro and Dimitri Zenghelis for detailed review comments. The author also thanks Francisco Trincado for designing the visuals and Miguel de Avendaño, Juan Antonio Sánchez, Virginia Crespi de Valldaura, Luis Lázaro and María Dolores de Azategui for editing the paper. Finally, the author would like to gratefully acknowledge the support and contributions of José López-Tafall and his team at Acciona.

Executive summary

The urgency of action. Climate change is one of the most pressing issues for global and national development agendas. With the last 19 years having contained 18 of the warmest ones on record globally, the urgency to address both the causes and impacts of climate change is clear. According to the Fifth Assessment Report (AR 5) by the Intergovernmental Panel on Climate change (IPCC) for a likely chance of more than 66 per cent of keeping the global mean temperature increase below 2°C, global emissions of all greenhouse gases need to be net zero by 2100.

The economic and commercial case for accelerated low carbon transition is strong. Reaching the target of net zero emissions globally by the end of the century is technically and economically feasible but requires urgent action. The rapid technological change and the falling costs of the key low carbon technologies over the past two decades provide a solid foundation for accelerated decarbonisation. Ambitious action on climate change could yield direct a economic gain of US$26 trillion in 2018-2030 period compared with a business-as-usual scenario according to recent analysis by the New Climate Economy project. Most of the policy and investment decisions shaping the next two decades will be taken over the coming 2-3 years, which makes it a critical period for adopting appropriate policy frameworks.

Scaled-up action requires overcoming barriers to the low carbon transition. Barriers to low carbon investments can be addressed through price and policy signals, as well as mitigated through lowering or sharing the investment risks. Carbon pricing instruments, which now cover around 20 per cent of global greenhouse gas emissions in over 46 countries2, have been shown to be particularly effective in improving viability of low carbon investments. The growing development of new financial instruments, such as green bonds, and the recent advances in the financial regulation on sustainable finance and risk disclosure, are further driving investment towards more sustainable technologies.

Shifts in the international policy landscape require ambitious national action. The adoption of the UN Sustainable Development Goals and the Paris Agreement on climate change in 2015 have set the goal for the global transition to net zero emissions in the second half of this century. Achieving these goals requires not only successful domestic implementation of the current emission pledges, but also a major political transformation in how countries approach climate action and define their ambition. Domestic framework climate change legislation comes to the forefront as the key means to consolidate political support for the climate agenda, to provide the framework for implementation of the Paris Agreement and for assessing progress, as well as to enable ratcheting-up of ambition going forward.

National climate change legislation and policies have grown twenty-fold over the past 20. years, with a remarkable growth in developing countries in recent years. Over time the attention has shifted from putting in place framework climate legislation or strategies for the articulation of greenhouse gas emission targets. In 2017 over 70 per cent of global greenhouse gas emissions were covered either by nationally binding climate legislation or by executive climate strategies with a clearly designated coordinating body, while climate legislation alone covered 44 per cent of emissions and 36 per cent of the population (Lacobuta et al. 2018).

Domestic laws and policies are not yet consistent with international commitments. Most countries need to align their domestic emission targets, enshrined in domestic legislation, and those committed through the nationally determined contributions (NDCs) to the Paris Agreement. In order to meet these targets and to be able to ratchet them up in the future, countries need to put in place strong domestic institutional frameworks and policies.

Framework legislation can help maintain policy continuity and enable implementation. The examples of countries considered in this study demonstrate a variety of approaches to national climate change policy and that there is no one size fits all. Putting policy into law with a strong Parliamentary oversight for implementation helps reduce the scope for backtracking and provides a mandate for policy-makers to advance action. The case studies on Mexico and the UK show that climate legislation has improved the quality of the political debate and helped maintain and strengthen the political consensus on and commitment to the long-term climate objectives through turbulent political times. The case of the US demonstrates how the lack of climate legislation can make climate policy extremely vulnerable to a change of leadership. There are clear advantages for embedding the core elements of the national climate change framework into a legislation for countries like Spain, with a long democratic tradition and limited scope for centralized policy-making by the national government.

The adoption of climate change legislation requires building political support. Developing a positive narrative around the benefits of climate change legislation and creating political momentum are key for passing a law. A positive narrative also helps avoid polarisation of the political debate as was the case in the US. Integrating climate change objectives with economic and social ones and linking the legal framework with a country’s self-interest, development priorities and opportunities or co-benefits of climate action, such as in the example of China, have shown to be effective in getting political and public support for climate policy. Furthermore, following an inclusive process of cross-party development of the key features of the legislation and strong ownership by civil society through stakeholder consultation, as well as personal leadership from the country’s leader, have shown to be effective in getting political buy-in for the legislation in Mexico, the UK, California, France and Germany. Consecutively cross-party and citizen support are the best shields against the risk of reversal of the legislation.

Scope of the law and the level of specificity in prescribing policies is one of the first critical decisions that need to be taken when developing a new legislation. A flexible approach, as in the UK and California, that delegates the choice of specific policies to meet the targets to the government could offer greater political acceptability for the law and flexibility to adjust the course based on changing economic conditions and lessons learnt. However, this model requires that clear institutional processes and statutory timelines for how and when the government should develop the detailed policies are specified in the law backed by strong parliamentary oversight and provisions for an independent review by an advisory body.

Alina Averchenkova
Distinguished Policy Fellowand the lead for the Governance and Legislation research theme at the Grantham Research Institute on Climate Change and the Environment and CCCEP at the London School of Economics
| @averchenkova

<![CDATA[ Algerian presidential elections and the energy reform agenda ]]> 2018-11-26T06:42:59Z

A new hydrocarbon law seems imminent in Algeria and progress has been made in improving the country's relations with international oil and gas companies. However, it appears that the introduction of substantive reforms will have to wait for the 2019 presidential elections.

Original version in Spanish: Elección presidencial y reforma energética se citan en Argelia


This paper reviews the pre-electoral economic and energy contexts in Algeria and explores the virtues and limitations of the ‘energy spring’ narrative of the new Algerian energy sector authorities.


In recent months there have been more announcements of an imminent hydrocarbon law and progress has been made in improving Algeria’s relations with international oil and gas companies, with several contracts having been extended or renovated. Nevertheless, it appears that the introduction of substantive reforms will have to wait for the outcome of the 2019 presidential elections.



Against all expectations, 2018 has been a relatively untroubled pre-electoral year in Algeria. The rise in oil prices has considerably eased the country’s economic situation and the budget has been given a social focus with the reversal of some of the adjustment measures applied in previous years. The expansive fiscal election cycle has also been underpinned by the Central Bank’s financing of public debt. In the spring of 2018, a year ahead of the presidential elections in April 2019, much publicity was even given to a number of direct interventions by President Bouteflika to correct decisions of the Ouyahia government. From an economic perspective, he has insisted on popular measures like the need to reverse subsidy reductions, halt the increase in ID and passport issuing costs and prevent the sale of agricultural land to foreigners. In the political field, he dismissed the chief of police, Abdelghani Hamel, who –like many others– happened to be a possible presidential candidate.1

He has also taken similarly assertive action in the energy sector with, for instance, a presidential decree to increase his power to appoint senior Sonatrach staff and to reinforce the authority of the company’s new Chairman. The new team responsible for energy policy, appointed in 2017, has spent months attempting to transmit a narrative of an Algerian ‘energy spring’. Even if modest from a European perspective, it is an opportunity for greater openness and deserves some encouragement. Although not quite a ‘petroleum perestroika’,2 it does seem to suggest a greater willingness to reform and an increased flexibility in the face of a changing global energy environment. This analysis will first look at Algeria’s overall economic context and then on the hydrocarbon sector, focusing on the indications in recent months of a possible increased openness.

Pre-election economy

If the narrative of an ‘energy spring’ is still premature, applying it to Algeria’s broader economic policy is simply inappropriate (other than in reference to the season’s usually unsettled weather). The tension between reformists and conservatives in Algeria gives rise to decisions that are contradictory, subsequently corrected or ultimately abandoned and therefore in a wildly erratic economic policy.3 The 2018 budget was far removed from the relative discipline of previous years, and the rise in oil prices has aggravated the electoral fiscal cycle. This is confirmed by the 2019 budget proposal (Loi de Finances) presented at the end of September: a close to 8% rise in public spending, particularly current expenditure –and, within that item, social transfers–, continued recourse to monetisation of the fiscal deficit and, of course, not a single new tax or cut in subsidies.4

Figure 1 shows Algeria’s main economic indicators, along with their recent and projected performance. First, economic growth fell from 3.7% in 2000-15 to only 2% in 2017. According to IMF projections growth will rebound in 2018 as a result of the pre-election fiscal expansion and the recovery in oil prices, whose effects will persist through 2019, although not as strongly. The Economist Intelligence Unit (EIU) expects slightly lower growth rates for 2018, but with an upturn beginning in 2019 due primarily to the rise in oil prices and the coming on stream in the next few years of the most recent investments in the gas sector.5

The cost of having maintained growth with counter-cyclical measures during the years of low oil prices shows in the deterioration of the country’s main macroeconomic balances. Inflationary pressure, contained until 2015, will push inflation in the next few years above 7%, with a resulting rise is discontent among a population already beset by rising prices. Conversely, the recovery in oil prices could reduce the bulky public deficit recorded in 2015 and 2016 of over 15% of GDP to 7% by 2018. This substantial budget deficit stemmed from the increase in social transfers, which the 2018 budget has raised by 8% to account for total 9% of GDP. Should the 2019 budget proposal be approved, social transfers would rise to 21% of the budget and foreseeably again expand as a percentage of GDP.

After the increase in current expenditure estimated for 2018, the public deficit should again drop to below 5% of GDP. This would slow down an escalating debt, set to rise from 8.8% of GDP in 2015 to above 30%. The data relating to the Algerian Treasury’s recourse to the Central Bank was released in June and, as expected due to fiscal expansion, was above the Finance Ministry’s target. Nevertheless, there was no further monetisation after February, showing that fiscal emergencies have receded as a result of higher oil and natural gas prices.

In the external sector, after the ending of the enormous surpluses recorded in the years of high oil prices, the recent price recovery will allow the current account to be rebalanced: from a deficit of over 16% of GDP in 2015 and 2016 it should drop below 10% from 2018. Foreign currency reserves should continue to decline, although at a slower pace and always with a relatively comfortable margin to cover over a year’s imports. The EIU expects slightly more favourable estimates for 2018 and slightly more favourable forecasts for subsequent, especially a faster rebalancing of the public deficit to around 6% of GDP in 2018.

These projections, estimates and forecasts are clearly very sensitive to oil price fluctuations. The penultimate row in Figure 1 shows the fiscal breakeven oil price, ie, the price of oil required to achieve budgetary balance. Between 2000 and 2016 the Algerian budget required average oil prices of over US$100/barrel to maintain a balance. The (modest) fiscal adjustments of 2016 and 2017 achieved a certain effect by reducing the fiscal breakeven price from US$102/barrel to US$86. The election budget cycle should raise the fiscal breakeven price to close to US$106, to subsequently decline to around US$84 in 2019, more in line with oil price forecasts (although the estimate is prior to the expansive budget proposal for 2019). It should be borne in mind that oil companies do not expect oil prices to be much above US$80/barrel, but they do require investment projects to be profitable at prices of only US$50. For the sake of prudence, hydrocarbon mono-producers and their public companies should therefore adopt a reasonably similar framework.

Figure 1. Algeria: main economic indicators
  2000-14 2015 2016 2017 2018 (1) 2019 (1)
Real GDP growth (%) 3.7 3.7 3.3 2.0 3.0 2.7
Inflation (CPI, %) 3.7 4.8 6.4 5.6 7.4 7.6
Public deficit (% of GDP) 2.9 -15.7 -13.5 -7.1 -8.2 -4.8
Public debt (% of GDP) 24.8 8.8 20.6 25.8 33.3 38.4
Current account balance (% of GDP) 11.4 -16.5 -16.6 -12.3 -9.3 -9.7
External debt (% of GDP) 15.3 1.8 2.4 2.3 2.0 1.8
Foreign exchange reserves (months of imports) 26.9 28.4 22.6 19.0 16.2 13.4
Fiscal breakeven oil price (US$) 102.1 106.8 102.5 86.7 105.7 84.3
External breakeven oil price (US$) 70.2 84.5 73.4 74.5 76.8 76.6

(1) Forecasts.

Source: IMF, Regional Economic Outlook Update: Middle East and Central Asia, May 2018, Statistical Appendix.

In general, the macroeconomic scenario reflects the inconsistencies of economic policy. Although the government has tried to adjust to a lower oil price environment, the election cycle has only partially allowed it to do so. The recourse to unconventional financing of the budget deficit raises serious questions over the middle term, as highlighted by the World Bank.6 Now that the narrative of ‘lower for longer’ appears to have proved to be wrong, the short-term incentives to maintain fiscal discipline could become even weaker.

Volatility has also had its effect on 2018’s microeconomic policy. An area of particular interest to Europe (and Spain) is trade policy. Since 2015 Algeria has applied one protectionist measure after another, significantly affecting commercial relations with the EU. The Algerian rationale is to contain the balance of payments deficit, but there is also a clear element of political economy: incumbents aim to protect the rent generated by licences, tariffs and bans typical of protected markets.

Algeria first paralysed the trade liberalisation foreseen in the Free Trade Agreement of the Algerian-EU Association Accord. Then it introduced discretionary import licences on products like vehicles and cement and other construction materials. From 2018 licences are no longer applicable to vehicle imports, but further restrictions have been introduced, including the halt to imports of various product groups covering some 850 tariff line items, increased tariffs on around 130 additional line items and further administrative and financial requirements.7

As explained below regarding the energy sector, the economic context prior to the elections has been marked by a temporary improvement due to the oil price rise. The problem is that the window of opportunity for fiscal adjustment and microeconomic reforms created by the rise has come at the same time as the run-up to the elections. The two factors combined reinforce the temptation to continue banking on a continued price recovery and avoiding or minimising reforms. But as with the energy sector, a relatively more favourable situation for the election cycle in the short term should not obscure the many economic challenges facing the country in the medium and long terms.

Gas and prices to the rescue

Contrary to other hydrocarbon mono-exporters, such as Venezuela, Algeria’s economic policy has not been so poorly managed as to prevent it from benefiting from the current rising trend in oil prices.8 The worst-case scenarios considered in 2014, when prices started to drop sharply, have not materialised. Neither has there been a return to the instability of the black decade of the 1990s or a coup d’état, as in Egypt.9 On the other hand, in line with expectations, the country continues to mark time while President Bouteflika’s succession remains unresolved. Because of this, economic policy-making continues in a context of slow but sure deterioration as it awaits more favourable political and economic circumstances.10

It was a risky gamble, and largely taken by default, given the political unviability at the time of engaging in tough fiscal adjustments and thorough microeconomic reforms. The bet was partly based on the hope of oil prices eventually recovering, but also on something more tangible: the entry into operation of new gas projects than can temporarily reverse the country’s declining production.

Figure 2. Oil production (thousands of barrels a day)

Figure 3. Gas production (bcm)

Figure 2 shows how Algerian oil production has stagnated in recent years and the decline expected over the medium term. With all due caution regarding the various forecasts, the short-term trend for gas production, shown in Figure 3, is more favourable. After the swift drop in production during the 2000s and the stagnation recorded in the first half of the current decade, production rose significantly in 2016 (but not in 2017) and further increases are expected as projects currently underway are completed and come on stream. In the case of gas, production is not expected to decline until the beginning of the coming decade, although all the increases registered during the period will be a thing of the past by 2027. While the possibility of President Bouteflika making endless future re-election bids cannot be ruled out, it is Algeria’s immediate election that is the more urgent concern.

Figure 4. Hydrocarbon exports (US$ million)

Before the 2018 pre-election year, oil prices again began to rise, boosting the country’s export income. Figure 4 shows the forecasted increase in hydrocarbon export earnings up to 2022, driven by the increase in both gas production and oil prices. As with the expected decline in gas production, the problem arises in 2022. Regardless of the trend in oil prices, Algeria needs to undertake the gas investments necessary to reverse the expected production decline.

However, it is advisable to regard the optimistic projections for Algerian gas production with a degree of scepticism.11 For instance, to include the production of shale gas is clearly premature, as explained below. The forecasts shown in Figure 3 depend on how production develops at the Hassi R’Mel field, particularly in winter when temperatures drop and gas is reinjected. Although Algeria has so far been able to fulfil its contracts, in 2017 it was unable to supply France with any additional quantities of gas. Some forecasts are so pessimistic that they consider no Algerian gas exports by 2030 under a scenario of high domestic demand, as has already occurred in Egypt.12 More importantly, even the most favourable projections are only optimistic in the short term, suggesting a very difficult scenario from 2023-24 onwards.

Similarly to the economy, the recent improvement in the Algerian energy sector indicators and projections cannot mask the challenges it faces in the short and medium terms. Considering how long it takes to develop gas projects, particularly in Algeria, investments should be undertaken as soon as possible. But the truth is that in recent years unfavourable contractual, fiscal and administrative conditions in Algeria have made it impossible to attract the necessary investments from international companies. The latest bidding rounds for exploration licences have been met with scant interest, with the country’s overall business environment seen to be highly discouraging.13 Indeed, further rounds have been indefinitely postponed and none are expected under the current regulatory framework.

Excessive red tape and long delays in approval, difficulties in operating in an erratic trade policy framework, obstacles to international flows (from financial to customs-related) and the security situation in general all raise the transaction cost of being in the country. Additionally, the tax system limits potential income by penalising extraordinary profits (ie, a windfall tax), adding a strong disincentive to the current market context. The limitation on foreign participation in projects (the so-called Rule 49/51 restricting it to 49%) is a further hindrance mentioned by foreign companies.

Finally, despite having some of the world’s largest reserves of unconventional (shale) gas, Algeria’s strategy for its exploitation has been equally erratic. According to various estimates, the country has the third or fourth largest ‘technically recoverable’ reserves, after the US, China and Argentina. The Ghadames Basin, extending from eastern Algeria to southern Tunisia and western Libya, is one of the world’s largest in terms of unconventional gas resources.14 But the advantages of favourable geological conditions and an established gas industry have so far been offset by technical, political and economic obstacles.

Concern about competition from fracking for a scarce resource like water –although played down by the industry, which is banking on further technological development– has given rise to violent protests in the affected localities in the southern part of the country (like those in In Salah in 2015 following the first perforations). On the other hand, the bureaucratic inefficiency and excessive red tape plaguing the development of conventional gas resources also affect shale gas.15 In a context of low prices and a hostile public opinion, those previously in charge of Algeria’s energy policy had as a priority the development of conventional gas reserves with lower production costs. Although they did not rule out exploiting shale gas, they decided to postpone it in the hope of more favourable conditions in the future, such as higher natural gas prices, more advanced technology to minimise costs and reduce the impact on aquifers and water consumption, and (linked to the latter) and a more amenable public opinion.

A late ‘energy spring’, of a limited character and yet to be confirmed

Given the lethargy induced by the political paralysis in the Algerian energy sector, in the spring of 2017 the government began to signal a change of course. The first step was to stabilise the situation at Sonatrach, paralysed by both corruption scandals and the rapid succession of five chairmen in barely seven years. The appointment of Abdelmoumen Ould Kaddour changed the trend. In 2007, Kaddour had been the subject of a shady plot devised by the then all-powerful intelligence services (Département du Renseignement et de la Sécurité or DRS), which were later disbanded by Bouteflika in 2016. Accused of being in possession of DRS documentation, he was charged with espionage by a military court and sentenced to 30 months in prison in a hurried trial rife with inconsistencies. After 20 months in prison he was set free with no explanation thanks to the influence of someone in Bouteflika’s trust. He then moved to Dubai as a consultant.

In early 2017, presidential emissaries travelled to Dubai to visit Kaddour and managed to convince him –apparently with some difficulty– to take charge of Sonatrach.16 This was not just a personal rehabilitation for Kaddour himself, but also indirectly for his mentor, Chakib Khelil, Minister of Energy from 1999 to 2010, the real target of the DRS intrigues aimed at taking over control of Sonatrach.17 The fact that Khelil is one of the potential presidential candidates has given rise to a number of interpretations of Kaddour’s appointment. In June 2018 a presidential decree modified Sonatrach’s statute, granting new powers to Kaddour, essentially as regards making appointments to the board of directors. Nevertheless, it also strengthened presidential control over the company, whose chairman and deputy chairman would henceforth also be appointed by presidential decree. Sonatrach is close to completing the renovation of its management team and already has new directors for its major divisions (Strategy, Upstream, Pipeline Logistics and Commercialisation).

Around the same time, Arezki Hocini was made head of the National Hydrocarbon Resources Development Agency (Alnaft), the sector regulator. Hocini is close to Kaddour and Khelil and was the first to be rescued from oblivion by the regime, although in his case simply from mundane retirement. The new Energy Minister, Mustapha Guitouini, was previously at the distribution company Sonelgaz rather than being involved with upstream exploration and production; neither does he have a significant political profile, so until recently he has kept a low profile and barely intervened in extraction policy.

The new energy team immediately returned to the spirit of greater openness enshrined in the 2005 oil law promoted by Khelil but later curbed by measures such as the 49/51 rule and the windfall tax, which placed restrictions on foreign investment. In parallel, Alnaft seems to be in the process of extending its responsibilities, which –although no details have been released– may involve taking over some of Sonatrach’s historical regulatory and control functions, thus making it more commercially-oriented and comparable to other major international companies.

The stated aim was to revive the Algerian oil and gas sector with the backing of the presidential circle. To begin with, contact was re-established with the international companies to try to find an amicable solution to pending disputes and brush up its tarnished image. A year later Sonatrach was able to resolve 80% of its outstanding litigation, including its disagreements with Norway’s Statoil and the US company ExxonMobil.18 The most notable case was the partnership reached with Total, putting an end to a fraught history and returning to a climate of mutual understanding between the two companies.

Then came the signing of new contracts and the extension of others, among them several with Total. One of the agreements is a concession signed at the end of 2017 within a new legal framework between Sonatrach, Total and Alnaft to develop the Timimoun field.19 At the beginning of 2018 Cepsa, Sonatrach and Alnaft agreed on a further concession to exploit the Rhoude el Krouf (RFK) field, located in the Berkine Basin. Subsequently, in April 2018 Sonatrach signed an ambitious framework agreement with ENI to relaunch exploration and development in the same basin and to strengthen their cooperation in other areas of the energy sector (including shale gas, petrochemicals, renewables and offshore exploration).20 More recently, in June, another agreement was signed by Sonatrach, Total and Repsol to extend the Tin Fouyé Tabankort (TBT) gas-concession contract.

These initiatives were accompanied by a round of consultations with international oil companies to gather information on the measures that would be necessary to reform the Hydrocarbon law and make the sector more dynamic. Although a welcome novelty, the outcome of the consultations has not been made public and nor have the companies been informed whether their suggestions will ultimately be taken into account. This vagueness and lack of transparency are a further significant limitation to the past few months’ narrative of a more open energy sector. While international companies appear to have been led to believe that host government take (HGT, which in most cases is around 90%) will be reduced by the new Hydrocarbon law, they are discounting that it will continue to be too high.

Foreign policy adds a further layer of complexity. Thus, the success of the contracts signed with Total has partly been due to France’s aim of preserving its interests in Algeria. Meanwhile, it has continued to block the Midcat gas pipeline and the access by pipeline of Algerian gas to the rest of the European market. These strategic inconsistencies have a considerable impact on the prospects for Algerian gas exports to Europe.

The other remaining challenge was the renewal of gas supply contracts with Algeria’s main customers, many of which were close to expiration. The negotiations, of which little has been made public, had been stretching out for years with no visible progress. European companies, supported by the Commission, insisted on more flexible contract conditions, reducing their duration and the possibility of less rigid price indexation formulas, as Russia was already doing to adapt to the new far more competitive context of a more abundant supply of natural gas.21 Although the Algerian authorities showed some understanding, they countered by stressing the importance of security of demand and insisting on a certain stability of expectations.

In June 2018 Naturgy (previously Gas Natural Fenosa) became the first European company to renew its contract, ensuring its supply of Algerian natural gas until 2030. Although no details have been released, the terms appear to be more flexible, both as to time frame (10 years) and price formulas. Foreseeably, negotiations with all other clients –some enshrined in framework agreements like those between Sonatrach and ENI and Total– will follow the same format. While late, this is a welcome development that reveals an inkling of rationality in Algeria’s energy policy, fostering positive expectations about the long-announced new hydrocarbon law.

After a long wait and much rumour-mongering, on 4 June Kaddour announced a contract with the US consultancy firm Curtis, Mallet-Prevost, Colt & Mosle to provide advice on designing the country’s new oil sector legislation. He also stressed the need for it to be enacted and applied swiftly to ensure a better investment context and to attract the interest of international companies. This strategy appears to consist of the new law being approved with practical implementation mechanisms being adopted at the same time –contrary to 2005, 2006 and 2012, when the relevant decrees were delayed for years, paralysing the sector as a result–.22 Minister Guitouni, on the other hand, has expressed his disagreement for the first time and has showed his preference for a more cautious approach that could hinder the process.23

Something similar is happening with respect to the future of unconventional gas. Conscious that an increase in conventional gas exploration and production will be insufficient to offset the declining output at existing fields, the new Algerian energy sector authorities are again showing an interest in developing the country’s vast shale gas reserves. In recent months they have started talks with the US companies ExxonMobil and Chevron, although they seem to be at a very early stage and with a long-term prospect.24 Shale is also the object of the partnership with Eni and Total, although the negotiations that have made the most progress appear to be those with Anadarko and BP. In recent declarations to Bloomberg, Kaddour included among Sonatrach’s priorities both offshore exploration and what he termed ‘new energies’ (‘We don’t want to call it shale… I don’t like the term’).25

Given time constraints, none of these projects will see the light of day before the upcoming presidential election, thereby avoiding political costs during the campaign and allowing the government’s cautious stance to be maintained for a few more months. Given the difficulties facing conventional gas production, it is unlikely that shale gas will be any easier. Considering the difficulties faced by conventional production, it is unlikely for the development of shale gas to be any easier. To the contrary, its success would depend on maximum operational efficiency, which would require a favourable business, tax and regulatory framework that as of today is present almost only in the US: a smooth decision-making process, services companies that operate in a highly competitive market, technological development appropriate to each specific project and an uninterrupted flow of equipment and technical staff. For instance, equipment imported by international companies is held up by customs, on occasion by up to six months, which is plainly at odds with the speed required by the shale industry. In any case, the new law is expected to have a more favourable tax treatment for shale and offshore gas, as well as promoting the investigation of underexplored basins.


Algeria’s macroeconomic situation reflects the inconsistencies of its economic policy, further aggravated by the elections. Resorting to unconventional financing of the deficit and the recovery of oil prices have further weakened fiscal discipline in the run-up to the presidential election. The latter’s timing has reduced the window of opportunity for fiscal adjustments and reform that had been made possible by the temporary improvement in the economic context, masking the many economic challenges facing the country over the longer term. The hydrocarbon sector is in a similar situation. Improved conditions should not mask the absence of the investments that are necessary to reverse the decline in production. In addition to the excessive red tape hindering projects –from long delays in approval and execution to obstacles to international transactions– there is an unsatisfactory fiscal framework and a 49% limit on foreign participation in gas projects. Algeria’s shale gas strategy to date has been erratic and raises the same doubts that also affect the conditions for exploiting conventional gas.

To deal with these difficulties, the new Algerian energy-policy authorities have shown signs of being more amenable to reforms and laid the groundwork for the new hydrocarbon law and for a shift in policy as regards unconventional gas. In only a few months, Sonatrach, the national oil and gas company, has resolved a large number of its disputes and arbitration problems with international companies; it has signed new contracts and renewed or extended others with Cepsa, Eni, Naturgy (Gas Natural Fenosa), Repsol and Total; and it has also rekindled an interest in unconventional gas and sought support from US and European companies. The new hydrocarbon law, in the offing for years now, is probably a unique opportunity to culminate these efforts and provide a firm setting to attract the international investment needed to develop Algeria’s gas reserves. Sontrach’s Chairman and the hydrocarbon sector regulator have spent months resorting to a narrative of an Algerian ‘energy spring’, although certainly not with a name that is so uninspiring in the North African context.

However, the new slant in Algeria’s oil and gas policy does have certain limitations. This paper has highlighted red tape and lack of transparency as two of the main burdens weighing down the possibility of a more open energy sector (which are particularly critical to the shale industry), as well as the distortions caused by foreign policy considerations. Nevertheless, the conclusion is that the foremost limitation, as for the economy as a whole, is that the timing of reforms overlaps and is subordinate to the election cycle. Furthermore, red lines such as ‘49/51’ rule and an excessive host government take cannot be crossed before the process is over and only with a substantial degree of difficulty afterwards. This makes complicates and delays taking of decisions, prevents the employment of high-quality contractors, pushes back reaction times and undermines the attractiveness of the county’s energy sector to international investors.

The future of Algerian energy is one of the most important strategic issues to be settled by the 2019 presidential elections. After years of paralysis, energy reform is something that cannot be postponed much longer, but neither is it likely to be resolved before the country’s political situation is clearer. A sound energy sector reform not only needs a new law and its effective implementation but legitimacy and political authority. If, as seems likely, Bouteflika accedes to the parliamentary majority’s demand that he run for President again, an ambitious reform programme could become one of the key legacies of his fifth term in office. He will have to confirm, broaden or reverse certain important measures, starting with the hydrocarbon law and its associated implementation decrees, and only in the medium term will it be possible to devise a coherent strategy for exploiting unconventional gas reserves.

Gonzalo Escribano
Director of the Energy and Climate Change Programme, Elcano Royal Institute
 | @g_escribano

1 The Economist Intelligence Unit-EIU (2018), ‘Bouteflika’s rivals bide their time’, 18/VI/2018.

2 See ‘Les hydrocarbures pris en otage par la présidentielle de 2019’, Africa Energy Intelligence, nr 818, 5/VI/2018.

3 G. Escribano (2017), ‘Algeria: global challenges, regional threats and missed opportunities’, in K. Westphal & D. Jalilvand (Eds.), Political and Economic Challenges of Energy in MENA, Routledge.

5 EIU (2018), Algeria. Country Report, July.

6 World Bank (2018), ‘Algeria Economic Outlook – Spring 2018’, April.

7 European Commission-High Representative (2018), ‘Rapport sur l’état des relations UE-Algérie dans le cadre de la PEV rénovée’, SWD(2018) 102 final, 6/IV/2018.

8 G. Escribano (2018), ‘Argelia no es Venezuela’, Elcano Expert Commentary, nr 22/2018, 4/IV/2018.

9 G. Joffé (2015), ‘The outlook for Algeria’, IAI Working Papers 15/38.

10 G. Escribano (2016), ‘A political economy of low oil prices in Algeria’, Elcano Expert Commentary, nr 40/2016, 19/X/2016.

11 H. Darbouche y J. Hamilton (2015), ‘North Africa’s energy challenges’, in Y. Zoubir & G. White (Eds.), North Africa Politics. Change and Continuity, Routledge.

12 A. Aissaoui (2016), ‘Algerian Gas: Troubling Trends, Troubled Policies’, Oxford Institute for Energy Studies Paper NG 108, May.

13 Algeria is 166th (of 185 countries) in the World Bank’s Doing Business 2018 ranking (

15 T. Boersma, M. Vandendriessche & A. Leber (2015), ‘Shale gas in Algeria. No quick fix’, Brookings Energy Security and Climate Initiative Policy Brief 15-01, November.

16 F. Alilat (2018), ‘Algérie: Ould Kaddour, de la prison à la tête de Sonatrach’Jeune Afrique, 15/I/2018.

17 In June 2018 Kaddour said in an interview that the entire affair had been concocted by the DRS ‘pour casser Chakib Khelil’. See Y. Babouche (2018), ‘Ould Kaddour: “J’ai été jugé pour espionnage alors que BRC avait construit le siège de l’état-major de l’armée!”’Tout Sur l’Algérie, 3/VI/2018.

20 World Oil (2018), ‘Eni and Sonatrach strengthen cooperation in the gas sector in Algeria’, 18/VII/2018.

21 Essentially reducing contract time frames from 20 or 25 years and agreeing on indexation formulas with higher weightings for the prices of European hubs.

22 African Energy Intelligenceop. cit.

23 EIU ViewsWire (2018), ‘Algeria economy: quick view – US firms hired to advise on hydrocarbon law’, 7/VI/2018.

24 Natural Gas World (2018), ‘Sonatrach eyes foreign investors for shale gas: CEO’, 6/VII/2018.

25 Sonatrach CEO Kaddour on Oil Supply, Prices, Investment, Bloomberg Markets and Finance, 24/IX/2018.

<![CDATA[ Energy in 2018: geopolitical tensions OPEC+ and Trump Year II ]]> 2018-04-17T06:20:31Z

The year 2018 points to oil prices above the 2017 average, to a tightening of geopolitical dynamics in the Middle East and to a growing rivalry between OPEC+ and unconventional producers in the US.

Original version in Spanish: Energía en 2018: aceleración geopolítica, más OPEP+ y Trump año II


What were the principal dynamics of the energy sector in 2017? What can be said about 2018?


The year 2018 points to oil prices above the 2017 average, to a tightening of geopolitical dynamics in the Middle East and to a growing rivalry between OPEC+ and unconventional producers in the US, now supported by the Trump Administration. More positively, the recovery of oil prices could have stabilising effects on those producer countries best prepared to take advantage of it.


The year 2017 was intense, as foreseen in our paper of the beginning of last year, oil prices rose more than expected, geopolitical dynamics and pressures accelerated and accumulated in the Middle East, OPEC+ consolidated its credibility and President Trump decisively intervened in the energy field. Meanwhile, the year 2018 points to oil prices above the 2017 average, to the development of geopolitical rivalries stoked during the past year and to the emergence of new ones, including the possibility of new US sanctions against Iran. Consumer countries should begin to adapt to somewhat higher prices. On the other side of the equation, some producer countries have fallen into chaos and have little margin for a turnaround (Venezuela), while others appear better prepared to take advantage of the recovery in prices (Persian Gulf producers and Algeria). The competition between unconventional producers (fracking) in the US and OPEC+ –with a more assertive Russia now integrated nearly completely into this enlarged version of the oil cartel– will continue to deepen during 2018. Finally, European energy policy will continue to articulate the 2016 energy winter package; its evolution is analysed in another document devoted to climate change in 2018.

Prices supported

In the second half of 2017, oil prices rose more than expected, especially after the initial price drop following the OPEC meeting on May 25. Part of this dynamic can be attributed to geopolitical risk, but the prospects for supply and demand also suggest a tighter market (if not quite as much as currently reflected in the price). At the beginning of last year, the US EIA had forecast a price of US$53/barrel; at the same time, Merrill Lynch and Bank of America had forecast US$60. In a Reuters survey of 28 analysts at the beginning of December 2016, the forecasts ranged between US$83 and US$50/barrel, with an average of US$57. According to the most recent data, and despite its rapid ascent, the average price of Brent for all of 2017 was around US$54/barrel, revealing the basic accuracy of the major projections. The same Reuters survey undertaken at the end of December 2017 yielded an average projection of nearly US$60 for 2018, well below the US$70/barrel reached in the market during the first days of the new year (for the first time since 2014).

Although many forecasts for the coming months have recently been raised, there is some consensus that prices will tend downwards over the course of the year. This re-adjustment of the fundamentals could increase the sensitivity and volatility of prices, but it should not be too dramatic. The International Energy Agency (IEA) believes that in 2018 production will grow more than demand, particularly in the first half of the year, and then readjust during the second half. Underlying such projections is an analytical bet on the ‘moderation’ of US producers in search of greater profitability and, therefore, on as small a production increase as possible. The US Energy Information Administration (EIA) forecasts an average price of US$61 in 2018, US$7 higher than the actual average in 2017, but it also projects an excess of supply in 2018 and 2019 due to the production increase unleashed in the US in recent months.

The oil price recovery could be maintained, given that a price floor is supported by other factors like rising geopolitical tensions, a more strategic focus by US producers and/or stronger-than-expected demand. The recent increase in the price of oil is eroding the favourable environment enjoyed by the world (and Spanish) economy in recent years and creates more pressure to implement economic reform in order to continue gaining (or avoid losing) competitiveness. But there are also advantages for oil producers (and, as we shall see, many of them are of great strategic importance): the price recovery relieves financial pressure and allows for more gradual and politically-sustainable economic adjustment measures, in most cases alleviating very complicated domestic situations. It would be sensible for consumers to expect a new price range for Brent somewhere around its recent level; at the same time, producers might moderate their expectations for price to somewhere around US$60/barrel.

The geopolitical risk premium is back

While acknowledging the intrinsic unpredictability of geopolitical risks, all the signs continue to suggest that the price rise that began in 2017 will continue to be seen in 2018. Ian Bremmer, head of Eurasia Group, even said recently that if he had to choose ‘one year from the last 20 for predicting a large unexpected crisis –the geopolitical equivalent of the financial crisis of 2008– it would be 2018’. Although this forecast could be seen as extreme, it is certainly the case that a number of tensions have accumulated, darkening the prospects for positive developments in the strategic context of the oil and gas markets. The defeat of Daesh in Iraq and the eradication of its adherents in Libya has been good news, but these events were immediately overshadowed by the Kurdish independence referendum and the continued deterioration in Libya. Without being alarmist, one should recognise that these geopolitical developments are perceived as additional ingredients in the structural deterioration of the liberal order and they are encouraging new strategic visions of international relations to be articulated. Even the quite liberal EU is now banking on a ‘principled pragmatism’, limiting its foreign policy space in the wider Mediterranean neighbourhood just when this region is regaining strategic and energy significance.

With all its nuances, the reality is that the markets have been more inclined to incorporate geopolitical risk than to discount it. The re-adjustment of the oil market in 2017 has amplified the impact of geopolitical tensions on prices and re-focused international attention on the Middle East in anticipation of the major developments which could come in 2018. After the intensification of geopolitical dynamics experienced during the second half of last year, 2018 is expected to be a year of extreme volatility with potentially significant energy implications.

The Qatar crisis broke out in June, sparked by the decision of Saudi Arabia, Egypt, Bahrein and the United Arab Emirates (UAE) to cut diplomatic relations with the country. According to Qatar, information pirates based in the UAE hacked the website of the Qatari news agency and posted false commentaries on Iran and other sensitive regional issues which were attributed to the Emir of Qatar. The diplomatic situation escalated into crisis with a de facto embargo on the country that included the shutdown of two ports in the Emirates which are key for Qatar (Jebel Ali, on which it depends for its commercial supply chain, and Fujairah, the world’s second largest bunkering port) and raised the prospect of dire logistical implications for Qatar’s exports of oil and, to a lesser extent, gas. Oil prices rose for a number of days before it became evident that supplies would not be significantly affected, prompting prices to fall back again. Although this was not the first episode of cyber-geopolitics in the Middle East, it did provide a new example of the potential for cyberthreats in such a sensitive region.

At the end of September the markets were disturbed again by the independence referendum in Iraqi Kurdistan and the taking of the oil fields of Kirkuk (the largest in the north of the country) by the Iraqi Kurds. The markets immediately reflected the geopolitical risk of the new conflict, more than offsetting the impact of industry improvements that had come in the wake of Daesh’s retreat and the recovery of investor interest on the part of international companies. Concerned with containing the aspirations of its own Kurdish population, Turkey announced a blockade on oil exports from Kurdistan (around 500,000 barrels/day). Iran also showed its opposition by paralysing Iranian exports of refined petroleum products to the autonomous Kurdish region and blocking imports of Kurdish crude. When the Iraqi central government recovered control of Kirkuk it confirmed that neither Iraqi nor Kurdish exports had not been very much affected and that no side in the conflict wanted to get further embroiled. With this moderation of tension, prices slipped down again.

The first weekend in November saw three events which tightened prices again in view of the potential destabilisation of Saudi Arabia and the intensification of the confrontation with Iran: (1) the arrest on charges of corruption of various members of the Saudi royal family and the reconfiguration of the Saudi government; (2) the interception of a ballistic missile launched from Yemen by the Houthi rebels; and (3) the resignation, while in Saudi Arabia, of the Lebanese Prime Minister, Saad Hariri, who accused Hezbola and Iran of destabilising his country. The bold move by the Crown Prince, Mohamed Bin Salman, was intended to consolidate his power, although it was interpreted by some as a sign of weakness that might compromise the success of his economic reforms or even threaten the stability of the kingdom. At the same time, the deterioration of the conflict in Yemen and the threat of Hariri’s resignation both pointed towards the further deepening of the rivalry with Iran. As a result, the price of Brent shot above US$62/barrel, driven by fears of an accelerated deterioration of geopolitical stability in the Middle East.

At the end of 2017 such fears were stoked by the outbreak of the largest popular protests in Iran since 2009. The risk of destabilisation in Iran pushed up the oil price, even though there was no appreciable impact on the Iranian oil supply chain. In fact, Iran’s oil installations (both production fields and export terminals) are located far from the major population centres and are tightly controlled by the regime’s security services and reasonably well-defended against sabotage. Only the –now receding– fear that a continuation of the social protests and their prompting of a general strike might affect the energy sector would seem to entail any risk of perturbing the supply of Iranian oil. But the feeling that the regime has become more fragile has generated new doubts with respect to its foreign policy strategy for 2018. In addition to maintaining the confrontation with Saudi Arabia and Israel via regional proxies, and dealing with President Trump’s decision on new sanctions, the regime must also now face a complicated domestic front and search for ways to improve the economic situation.

Saudi Arabia also faces many open fronts –too many according to Crown Prince critics– including a literal battlefront in Yemen. The year 2018 should see, furthermore, the implementation of the key reforms of the Vision 2030 Strategy –including the market sale of 5% of Saudi Aramco and the reduction of politically sensitive subsidies (particularly energy subsidies)–. Although the Crown Prince’s economic reforms could cause some sacrifice, the kingdom seems to be compensating for this with other social reforms (timid from a Western perspective but very much appreciated by the Saudi population). As in other mono-producer petrostates, the recovery of oil prices will allow a more gradual and measured reform process without undermining the Crown Prince’s narrative. It is now clear that Saudi Arabia has proved capable of managing the oil countershock relatively effectively; each day the country moves farther away from the economic and financial instability predicted by some analysts when the price of oil was at its lows.

Today the major source of instability in the region continues to derive from the rivalry between Saudi Arabia and Iran, intensified by the delicate internal equilibriums in each of the two countries. The probability of geopolitical accidents between the two rivals will continue to increase over the coming months, but it does not seem that this will generate any problems for supply. Long before that would happen, cooperation would come to the fore in OPEC+, where the presence of Russia has continued to act as geopolitical insurance (as suggested in our paper last year). What does seem to be clear is that 2018 has begun very differently to 2017: now we are no longer in the low-price environment of an oversupplied market in which geopolitical crises barely impact upon the markets. In the current context of adjusting supply and demand, the acceleration of geopolitical dynamics described above is injecting a risk premium into the markets, indicating a change in expectations which further intensifies the pass-through to prices. It seems reasonable to expect that the geopolitical risk premium has returned to accompany (and raise) the oil price during 2018.

OPEC+, moving forward

The impact of these geopolitical crises on the supply of oil should not obscure from view the underlying tendency of a market undergoing readjustment in the wake of concerted action on the part of OPEC, Russia and other countries (OPEC+) to reduce production. The participants of OPEC+ have agreed to maintain their production cuts of 1.8 million barrels/day (mbd) –1.2mbd within OPEC and another 0.6mbd from the rest of the producers– for the duration of 2018. Although both the markets and a legion of analysts had been sceptical of the effectiveness of the agreement reached in November 2016 and doubted that it could be sustained even in the short run (to say nothing of its effective compliance through to the end of 2018), OPEC+ has maintained both discipline and a reasonably consistent policy through all of 2017. Instead of giving way to the collapse of an obsolete OPEC incapable of influencing the global markets, the agreement has propelled forward an enlarged OPEC now co-led by Saudi Arabia and Russia. Even in the face of all the questions raised by such an ‘unlikely alliance’, in 2018 the new OPEC+ could easily continue along this course, fundamentally altering one of the principal axes of global oil and energy governance.

Especially noteworthy is the resilience of the agreement in the face of the geopolitical convulsions analysed in the previous section, many of which involve confrontations (even in operational theatres) between some of the principal actors of the cartel. Indeed, the commitment of the parties to the agreement has not been weakened even by the blockade of Qatar, the intensification of the Saudi-Iranian rivalry, the confrontation in Syria pitting many Arab country members of OPEC against Russia or the recent protests in Iran. Actors whose political and diplomatic behaviour is often considered irrational (and therefore leaving others little room for negotiation), rapidly become rational as soon as they sit down at OPEC+ meetings. It is likely that this encapsulated immunity to the geopolitical crises of 2017 will continue through 2018. To the extent that a shared interest continues to exist, it seems reasonable to assume the continued survival of OPEC+, at least in the short term. Under certain favourable scenarios, compatible with some gradual exit and compensation strategies, OPEC+ could even obtain a certain level of informal institutionalisation upon the foundation of its collaborative work to date.

Russia, and its role, will prove key. Although its commitment might be nuanced, for the first time in history Russia has cut its oil production in concert with OPEC, establishing what has been called an ‘improbable’ and ‘uncomfortable’ alliance between Saudi Arabia and Russia. OPEC and Russia had begun conversations exploring such coordinated action –as a response to oil price declines– on three previous occasions: in 1997-98, 2001-02 and 2008-09. However, not only did Russia not fulfil its promised production cuts on any of these occasions, but it raised production –much to the exasperation of OPEC–. Although Russian and Saudi preferences are now aligned in the short term, they run counter to the commercial interests of Russian oil companies that wish to continue increasing their production, especially as prices recover: the more oil prices rise, the greater the pressure upon the Kremlin to begin to seek an exit strategy from the agreement.

The course of 2018 will tell us whether the new OPEC+ led by Saudi Arabia and Russia will be capable of consolidating itself as an axis of the emerging global petroleum order, making reality the worst geopolitical nightmare imagined by Mackinder or Brzezinski: the Middle East, Central Asia and Russia all aligned via their oil policy. Although Putin can take advantage of this strategy, it became clear last year that this has also meant transforming Russia from a member of the G-8 into a participant sui generis of the oil cartel, affecting an unusually rapid downgrade of Russia’s role in global governance (but one which also is in line with the economic reality of the country).

In contrast, given the divergence of foreign policy preferences between Russia and Saudi Arabia, the ‘improbable alliance’ in the realm of oil cooperation will remain encapsulated from other areas of policy and action. To maintain the oil production agreement effectively will be difficult enough; therefore, we should not expect Saudi-Russian cooperation in foreign policy. To manage the agreement successfully, and to prepare for the eventual exit from the agreement by some producers during the second half of the year, will likely be the top priority for OPEC+. Given the credibility gained by a decent compliance record in 2017, and despite geopolitical uncertainties, its prospects seem favourable. OPEC+ is one of the most notable geopolitical irruptions from the year 2017 and it promises to also be a protagonist in 2018.

The Trump Presidency, year II

President Trump has been yet another geopolitical irruption on the international energy scene. During the first year of his presidency, Trump delivered on many of his electoral pledges. Most notably, his ‘America First Energy Plan’ involves a 180-degree turn in the direction of US energy policy under President Obama. At the core of this plan is the goal to secure ‘American energy dominance’, which could be defined as a kind of ‘fossil fuel supremacy’ demanding the revocation of all of the environmentally-oriented measures of the previous Administration. Although the use of slogans is quite typical of US energy policy, ‘energy dominance’ mainly seems to consist in producing more energy at a lower cost by eliminating regulations and taking advantage of export opportunities.

Trump began by politically unblocking the Keystone XL and the Dakota Access (DAPL) pipelines, reversing the offshore drilling bans in the Arctic and the Atlantic, and manoeuvring all through 2017 to allow exploration in the Arctic National Wildlife Refuge (ANWR). In March of 2017, the President signed an executive order for the Environmental Protection Agency (EPA) to begin dismantling the Clean Power Plan, established by Obama and requiring the states to reduce their CO2 emissions from gas- and coal-fired power plants by 32% in 2030. During 2018 the EPA is supposed to replace the regulations approved by the Obama Administration and set new emissions standards. On 8 January 2018 the Federal Energy Regulatory Commission (FERC) rejected the petition of the Department of Energy for a plan to compensate nuclear and coal plants for their contribution to storage capacity on the grounds that such compensation constituted a covert subsidy to both technologies.

Many have argued that this shift in energy policy is more rhetorical than real, and that it will have only a limited impact upon the future of the US energy sector. It remains to be seen which parts of the regulatory rollback will survive judicial review and independent agency oversight (given what recently occurred with the FERC decision); but, in any case, US oil and gas production will rise still further as productivity continues to improve. The regulatory rollback could produce excesses which damage the very industry the Administration wishes to protect by eroding the confidence of the citizens in their own energy sector. We would then find ourselves with a lesser evil: the shift in US energy policy in 2017 might slow down the decarbonisation of the electricity sector (the principal vector of emissions reductions in recent years) but it will not stop or reverse it –in part, at least, as a consequence of US domestic opposition to the President’s energy policy and the ultimately refusal of the financial sector to invest in coal-fired generation–.

It is true that business interests, together with the regulatory powers of the states (especially those where voters support renewable energies for economic reasons –as in Texas– or environmental preferences –as in California–), represent important countervailing powers. But it is obvious that Trump’s policies will make their decarbonisation efforts more difficult, and more expensive and time-consuming to achieve. For example, Trump has announced that he wants to relax the next round of fuel economy standards for 2022-25. This would increase oil demand by some 200,000 barrels a day by the end of that period, benefiting oil producers and creating a disincentive for efficiency gains and for competition from the electric vehicle (along with the inevitable loss of competitiveness to Chinese EV producers).

From a business perspective, the most important measure for 2018 arrived at the end of last year when the US Congress passed a fiscal reform bill that reduced the top marginal corporate tax rate from 35% to 21%. Energy companies are among those that most benefit from this change since the new law also allows capital deductions to be taken in the same year that the investment is made, significantly reducing the tax burden on the energy sector and stimulating investment and business profits. In 2017 one of the greatest fears was that the tax incentives for renewable energies would be repealed; in the end, however, they have been maintained, reducing much uncertainty with respect to their future.

Finally, as it has done in other areas, the Trump Administration has tended to detach itself from multilateral energy forums. Although this unilateralist policy culminated with the US withdrawal from the Paris Agreement, it has also impacted other mechanisms of global energy governance. Among his election promises was the unilateral sale of half of the US strategic petroleum reserve, irrespective of the rules of the International Energy Agency, and he threatened again to do it after OPEC+ made its agreement to cut production. The administration has also tended to ignore its financial commitments to the UN’s Sustainable Development Objectives. And in its battle against regulation, the administration has dismantled the rule which obliges US extractive industries to declare all foreign payments (Section 1504 of the Dodd-Frank legislation designed to fight corruption in the exploitation of natural resources in producer countries).

Tensions over multilateralism and trade will also be apparent in 2018. The White House began the year imposing a special tariff on the imports of solar cells and panels (mainly of Chinese origin) of 30% (during the first year, although it will fall to 25%, 20% and 15% in each of the following years, respectively). Other promises also remain on the agenda, like trade measures against imports of steel for oil and gas pipelines, or those pertaining to the energy and commercial aspects of the renegotiation of NAFTA. The US has moved from being the ‘indispensable power’ in the provision of global public goods (including leadership in the fight against climate change, on sustainable development, in good governance of energy resources and with respect to market opening) to becoming a ‘dispensable power’ within the realm of global energy governance: it appears that the latter can only move forward without the former. In terms of global energy governance, then, 2018 promises to prolong the ‘American parenthesis’ of the first year of the Trump Presidency.

Algeria is not Venezuela

Algeria and Venezuela have been on the radar of analysts since the beginning of the oil price fall in 2014. The lack of economic diversification during the years of high oil prices and the absence of reform in the face of the oil countershock of recent years have made both countries candidates for economic –even political– collapse. The comparison of these two mono-producers has long been a classic in the literature on petro-economies. Nevertheless, entering 2018 the two countries present increasingly divergent perspectives. Not without difficulties or latent risks, Algeria has managed to navigate the years of low prices and, against all expectations, Bouteflika faces the year with his eyes on the presidential elections of 2019. On the other hand, Maduro has driven Venezuela into a humanitarian (and energy) crisis and effectively dismantled the petroleum industry, leaving the country with nearly no margin or foundation for taking advantage of the recovery in prices.

Clearly, the situation in Algeria presents some relatively high levels of political and economic uncertainty. However, the most catastrophist prophecies –a repeat of the civil war that followed the petroleum countershock of the second half of the 1980s, possible Egyptian coup d’etat scenarios or of the potential spread of conflicts in neighbouring countries– have not materialised. On the contrary, a kind of continuity has taken hold, even if it has been weakened by low crude prices and is now girded by the recent price recovery.1 During the last years, Algerian macroeconomic fundamentals have deteriorated significantly, but the government has been capable so far of avoiding an insolvency crisis like the one the country experienced in 1986-1988. This has come at the cost of exhausting its petroleum fund and a large part of its foreign exchange reserves, with negative effects on economic growth. But the country still enjoys a financial cushion, accumulated during the bonanza years, and up to the current moment it has been able to avoid large scale recourse to external borrowing.

The 2016 and 2017 budgets stretched the limits of orthodoxy and the recourse to protectionism repressed the external disequilibrium and contained the drain on foreign exchange reserves. These budgets prepared the way for the change in the political-fiscal cycle foreseen in the budget approved for 2018, necessarily expansive to secure a favourable result in the presidential elections of 2019 and, in this case, to justify Bouteflika’s decision to seek a fifth term despite the state of his health. This change in strategy has its risks: the fiscal expansion expected in 2018 is likely to be financed through so-called ‘unconventional finance’ (by printing money), which even under the supervision of the central bank and the government will probably lead to an increase in inflation and the financing of low-profitability projects.

The reversal of some of the (timid) austerity measures comes at a relatively more favourable moment for the Algerian economy than did previous budgets. The rise in the price of oil especially benefits Algeria because, in contrast with Venezuela, its oil is of high quality, sweet and light, and in the most recent months has benefited from a considerably premium above the price of Brent, the benchmark crude. Still, the lack of investment in exploration and production has led to a slight decline in oil production and impedes an acceleration of the slow recovery of gas production; at the same time, domestic demand is growing rapidly, placing pressure upon available oil and gas exports. Therefore, together with the macroeconomic management to be expected in a pre-election year, a new hydrocarbons law should also be anticipated. Algeria needs to attract investment in the development of its hydrocarbon resource, but the opening and modernization of the sector faces much resistance. The Algerian government could easily slip into the delusion that the recovery in oil prices frees the country of the need for economic reform (and above all energy reform), which would prolong the currently stationary situation the country is in.

In contrast with the deteriorated continuity of the Algerian case, the degradation of the political and social situation in Venezuela and the country’s decline in oil production hardly has any precedents. After reaching a peak of 3.5mbd in 1998, one year before the arrival of Hugo Chavez to power, the oil production of Venezuela plummeted, falling to barely 1.8mbd in November 2017, a minimum level not experienced since 1985 and which does not even allow Venezuela to reach its full OPEC quota (1.97mbd). This collapse of Venezuelan oil production has accelerated in recent months, forcing the national oil company, PdVSA, to import diluents and light petroleum to process its heavy crude for export and for further refining for domestic consumption. In response, Maduro has named a loyal General without any experience in the sector to head the Petroleum Ministry and PdVSA, and he has appealed to China and Russia for financial assistance. China has resisted such appeals and has opted instead to cut its losses and reduce its exposure. On the contrary, in November 2017 Russia agreed to restructure part of Venezuela’s debt, but the deal excluded the US$ 6 billion that PdVSA owes to Rosneft, which in turn has opted to take-over PdVSA assets at bargain prices.

The projections for 2018 anticipate further production losses of between 100,000 and 300,000 barrels/day. In a scenario of political and social collapse, nearly double that quantity could be taken off the market. Oil exports to the US are already in free fall in the wake of sanctions, PdVSA is paralysed by financial asphyxia and government dirigisme, and the technical bankruptcy of the country makes it impossible to reverse the production decline. On the other hand, nor does it seem likely that Russia represents a lasting solution to the decline in production. Although the worst scenarios of production decline can be avoided, to increase oil production would require investing simultaneously in the costly resources of the super-heavy oil of the Orinoco belt and in advanced recovery techniques in the more mature conventional oil fields. At today’s oil prices, with the current management and human capital deficiencies at PdVSA, and in a context of political instability reigning in Venezuela, both tasks seem complicated.


With respect to prices, the projections for 2017 were in line with the year-end average price for Brent of US$54/barrel (in our document last year we adopted the US EIA projection of US$53). As was also to be expected, the extension of the OPEC+ agreement supported the price rise during the last part of the year to the upper range of the band of price expectations and, as had been speculated, it provoked a response from US production. With respect to the Trump factor, it was also easy to bank on his distorting role on energy policy and his 180-degree turn with respect to the policies of the Obama Presidency. On a more positive note, the price recovery has alleviated the economic situation of some mono-producers, like Algeria and the countries of the Persian Gulf, and improved their situation with respect to reforms, although the border between allowing a more gradual pace and simply delaying such reforms can be difficult to determine. In contrast, in Venezuela the oil industry has been effectively dismantled to the point where the country cannot even benefit from higher prices. On the European scene, the awkward but unstoppable machinery which is EC energy policy has continued to develop the 2016 winter package, as was foreseen. Therefore, it has not been analysed this year in this 2018 energy document but rather in a related annual document devoted to climate change.

Indeed, 2017 developed more or less as had been foreseen at the beginning of last year. All of these developments seem set to remain on course in 2018: a higher oil price environment than in 2017 (the 2018 projection of the US EIA for Brent is US$61/barrel); a market readjustment, although according to the IEA and the US. EIA some excess supply will remain; a not so ‘moderate’ expansion of US production; new energy policy moves by the Trump Administration (although perhaps some new regulatory defeats as well); a gradual recovery of the economic policy space for producers like Saudi Arabia, Algeria and Russia (but not for Venezuela, which now appears fated to see the prostration of its oil industry culminate in the collapse of the country); and, finally, the consolidation of OPEC+ and the growing protagonist’s role of Russia.

By contrast, while our 2017 document discounted a contained geopolitical volatility, the second half of 2017 has brought with it an unexpected intensification of existing geopolitical tensions that makes 2018 a year of large and accumulated uncertainties. The endogenous deterioration of the situation in the Middle East, together with the actions of the Trump Administration in the region (recognition of Jerusalem as the capital of Israel, new sanctions on Iran) and the growing presence of Russia (in OPEC+ and in the Eastern Mediterranean) raise new focal points of tension. The possibility of geopolitical accidents with an impact on the regional energy sector is increasing, and with it the geopolitical risk premium contained within the price of oil. Although the markets are readjusting in response, and the interests of the various actors are realigning to achieve a new equilibrium (a kind of ‘geopolitical break-even’ point around the current price that seems to be acceptable for everyone), it could easily be destabilised again by any change in the relation of forces in the Middle East.

The consensus on 2018 is that geopolitical volatility will remain at maximum level, concentrating a large part of the attention of energy actors. But this does not necessarily imply that some inevitable catastrophe will occur that cannot be absorbed in the form of rising prices.

Gonzalo Escribano
Director of the Energy and Climate Change Programme of the Real Instituto Elcano
| @g_escribano

1 Gonzalo Escribano (2017), ‘Algeria: global challenges, regional threats and missed opportunities’, in K. Westphal & D.R. Jalilband (Eds.), The Political and Economic Challenges of Energy in the MENA Region, Routledge, Oxford.

<![CDATA[ Year one of Trump’s energy policy ]]> 2018-01-30T06:26:02Z

At a certain point, the Trump Administration will need to decide whether to honour campaign promises or to follow the dynamics of business and the market, as well as those of the domestic (and multilateral) institutions which shape the realities facing US energy policy.

Original version in Spanish: La política energética de la presidencia Trump, año I

During the first year of his term in office, President Trump has fulfilled, one after another, at least many of the electoral promises included in his America First Energy Plan, forcing a 180-degree turnaround from the energy policy of President Obama. The declared objective of this strategy is to achieve US energy dominance, a kind of carbon (or fossil fuel) supremacy that has taken over, at least symbolically, many important US energy policy measures. Immediately following his swearing in, Trump signed executive orders allowing both the Keystone XL and Dakota Access (DAPL) pipelines to proceed. More than representing simply an important economic decision, these executive orders served as a declaration of Trump’s intentions, particularly given the media context in which these fossil fuel infrastructures had generated significant public opposition. Trump requested that the promoters of the Keystone XL –which had been blocked by Obama– present the project to the government again; and when they did, this time it was approved. He also ordered that the DAPL –halted by Obama after three months of opposition and protest, resume construction– and by mid-year the pipeline was transporting oil.

“The policies of President Trump will not easily reverse the trend of the energy transition taken up by the US towards a combination of gas and renewable energies"

Also among the first measures taken by President Trump was the decision to reverse the recent prohibition against drilling in the Arctic and the Atlantic oceans, which had been approved at the last minute by the Obama Administration. This energy policy change was also mainly symbolic: there is a certain consensus that such measures will have very limited real effects, given that even after the increase in oil prices during recent months the exploitation of the Arctic remains unprofitable, in particular relative to the fracking of shale oil. In September, the Washington Post revealed that the Trump Administration was maneuvering to allow for hydrocarbon exploration to proceed in the Arctic National Wildlife Refuge (ANWR) for the first time in 30 years. This measure, recently approved, is another high-profile blow in the decades-long policy battle between the environmentalists and native-American tribes, supported by the Democrats, on the one side, and the political leaders of the State of Alaska, supported by the Republicans in the Congress, who want to exploit these petroleum resources, on the other.

The next shift in energy policy came in March when the Clean Power Plan (CPP) –another flagship of the Obama Administration’s energy policy– was suspended. The President signed an executive order calling for the Administrator of the Environmental Protection Agency (EPA) to begin to dismantle the CPP –which had been projected to reduce GHG emissions in the electricity sector by requiring states to reduce CO2 emissions from gas and coal-fired plants by 32% in 2030 (when compared with 2005)–. In fact, however, it was once again a nearly symbolic decision, given that the CPP had never entered into effect. During 2018 the EPA will need to replace the regulation approved by the Obama Administration and set new emissions standards. The year has begun with an important defeat for the Trump Administration, however: on January 8, 2018, the Federal Energy Regulatory Commission (FERC) rejected the petition of the Department of Energy to establish a model for compensation of nuclear and coal plants for their energy storage and grid resilience capacities. That proposal has been interpreted as a clear subsidy to both technologies, given that other technologies, like wind and solar (and to some extent gas), do not have this possibility because of the high cost and their limited capacity for storage.

A varied range of arguments have been used to reduce the perceived significance of such measures, and while most of them are valid, sometimes they are stretched. Most of them point out that the shift in energy policy has been more declarative than substantively real, and that its impact will be limited. It is true that, at this stage, the reduction in the costs of renewable energies have made the transition in the US electricity sector almost inevitable. The policies of President Trump will not easily reverse the trend of the energy transition taken up by the US towards a combination of gas and renewable energies, supported by new electricity storage systems and smart grids. The interests of business and the regulatory capacity of the states, especially those where the voters support renewable energy either for economic reasons (for example, as in Texas) or out of environmental preference (as in California) represent important counterweights in this regard. But it is evident that Trump’s policies will slow down the transition and make it somewhat more expensive (than it needs to be). In the same way, the defeat inflicted by the FERC to the proposal for hidden subsidies to coal and nuclear energy show that the institutional counterweights and checks do limit the space in which President Trump’s energy policy can unfold. On the contrary, however, although the regulators continue to act to displace coal-fired plants from the U.S. electricity mix for reasons of cost, they can only expect obstacles from the Trump Administration.

“Trump’s unilateralism has affected other key mechanisms of global energy governance, precisely when such mechanisms are needed even more”

But the culmination of the abrupt shift in the Trump Administration’s energy policy and its aspirations to energy supremacy was made especially visible by the Administration’s withdrawal from the Paris Agreement. The Administration has also begun to turn its back on the US’s financial obligations to the UN’s Sustainable Development Objectives. Furthermore, Trump’s unilateralism has affected other key mechanisms of global energy governance, precisely when such mechanisms are needed even more to undertake an orderly energy transition in economic and geopolitical terms. The clearest example of this has been the response of the Trump Administration to the agreement between OPEC and Russia, along with other oil producers, to maintain the production cuts in order to stimulate a recovery of oil prices. The President announced that he would carry out another of his electoral promises to unilaterally sell off half of the US’s strategic oil reserves, irrespective of the rules of the International Energy Agency (IEA) in this regard, revealing that Trump’s lack of interest in the fight against climate change, or in environmental protection, also extends to his attitude toward multilateral energy cooperation.

The risks to US energy security stemming from this unilateralism nearly materialised in August with the arrival at the shores of Texas of Hurricane Harvey, which paralysed the offshore production of the Gulf of Mexico and the shale production of Eagle Ford, as well as nearly 30% of the refining capacity of the country. The impact on prices, and the related scenarios of shortages, were only temporary, but they produced some fear of a repeat of the situation in 2005 when Hurricane Katrina obliged the US to appeal to the solidarity of the members of the IEA to release some of their strategic reserves. Although in the end it was not necessary to call on the cooperation mechanisms of the IEA, the mere possibility of having to do so placed the unilateralism of Trump, along with its contradictions, plainly in disturbing view of the mirror. Tensions with multilateralism have also been apparent in the commercial field: the White House will need to decide before the end of January whether or not to apply additional tariffs or other commercial measures to the imports of Chinese solar panels. The first protectionist decision of President Trump could in this way affect the whole of the energy sector. Other cases related to the energy sector remain unresolved, like the commercial tariffs facing imports of steel (used in oil and gas pipelines) or the implications of an eventual renegotiation of NAFTA.

It must be clarified that what explains US energy leadership is not energy nationalism as much as an energy ecosystem characterised by deep markets that stimulate business dynamism in both hydrocarbons and renewable energies. The impressive increase in the production and export of US crude oil illustrates perfectly the limits to energy isolationism of the kind proposed by Trump’s campaign. In 2015 the Obama Administration eliminated the ban on petroleum exports, a decision which candidate Trump opposed, but during 2017 a wave of oil exports was unleashed. It is true that part of this increase was due to the effects of Hurricane Harvey, which forced crude oil to be exported in the face of widespread refinery closings, but the data continues to be revealing: between January and June of 2017 the US exported on average 750,000 barrels a day of petroleum, a figure which was doubled during the last quarter of the year and which made the country one of the largest oil exporters in the world. Production levels are also rising, and with the higher price ranges now expected for oil, the projections for 2018 continue to rise. The policies which have produced this phenomenon were already in place before the arrival of President Trump, and despite having campaigned in favour of returning to the prohibition against US petroleum exports in the name of ‘America First’, it is one of the few star measures from his campaign program that has been forgotten in practical terms, and even rhetorically. This absence is probably the most notable and revealing limitation of his America First Energy Plan.

In business terms, the most relevant measure arrived at the end of last year, when Congress approved a tax reform which reduced the tax rate on companies from 35% to 21%, with energy companies among the principal beneficiaries. In addition to a reduction in the tax rate, the tax legislation allows for the deduction of capital invested in the year in which the investment is made, which will lower even further the tax burden on the energy sector, stimulate investment and push up business profits. In the field of renewable energy, one of the great fears of the sector has been the future of the renewable energy tax incentives, which finally were preserved and have now contributed to moderating uncertainty with respect to the future of renewables. This business component of the America First Energy Plan, and not its unilateralist, protectionist and fossil fuel rhetoric, is what rescues the first year of the energy policy of President Trump. It remains to be seen up to what point this component is capable of resisting the tensions between different business interests. At a certain point, the Trump Administration will need to decide whether to honour campaign promises or to follow the dynamics of business and the market, as well as those of the domestic (and multilateral) institutions which shape the realities facing US energy policy.

Gonzalo Escribano
Director of the Energy Programme, Elcano Royal Institute
| @g_escribano

<![CDATA[ Venezuela and PDVSA: killing the goose that lays golden eggs ]]> 2018-01-19T02:55:58Z

In a country that depends almost entirely on its oil exports it seems very strange that its leaders despise the national oil company.

Also available the Spanish version: Venezuela y PDVSA: matando a la gallina de los huevos de oro

In a country that depends almost entirely on its oil exports it seems very strange that its leaders despise the national oil company. This, however, is precisely what is happening in Venezuela under the government of President Maduro.

Between December 2014 and December 2017 Venezuelan oil production fell from 2.9 million barrels/day to 1.8 million as reported by the government to the Organisation of Oil Exporting Countries (OPEC). This implies a loss of over US$62 million a day, taking into account the average price of the Venezuelan oil basket in December.

Figure 1. Venezuelan oil production: direct communications to OPEC

A country that is currently undergoing one of the worst economic and social crises in its history would naturally look for ways to halt the decline in order to have access to this much needed foreign currency. Especially considering that according to the Venezuelan Central Bank (2015 data, the latest available official balance of trade statistics) 95% of its total foreign exchange revenue is generated by oil exports and that PDVSA’s total revenue accounted for around 37% of GDP in 2016 (using 2016 GDP estimates by Torino Capital and comparing them with PDVSA’s 2016 published financial results). All actions taken by the government, however, seem to further hinder any possibility of recovery.

“PDVSA has failed to offset the production decline of its traditional oil producing areas”

The decrease in production is a natural occurrence because oilfields become depleted. In order to offset this natural decline it is important to apply effective reservoir management techniques and invest in technologies for maximising recovery. On the other hand, companies should constantly develop new fields so as to ensure a stable total production. This is not what is happening in PDVSA. The company has failed to offset the production decline of its traditional oil producing areas. Such a decline is inevitable since they have been producing oil for over 100 years.

For the country that according to the International Energy Agency has the world’s largest oil reserves this should not be a major concern, given that the production loss can be quickly replaced by new fields. In the past years Venezuelan oil production has shifted from the traditional areas of the north-west to the centre-east where the Orinoco Oil Belt is located (the Faja as it is known in Venezuela), an area covering around 55,500 km². According to PDVSA’s 2008 operational report, oil production in the Faja accounted for 16% of total production that year and PDVSA’s 2016 operational reports show that it has grown to 50%.

In its 2017 annual statistical review, BP estimates that by the end of 2016, 222 billion barrels could be recovered from the region in an economically feasible way using existing technology (as a reference, Saudi Arabia’s total oil reserves stand at 266 billion barrels). The oil in the area, however, is extra-heavy, with an API grade below 10 degrees, and its production and transport therefore require additional efforts. In order to ensure the flow of crude towards the processing plants it needs to be blended with diluents. Initially another Venezuelan crude of higher gravity from the traditional oil fields of the north-west was used (Mesa 30) although, given the natural decline of these fields, the company started using refined products as diluents, particularly naphtha.

In the past three years the Venezuelan refining system has experienced many difficulties, largely related to ageing infrastructure and lack of investment, resulting in a dramatic drop in output. This forced PDVSA to start importing naphtha, and on some particular occasions light crudes, so as to keep the necessary flow of diluents for transporting oil from the Faja. These diluents should, theoretically, be recovered after treating the extra-heavy oil in the upgrading facilities and then sent back to the producing fields so as to maintain a constant flow. The upgrading capacity, however, has not increased at the same pace as the production of this extra-heavy oil, a large part of the production of the Faja is therefore exported with the diluents, as blended crude (naphtha with extra-heavy oil).

The fact that a large part of PDVSA’s production is tied to debt repayments, in addition to the scarcity of foreign currency due to the country’s extremely restrictive exchange control have given rise to an important cash flow problem for the company. This has in turn affected its capacity to import diluents in the required quantities to continue increasing oil production in the Faja to the levels needed to make up for the decrease in the traditional areas.

The Faja, on the other hand, is an inhospitable region, far from the country’s traditional oil centres and therefore lacking the necessary infrastructure to effectively operate the oil fields. Each new development requires hundreds of kilometres of different pipelines (for water, diluents, crude and natural gas) to allow the flow between the oil field and the processing plants. New roads are needed to link urban centres with the fields. This entails enormous investments, time and planning.

Most significant, however, is the need to have qualified personnel for each phase of the development. Unfortunately, PDVSA’s working conditions, where an engineer is paid a monthly salary equivalent to US$20, together with Venezuela’s deep social crisis have forced many qualified workers to leave the country. This, combined with the prioritising of political proselytism over technical qualifications, explains the general demoralisation of the majority of PDVSA’s employees. A few days after being appointed PDVSA’s new CEO, Brigadier General Manuel Quevedo publicly encouraged the workforce to engage in bullying and persecuting anyone not demonstrating unconditional support for President Maduro.

“All managerial posts, including the Board of Directors, have been assigned to people identified with President Maduro, regardless of their qualifications or experience”

All managerial posts, including the Board of Directors, have been assigned to people identified with President Maduro, regardless of their qualifications or experience in the oil industry. Nelson Martínez was the last high executive who had the necessary technical qualifications to solve the company’s serious internal problems, but he was ousted in November. During his short time in office he had to bear constant political attacks that did not allow him to devote himself to running the company. Additionally, the government imposed upon him a military executive vice-president, a few vice-presidents and an executive board with no knowledge of the oil industry, who reported directly to President Maduro and who constantly overruled any of his decisions.

In this very complicated context, it is impossible to develop the oil fields that might offset the natural production decline without the support of operating and financial partners. PDVSA’s partners who are still in Venezuela, however, have complained that they are not allowed to participate in the decision-making processes and that political judgement prevails over operating decisions. In addition, PDVSA has had significant delays in payment in the past years and many have opted to terminate the relationship. With regards to possible financial support, the recent sanctions imposed by the US, combined with PDVSA’s default on its international commitments, have destroyed the company’s credit rating and thus increased the cost of financing to unmanageable levels.

Figure 2. PDVSA’s main challenges

For all these reasons, the decline in total Venezuelan oil production has been unavoidable. Unfortunately, it seems that the trend will not only not be reverted in the short term but will worsen further. A few weeks ago, President Maduro launched a series of strong attacks against the company, claiming that PDVSA was responsible for the country’s current economic crisis. Using the attorney general, appointed personally by him, the government has presented dubious indictments and illegally detained technical executives of PDVSA. Those arrested have been accused on public television, with no right to legitimate defence and with no access to the prosecution files; furthermore, they have been isolated and have allowed no contact with their families. The workforce is demoralised and scared of political persecution, something that has been aggravated by the company’s militarisation, as it is now filled with uniformed military personnel and members of the National Guard who are close to the new CEO.

Given this context in which it is difficult to imagine production being restored, the stabilisation of oil prices might afford new opportunities to PDVSA. But in order to take advantage of the new situation it would vital for the company to focus on restoring the morale and technical capacity of its workforce, a necessary first step to address all other issues.

Asier Achutegui
Independent consultant

<![CDATA[ The Paris Agreement after Trump and the future of climate action ]]> 2017-06-06T05:10:53Z

The message from world leaders is clear: there is no intention of abandoning an agreement that has taken over five years to negotiate. The world will move forwards towards a low-carbon future despite Trump’s efforts to hold it back.

On 1 June 2017, the 45th President of the US, Donald Trump, announced his government’s withdrawal from the Paris Agreement. The announcement, though disappointing for the global community, was expected. As such, statements from major greenhouse-gas emitters such as China and the EU were ready to be released shortly after Trump’s withdrawal speech. The message from world leaders is clear: there is no intention of abandoning an agreement that has taken over five years to negotiate and there is no possibility of renegotiation at the request of a single nation. The world will move forwards towards a low-carbon future despite Trump’s efforts to hold it back. The environment, the economy and the people need a low-carbon transition.

The withdrawal and renegotiation announcement by President Trump has been heavily criticised. It makes little sense to try to renegotiate an agreement that is legally binding on procedural issues, which is based on Nationally Determined Contributions (NDCs) that countries voluntarily submitted, and which takes into account the principle of common but differentiated responsibilities and respective capabilities while being mindful of national circumstances. No country imposed any obligations on others, either in terms of reducing GHG emissions or as regards contributions to the Green Climate Fund. The hybrid nature of the agreement –with rule development, oversight and five-year reviews taking place at the international level, and contributions decided at the domestic level– ensures voluntary pledges that are in the countries’ own interests.

“Trump based much of his withdrawal speech on the cost of climate action. However, there are a number of reasons why his arguments are highly questionable”

Trump based much of his withdrawal speech on the cost of climate action. However, there are a number of reasons why his arguments are highly questionable: the study he cited did not include the benefits of action (ie, ignored the costs of inaction), innovations and evolving technology costs were ignored, and labour market figures were both misunderstood by Trump and incomplete in the study. Nevertheless, analysing the labour market consequences of a low-carbon transition and ensuring a just transition for workers is a relevant and, to date, underexplored issue. Designing measures in national climate laws that are in the making to ensure workers can adapt to a low-carbon economy will, probably, increase the likelihood of citizens buying-in climate policies.

In addition to the above, Trump’s claim that full implementation of the NDCs would only reduce temperatures by 0.2ºC is arguably underestimating the impact of the full implementation of the Paris Agreement. The MIT states that full implementation of the Paris Agreement would lead to a reduction in global mean surface air temperature (SAT) of between three and 5.5 times higher than claimed by Trump. This means a reduction in SAT of between 0.6ºC and 1.1ºC by the end of the century compared with a no-policies scenario. While this is insufficient to limit global mean temperature increases to well below 2ºC compared with preindustrial levels, as full implementation will mean overshooting the 2ºC guardrail by about one degree, it is hardly insignificant progress. Additionally, big emitters such as China and India are recognised to be on track to over-complying with their initial Paris commitments, partially counteracting the US rollback of federal climate regulations.

What does US withdrawal from the Paris Agreement mean? The consequences can be analysed both within the US and internationally. For the US, withdrawal implies single-handedly isolating itself from the international climate diplomacy community, a move that damages its credibility as a trustworthy partner in negotiating global matters. It also means squandering the political capital invested in designing the key features of the agreement and its rulebook and frustrating climate negotiators worldwide. Frustration will arguably result from the fact that the architecture of the Paris Agreement was in part designed to suit US political constraints.

“US withdrawal from the Paris Agreement has also effectively erased the global climate leadership the Obama Administration nurtured”

US withdrawal from the Paris Agreement has also effectively erased the global climate leadership the Obama Administration nurtured, especially during his second term in office. States, cities and American corporations are, however, manifesting their intention of pushing ahead with ambitious commitments. In fact, after Trump’s announcement it was reported that Michael Bloomberg is leading a group of mayors, governors, university chancellors and companies in negotiating the acceptance of their commitment pledges under the UNFCCC along with those of other parties. Currently, non-state actor pledges are held under the Non-State Actor Zone for Climate Action (NAZCA) platform and the 2050 pathways platform, among others.

Further consequences of US paralysis on climate action could include transition risks such as those identified by the Task Force on Climate-related Financial Disclosures. One such example is the US government’s greater exposure to climate-related litigation, a concern voiced by Trump during the withdrawal speech that is unlikely to be circumvented by withdrawing from the Paris Agreement. Additional transition risks that can be faced by the US and its companies are related to the market opportunities forgone in competing for the demand for low-carbon goods and services (estimated to be worth US$4.2 trillion), the loss of reputation and facing sectorial stigmatisation.

For the world, losing the second-largest GHG emitter in the global fight against climate change is not good news. Preventing dangerous interference with the climate system will become harder after Trump’s withdrawal announcement. US non-state actors and the remaining parties to the Paris Agreement now have the task of filling the void left by yet another US climate default (the first being its failure to ratify the Kyoto Protocol). It also becomes more expensive for developed countries to meet the Copenhagen, Cancun and Paris pledges, including the commitment to disburse US$100 billion annually from 2020 onwards to foster mitigation and adaptation by less developed countries.

Now more than ever, leadership by the EU and China is essential to drive the world’s transition to a low-carbon future, but they will need other regions and actors to collectively implement current commitments and should rise to the occasion to respond to one of the world’s most pressing challenges.

Lara Lázaro
Senior Analyst, Elcano Royal Institute
| @lazarotouza

<![CDATA[ Energy and the climate in 2017: limited volatility, climate implementation and political uncertainty ]]> 2017-05-22T05:28:48Z

The main factors likely to shape the energy and climate fields in 2017 are: a relatively contained volatility in the prices of oil and the implementation of increasingly ambitious climate policies in a context of political uncertainty.

Original version in Spanish: Energía y clima en 2017: volatilidad contenida, implementación climática e incertidumbre política


The main factors likely to shape the energy and climate fields in 2017 are: a relatively contained volatility in the prices of oil and the implementation of increasingly ambitious climate policies in a context of political uncertainty.


The year 2016 bequeathed Spanish foreign policy some major and pressing challenges in the arena of energy and climate: the swift coming into force of the Paris Agreement, the completion of the rulebook following COP22, the energy and climate uncertainties stemming from Brexit and the Trump Administration, the long-awaited Energy Union Winter Package and an agreement between OPEC and Russia to restrict oil production. Many of these are, in fact, developments that had already emerged by the end of 2016, and thus will to a large extent mark what 2017 brings. The present analysis offers a number of conjectures regarding: (1) the geopolitics of oil prices; (2) the central importance that the evolution of European energy policy will have for Spain; (3) the future of aspirations surrounding the climate; (4) the development and implementation of European and Spanish climate policy; and (5) the opportunities that emerge from the leadership vacuum that the US is expected to leave in international climate talks.


The geopolitics of oil prices

Last year it was suggested that, in light of the demand and supply forecasts, the oil market would continue being affected by an excess of supply likely to keep prices low. From among the highly varied forecasts, a range was quoted for a barrel of Brent that went from US$55.78 (forecast by the US EIA) to US$37 (forecast by the World Bank), limits that did indeed encompass market movements in 2016, which averaged approximately US$45. After collapsing at the beginning of the year, the price of Brent crude recovered with the first tentative signals of intervention from OPEC, eventually exceeding US$50 in the summer. With summer over the price fell rapidly to around US$45, returning at the end of September with the first serious warnings of production cuts announced by OPEC in Algeria.

At the end of November OPEC reached an agreement, the first in eight years, to cut production by 1.2 million barrels a day, to which a group of non-OPEC producers led by Russia later added another cut of 558,000 daily barrels (Russia accounting for 300,000, Mexico 100,000 and Oman, Azerbaijan, Kazakhstan, Malaysia, Equatorial Guinea, Bahrain, Brunei and the two Sudanese republics smaller quantities). Prices rose rapidly in response, ending the year at around US$55 per barrel. The agreement came into force in January 2017 and is valid for six months, extendable for another six. It will be necessary to wait for the end of the first quarter of the year and the data for oil tanker movements to check compliance with the agreement, but various producers, such as Saudi Arabia, Kuwait and Iraq, have made considerable noise about their production cuts during the first weeks of 2017.

The oil price forecasts for 2017 are, as always, highly diverse. Keeping the same sources used in 2016, the range goes from the US$53 forecast by the US EIA to the US$55 forecast by the World Bank. Clearly, other forecasts broaden the scope for increases, some even exceeding US$60, such as those of Merrill Lynch and Bank of America. Other analysts by contrast predict that the rapid response of non-conventional US oil could take price back to below US$50 towards the end of the year. Among the producers, Gazprom forecasts prices in the US$50-55 range for 2017, the Saudi Arabian budget for this year assumes equally conservative prices, and Iran is working on the basis of similar ranges. In a survey carried out by Reuters of 28 analysts at the beginning of December 2016, some days after the OPEC agreement, the forecasts ranged between US$83 and US$50, and the average was US$57.

It appears that there are lower expectations of price volatility, with a tightening in the ranges of the forecasts, above all in a downward direction. The significant volatility in the oil price has been described as one of the main failures in the governance of globalisation, so its eventual mitigation is likely to have highly positive geopolitical and geo-economic effects. There are, however, differences in the forecasts regarding the evolution of oil market fundamentals for 2017. The US EIA predicts that oil supply will continue to outstrip demand until at least 2018, barring seasonal peaks in demand during the summer. By contrast, the International Energy Agency (IEA) in its January 2017 Oil Market Report forecasts a rebalancing of the market in 2017 caused by an excess of demand over supply, and the consequent consolidation of prices.

Be that as it may, 2017 dawns with new questions: will the agreements to restrict production be respected, either by OPEC or the non-OPEC countries? Will they suffice for eliminating over-supply or encourage non-conventional US production to a greater or lesser degree than forecast? What will be the impact of the Trump Administration’s energy policy? Will there be positive geopolitical surprises like a rapid recovery of production in Libya and Nigeria, not subject to OPEC cuts? Or, on the contrary, could negative developments arise in these and other scenarios?

The price forecasts reflect different answers to all these questions. If discipline between OPEC and Russia holds, prices could firm up over the course of the first half of the year. An extension of the agreement covering the second six months, added to the seasonal increase in demand in the summer, could help to drive the price towards the upper end of forecasts. Experience shows that OPEC has serious difficulties in maintaining discipline among its members over long periods of time; moreover, the OPEC/non-OPEC deal, which includes non-OPEC countries with little in common, ranging from Mexico to Brunei, lacks mechanisms for maintaining discipline. In this context, and in light of the fiscal problems constraining many producers and the incentive not to comply with the agreed production cuts, maintaining discipline appears relatively simple for the first half of the year, but less so for the second.

Extending the agreement to the second half of the year would require new negotiating efforts and probably cuts (in response, for example, to the recent growth in Libyan and Nigerian production), plus a new distribution of concessions and obligations. The initial production cuts were announced by various OPEC producers in the first few days of 2017, particularly Saudi Arabia and its Gulf allies. In fact, the Saudi Oil Minister, Khalid al-Falih, announced on 16 January at the World Economic Forum that the agreement might not be extended if prices consolidate production at their current levels, and that he doesn’t ‘lose sleep’ over US producers of shale. At the beginning of February the Director of the National Iranian Oil Company announced in response that Iranian production would exceed 4 mbd by March, without even mentioning the OPEC deal.

In any event, if the agreement is adhered to, it is likely that towards the end of the year the response of the US frackers will restrict the price rise by increasing their output, almost all of it profitable at what would be the higher end of the prices being forecast. If there is any certainty in the Trump Administration’s energy policy it is that it no longer puts any hurdle in the way of expanding oil production and fracking, despite the obstacles erected by Obama in the last days of his government. It should be remembered however that what drives US output stems not so much from regulations as the structure of the market and the price vectors, which in the current environment are much more important than the energy policy of the new president, whose impact on hydrocarbons is expected to be limited.

Although to a lesser extent, other producers may also respond with increases in output, such as Latin American and African deep water producers and North Sea output. Indeed, the OPEC/non-OPEC deal excludes some of the largest oil producers in the world, such as Canada and Brazil, and could encourage the oil reforms envisaged by producers such as Argentina. Over the medium term, the producers in the Middle East are aware of the major reserves of non-conventional hydrocarbons in China (their main customer). They also know that if any country can replicate the US fracking revolution, albeit by different means, that country is China. But in the short term, the challenges for OPEC and Russia will be, first, to maintain the production-cuts deal in the second half of the year; and secondly to seek an exit strategy from the agreement to avoid the collapse in prices that has followed every failed attempt to rig the market fundamentals in a lasting way.

As far as the geopolitical risks are concerned, they seem to have been relegated to a secondary role by the scope of the agreement between OPEC and, essentially, Russia. Perhaps one of the least-noticed aspects of the talks among producers concluding in late 2016 is that the prominent role afforded to Russia seems to offer a sort of ‘geopolitical insurance policy’ against the volatility of oil prices. Russian mediation between Saudi Arabia and Iran in the OPEC negotiations, and the way the conflicts in Syria and Iraq unfold, mitigate the geopolitical risks and demote them to a secondary status.

Russia will also be the focus of US energy policy. The new President and his Secretary of State will need to take decisions on such issues as the continuation or otherwise of sanctions against the Russian oil industry and the nuclear pact with Iran. In the case of the former, it does not seem compatible to lessen sanctions against a country that commits itself to negotiating and fixing production quotas to rig the market fundamentals: it is not necessary to lift sanctions on a state that chooses to sanction itself; or, if they are lifted, at least demand a renouncement of output quotas. In the case of the latter, the OPEC agreement mediated by Russia already restricts the increase of Iranian output, regardless of the Trump Administration’s foreign policy considerations and the importance that Russia plays in them. Meanwhile, Russia has recently acknowledged that the advent of Trump could increase US gas exports to Europe and create a new geo-economic rivalry that the Russian government has hitherto discounted.

The recovery in prices will do something to ease the economic tensions of producer countries, but not enough to avoid the need for continued belt-tightening measures. The political economy characterised by oil prices at around the US$50-60 mark continues posing serious problems to the governments of producer countries, although it enables more gradualist approaches to the reforms that are needed. It should be remembered that Saudi Arabia has announced a record fiscal shortfall, obliging the regime to cut subsidies, double the price of petrol and reduce civil servants’ wages by as much as 20% for high-ranking posts, something unprecedented in the country. The deterioration of the Saudi economy also has implications for Spain, which in 2015 exported more than €3 billion-worth to Saudi Arabia, the seventh-largest market for Spanish exports in that year outside the EU, ahead of Brazil, Japan and South Korea. Venezuela, incapable of halting the decline in its output, is one of OPEC’s traditional hawks, but it seems unlikely that the level of prices being forecast will suffice to stem its serious economic woes.

Such difficulties become more acute among producers engaged in costly ongoing conflicts, such as Saudi Arabia itself (with Yemen), Iraq, Libya and Nigeria. Offering forecasts in the case of Libya is virtually impossible, except that any geopolitical impact was discounted years ago. In any event, the most recent news about Libyan output is positive: in January 2017 it stood at almost 700,000 barrels a day, more than double the 300,000 being produced last September. In Nigeria too it is likely there will be a consolidation of the recovery in production as the government’s management of problems in the Niger Delta improves. Lastly, Algeria remains in a situation of ongoing deterioration, with its economic and energy reforms semi-paralysed due to the uncertainty over President Bouteflika’s succession, but the risks are tending to decline as crude prices stabilise.

From the consumers’ perspective, whether they be countries, companies or individuals, it seems reasonable to accept that oil prices as low as those of the last two years could not last indefinitely; and that, as a consequence, national economies, companies’ strategies and consumers’ decisions will need to adapt to the stabilisation forecast for oil prices. These are likely to remain at levels not too dissimilar to current ones, although perhaps with a certain risk of price rises as the year unfolds. The impact of rising prices was already evident at the beginning of the year with the increase in natural gas prices (partly due to their indexation to oil prices, and partly to the increase in demand caused by the technical shut-down in the French nuclear industry) and the consequent rise in electricity prices.

Climate change in 2016: an eventful year

2016 was characterised by both positive and negative developments in the climate arena. After the diplomatic climax of COP21 and the ratification of the Paris Agreement by China and the US, the Agreement entered into force ahead of COP22 in Marrakesh, thanks to ratification by the EU, among others. It is the first time in the history of the climate talks that an agreement has come into force less than a year after being signed, which indicates the importance of climate change to the global agenda.

Another positive element that accompanied the Paris Agreement coming into force was the passing of the Kigali Amendment to the Montreal Protocol for the gradual elimination of the use of hydrofluorocarbons (HFCs). Progress has also been made in the transport sector. 2016 saw the approval of the global mechanism for offsetting emissions devised by the International Civil Aviation Organisation (ICAO). For its part the International Maritime Organisation (IMO) has adopted a system for collecting data on ships’ fuel consumption and measures related to reducing emissions of greenhouse gases are expected in 2018.

The agreements reached by the international community represent an unprecedented global commitment to a transition towards a low-carbon development model. It is a commitment founded on a decrease in the cost of renewable energies, on better scientific knowledge of the effects of climate change, on business opportunities for the companies that lead the transition towards a low carbon economy, on growing concern about the effects of climate change among the general public and on citizens’ demands for climate initiatives on the part of their governments.

The commitment to climate action has also been joined by the international financial industry, which since 2016 has had a report, piloted by Michael Bloomberg and Mark Carney, on voluntary disclosures relating to the climate risks that companies are exposed to and drawn up by the Task Force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board. Information about exposure to climate risks (and the ability to manage them) will be of immense value to investors and insurers, who will have the information needed to differentiate between investments in businesses that are acquainted with their climate risks and manage them proactively and those that are unaware of them.

The aforementioned progress and commitment indicate that climate action is irreversible, as the international community declared at COP22. However, 2016 was also the first acid test for the Paris Agreement. On 8 November Donald Trump was elected the new President of the US. As the second-largest producer of greenhouse gases, US climate policy is crucial to reducing carbon in the global economy.

Although there is uncertainty about the steps Trump will take at a federal level, the president-elect’s declarations on the climate issue, the appointment of climate-change sceptics opposed to Obama’s climate policy, such as the former Governor of Texas Rick Perry to head the Department of Energy, the Attorney General of Oklahoma Scott Pruitt to lead the Environmental Protection Agency (EPA) and the naming of Rex Tillerson, former Chairman and CEO of Exxon Mobile, as Secretary of State and head of US diplomacy, do not augur well. Indeed, the Trump Administration’s recently-published energy plan (An America First Energy Plan), outlines in the space of barely one page aspirations to increase domestic energy output, liberate the country from OPEC and drastically cut energy regulations, without even mentioning renewable energy or climate change, apart from affirming the Trump commitment to abandoning Obama’s Climate Action Plan.

Moreover, the initiatives that were unveiled in the first two weeks of Donald Trump’s presidency confirm the fears surrounding the new US government’s lack of ambition in the climate field. There are clear signs of a change of direction in US climate policy, such as: the deletion of references to climate change on the White House website; the restrictions imposed on communications and publications released by institutions of such acknowledged international renown as the EPA and the plans to dismantle this institution; the repeal of the law that limited methane emissions from oil and gas exploration and production processes; and the signing of two executive orders to proceed with the construction of two oil pipelines (Dakota and Keystone XL).

It should also be remembered that Trump committed himself during his campaign to revoke the Clean Power Plan, whereby the US undertakes to reduce emissions released from thermoelectric power plants by 32% by 2030 compared to 2005 levels. It is also likely that Trump will ‘cancel’ the Paris Agreement, and he seems set to do this soon. But in any event, according to article 28 of the Paris agreement, the US will not be able to withdraw prior to 2019. Finally, it is expected that Trump is unlikely to honour US financial commitments on climate issues.

The response from scientists, activists and politicians has been swift. Various universities in the US and Canada have been storing climate data on private servers since December. A march for science and against post-factual science policies has been organised for 22 April 2017, Earth Day. It is also worth pointing out that there is likely to be ongoing support for climate policy from individual US states and cities. Moreover, the fall in the costs of renewable energies and the competition from other fossil fuels make investments in coal, for example, increasingly less attractive. That said, despite all the initiatives under way to offset Trump and the relatively limited scope of the measures at a federal level, uncertainty is once again haunting hopes for the climate, potentially delaying the transition to cleaner energy.

An additional annoyance for Spain is the prominence of the role that the Institute for Energy Research will play in US energy policy: some readers may remember this ‘delightful’ Republican think-tank publishing a pamphlet in which it fallaciously concluded that for every post created by renewable energies in Spain, 2.2 had been destroyed in the rest of the economy.

Turning again to the international scene, the domino effect that Donald Trump’s electoral victory could have had on international climate talks –with China, among others, potentially reducing its level of ambition and paralysing negotiations– has not transpired. On the contrary, the international community meeting in Marrakesh sent out a message of unity amid the prospective challenge of climate change. The cause of this retrenchment in the acquired climate commitments may lie in governments’ awareness of the transition that has taken place from an international system of dividing up the mitigation efforts towards a situation in which countries and businesses compete for the opportunities stemming from a low-carbon economy.

A good example of the competition for the opportunities arising from a global energy transition has been provided by China in recent years. The exhaustion of an economic model highly dependent on greenhouse gas emissions, with the undesirable socio-economic and environmental consequences that accompany such a model, is giving way to a new economic model in China, underpinned by the country’s 13th Five-Year Plan (2016-20). China has set a course towards a model that produces lower emissions, competes for the renewable technologies market and bolsters its international standing as a fundamental player, and increasingly important asset, in the climate arena, among other goals. The figures in the renewable field are overwhelming: in 2016 China more than doubled its installed photovoltaic capacity relative to the preceding year (77GW in 2016, compared to 34GW in 2015) and has a third of the world’s wind capacity (more than 145GW of the 433GW installed worldwide in 2015). The alignment of Chinese social, economic and environmental interests is bringing about a change in international climate leadership.

In the European context, one of the potentially destabilising elements for climate policy in 2016 was the UK’s decision to leave the EU. Indeed, the uncertainties about the effects of Brexit on the fight against climate change are considerable. Given that the UK and EU climate policies have evolved in a coordinated manner in the past it may be expected that they will continue to be fundamentally aligned in the future, but Europe has lost a skilful negotiator on the international climate scene. Europe has also lost a (generally) ambitious partner on climate issues, something that lends more relative weight on EU climate decisions to member states that are less proactive on the carbon-reduction front, such as Poland and Italy. The effect of Brexit, while not being devastating to the climate process, could alter and delay the European energy transition. The mid- to long-term effects on the European Union Emissions Trading System (EU-ETS) and on the Effort Sharing Regulation (ESR), which impinges on the so-called diffuse sectors (businesses, residential, transportation and agriculture) are also unclear, and the uncertainties seem unlikely to be resolved in 2017.

As far as European leadership on climate issues is concerned, the situation that arose in 2016 recalled in some respects, all things being equal, the one seen in 2001 when the US failed to ratify the Kyoto Protocol, sowing doubts about the future of the international climate regime. Then, Europe took the lead in the international talks that culminated in the protocol coming into force in 2005. As happened on that occasion, the vacuum the US will create in the international climate talks in 2017 could present a new opportunity for Europe to resume its executive leadership role, this time accompanied by, among others, the other members of the High Ambition Coalition, the Climate Vulnerable Forumand China –on this occasion it will be more difficult for Europe to lead on its own, in part due to the Brexit effect and to the need to reconfigure the European project–.

Foreign policy, energy and climate change: European energy policy and the Winter Package

2016 was an important year for European energy policy, with the approval at the end of November of the Energy Union’s Winter Package. Apart from its somewhat unfortunate name, which the Commission is trying to replace, without great success, with the slightly more palatable Clean Energy for all Europeans (in line with the UN Sustainable Energy for All initiative), the package represents, together with the evolution of oil prices, the other major challenge of 2017 for member states’ energy policies, the companies in the sector and European consumers. The new energy package is a significant transition in the orientation of Europe’s foreign energy policy and the Energy Union itself, which may be summed up by the formulation ‘“from Tusk to Musk’. The Energy Union came into being as an initiative linked to Donald Tusk, the then Polish prime minister and now president of the European Council, aimed at encouraging the diversification of European gas imports from Russia following the succession of Ukrainian gas crises.

By contrast, the Energy Union Winter Package seems to replace the geopolitical strategy of reducing Europe’s dependency on Russian gas imports with one of diversifying its sources of energy towards renewables and reducing reliance on fossil fuels, including natural gas. Its support for renewable energies, especially decentralised ones and electric vehicles, as well as their pan-European regulation and the fostering of intra-European flows of renewably-produced electricity, seem to offer a prospect that differs from that originally envisaged by the Energy Union. The Winter Package thus seems to have more in common with the tech vision of Elon Musk and the plans of his company Tesla than the geopolitical ambitions initially set out by Donald Tusk.

It is unavoidable for Spain to participate actively in this conceptual shift in EU energy policy, which now not only covers the traditional aspects of the secure continuity of supply of hydrocarbons, but also increasingly the geopolitical aspects of the evolution of renewable energy sources, including exchanges of renewably-generated electricity, both within the EU and with its neighbours. A detailed analysis of the Package is impossible given its breadth, and therefore the paragraphs that follow are restricted to highlighting the opportunity it represents for Spanish foreign policy.

The Winter Package entails that the foreign energy policy of the new government will continue being focused in 2017 on the electricity aspects of the Energy Union. This dimension affects top-priority issues for Spain’s European energy policy, ranging from interconnections to the treatment of renewables and cross-border electricity flows, and including the situations of cities and islands regarded as peripheral and the governance of the Energy Union itself. Member states are obliged to submit Integrated Energy and Climate Plans covering 10 years to reach the 2030 targets: for example, how to reach the 15% electricity interconnection target, contribution to the 27% renewables target and 30% efficiency target (assuming the proposal is approved by the Commission), and how to improve the energy security situation. The government will need to submit a draft of its plan to the Commission on 1 January 2018, when a process of planning, monitoring and programmed communication will get under way in parallel with the Paris Agreement.

But the European legislative process in the Parliament and Council begins much earlier, in the first months of 2017 and augurs problems. It is likely that Parliament will demand more ambitious commitments (for example, 40% in efficiency and a more ambitious renewables target) and the Council will focus on the aforementioned agreed targets. The way energy policy is handled, the commitment to consumers and self-generation could also be sources of controversy. From the foreign policy perspective, the government will continue emphasising interconnections with France, but will need to make them manifest in the aforementioned Integrated Plan, which will mark out the rules of the game for the Spanish electricity sector over the course of a decade.

The whole of this process offers Spain a major opportunity in terms of its standing abroad. Possibly for the first time in many years, Spain finds itself in 2017 in a position to contribute constructively and creatively to European energy policy. The new government finds itself with a restructured sector that is freed from the burden of the tariff deficit, with a substantial international reputation, and with a climate policy that is firmly anchored in the Paris Agreement. It seems an ideal moment for raising the pitch of Spanish foreign policy in the energy arena, particularly in Europe. It is important for both the government and the various political parties to be able to overcome their differences at the domestic level, with consensuses emerging such as those related to energy poverty and climate change, in order to focus more attention on the international dimension of energy, at least in the European context. To extend an earlier idea, there is a gulf from Tusk to Musk that may prove to be particularly fertile for Spanish energy interests.

Closely linked to the preceding point, 2016 ended with a joint declaration, agreed on the sidelines of COP22 in Marrakesh, on a roadmap for sustainable electricity trading between Morocco and the EU, signed by the host country, Germany, Spain, France and Portugal. Its aim is to facilitate the exchange of renewable electricity and electrical integration with Morocco. Over the course of 2017 an implementation deal will need to be agreed, the signing of which has been set for COP23. Also in December of last year, at the meeting of Energy Ministers of the Union for the Mediterranean (UfM) in Rome, a ‘regional improvement framework’ was agreed for Euro-Mediterranean energy cooperation. This enables the implementation of joint projects across the three Euro-Mediterranean platforms of gas, electricity and renewables.

The Elcano Royal Institute has consistently emphasised the external benefits for Spanish foreign policy of this type of structural agreement and of establishing an attractive narrative for them. This enables the country to be perceived as Europe’s and Morocco’s comrade in their energy transitions, complementing Spanish advocacy for the interconnections while strengthening energy relations with Morocco. It would be advisable to extend this capacity for cooperation to countries such as Algeria, where Spain could contribute in a major way to establishing a more attractive narrative for Euro-Algerian energy relations. Spain can also rely on other European initiatives, such as the aforementioned UfM platforms for gas, electricity and renewables, and strengthen the activity and visibility of its foreign policy in the energy arena.

European climate change in 2017: implementation and design

Internally, Europe will continue working throughout 2017 on projects to reform the European emissions trading system (EU-ETS), the ESRand the dossier on land-use, land-use change and forestry (LULUCF), which are in a highly advanced stage.

On 15 February the European Parliament will vote on the EU-ETS reform, the main aim of which is to give a clear long-term pricing signal to the decarbonisation market for emission-intensive industries participating in the European emissions rights market. To this end it is necessary to modify the Market Stability Reserve and put forward measures that incentivise the decarbonisation of emission-intensive sectors while avoiding the risk of ‘carbon leakage’. As far as the ESR is concerned, the Commission’s proposal involves a share-out among the member states of the emissions reduction target for the so-called diffuse sectors (a target that involves an emissions reduction of 30% by 2030 compared to 2005 levels). The proposal relating to ESR is subject to changes both in the European Parliament and the EU Council of Ministers, which also have to come to an agreement in order for the Commission’s proposal to prosper. In the context of LULUCF, the Commission’s proposal consists of the member states adopting a legally-binding commitment until 2030 to offset emissions generated by land-use, land-use change and forestry.

Meanwhile, Germany holds the presidency of the G20 until the end of 2017. Two of the priorities of its presidency are the implementation of climate commitments acquired within the framework of the Paris Agreement and the reconciliation and alignment of climate and energy policies as prerequisites for ensuring economic growth.

Domestically, Spain formally ratified the Paris Agreement at the beginning of 2017. Its implementation and the raising of ambitions are now the principal challenges that remain. In this context it is expected that Spain will begin work in 2017 on designing the heralded Climate Change and Energy Transition Law, an Act that is expected to regulate existing and future measures (with 2030 and 2050 in mind) for the fight against climate change. The forthcoming legislation will need to address the complex task of combining the target of the virtually complete decarbonisation of the economy with the demands of the business sector: a sector looking for rules that are predictable and comparable at an international level, as well as economic support that is sufficient to avoid loss of competitiveness in sectors at risk of carbon leakage (off-shoring) vis-à-vis European and international companies.

As far as the outstanding tasks are concerned, in its most recent environmental performance review the OECD recommends that Spain increases the ‘greenness’ of its tax system, withdraws subsidies for diesel and reduces the fiscal pressure on employment. It also emphasises the importance of integrating and coordinating environmental policies across the various institutions, as well as the need to improve the transposition of European regulations. The OECD notes the importance of the transport sector in the country’s total output of greenhouse gases (24% of emissions in 2014), and underscores the opportunities for emission-reduction in this sector, for example through electrification. Measures in the field of energy efficiency, the development of renewable energies and opportunities in the construction sector are also mentioned as areas where there is scope for improvement.

In terms of foreign policy in the climate arena, the vacuum created by the Obama Administration’s departure from international climate talks and the reconfiguration of the EU in the wake of Brexit provide Spain with an opportunity to increase its presence and leadership on the international climate stage. In this it can rely on the backing of the Spanish public, because once again, as they have been doing since 2011, Spaniards have identified climate change as the second most important issue in foreign affairs after the fight against jihadist terrorism.

The tools available to the government to increase the Spanish presence on the global climate stage include, among others, institutions such as the Ibero-American Network of Climate Change Offices (RIOCC), which has the potential to be replicated in other geographical areas, and climate-related funding. Such funding will amount to €900 million annually by 2020 if the commitments announced by the government are kept. The additional nature of the funding, as well as the inclusion of the recipients’ requirements in managing the funding, will help to reinforce Spain’s image as a country that is committed to international mechanisms of climate solidarity.


2017 poses some major challenges for Spanish foreign policy in the energy arena. First, the majority of forecasts point to a stabilisation of oil prices at a level not dissimilar to those that currently prevail, although everything will depend on how united OPEC manages to remain in a year that its members are likely to perceive as eternal. This represents a wake-up call from the positive supply-side impact that has benefitted the Spanish economy in the last two years and was never going to last indefinitely, something Spain has already experienced in the form of rising electricity prices in the first few weeks of the year. In addition, the partial recovery of prices eases the tensions among such important suppliers for Spain as Algeria, Nigeria and Saudi Arabia, although it does not reduce the need to continue with economic reforms and fiscal tightening.

The second major external energy-related challenge of 2017 will be to contribute to the debate about the new European electricity and renewables package, and draw up the Spanish plans that the new regulations require. It is also important to maintain a proactive capability on the Euro-Mediterranean energy stage: making headway on a new renewable exchanges project with Morocco and clearing up doubts about the third electrical interconnection; contributing with ideas for renewing the European energy relationship with Algeria; and, in general, trying to raise the commitment and visibility of EU energy initiatives.

But apart from these major energy vectors, 2016 and 2017 are also years of change in the micro-geopolitics of energy to be resolved between new entrants and incumbents, and between the former and consumers (and ‘prosumers’, whether existing or potential). Conceptual factors carry more and more weight in consumers’ decisions and technology broadens their options. One of the milestones that passed virtually unnoticed in 2016 was that, according to International Energy Agency, 2015 saw a turning point for renewable energies, which in terms of installed capacity overtook coal for the first time.

The Trump administration will be seen in action in 2017 and the early decisions indicate a 180-degree about-turn in US climate policy. The international financial sector will benefit from a guide, namely the Task Force on Climate-related Financial Disclosures (TFCFD) report, to providing information about climate risks and their management, information that will have an increasing impact on investors and insurers. In the EU, resolute headway will be made on reforming the ETS, the ESR and the dossier on LULUCF, shaping the route to be taken by European climate policy in the medium term. Negotiations will begin in Spain to lay the groundwork for the Climate Change and Energy Transition Law, with the 2030 and 2050 horizons in view. Another eventful year on the climate front is thus to be expected.

Apart from the major EU targets in the field of energy and climate policy for 2030 (27% in renewables, 30% efficiency –if the Commission’s proposal is accepted– 40% decarbonisation and 15% interconnections), in 2016 it emerged that in 2017 Google will become 100% renewable, beating both Apple and Facebook to this prize; and that Tesla, not content with entering the solar roof and large battery markets in 2017, wants to build a million cars in 2018. It is not easy to specify exactly when the tipping point will come in the transition towards a low-carbon economy, but perhaps 2016 and 2017 are likely candidates.

Gonzalo Escribano
Director of the Energy Programme at the Elcano Royal Institute
| @g_escribano

Lara Lázaro
Senior analyst, Elcano Royal Institute
| @lazarotouza

1 In other words, that climate funding is in addition to official development aid, rather than siphoning off funds from development projects for the fight against climate change.