CNE Madrid Bureau: On Our Radar in 2022

CNE Madrid Bureau: On Our Radar in 2022

Published on January 18, 2022 / Leer en espa√Īol

Director, Madrid Policy Bureau

The beginning of a new year is always a good moment to pause for reflection, so we will take this opportunity to outline some of the global discussions that we will be following closely from Spain and that may shed light on key issues for Puerto Rico during this coming year.

The Price of Electricity and the Structure of the Electric System

Price increases in the electric bill are not exclusive to Puerto Rico. This year, Spain broke a disastrous record when the price of electricity reached a historic high: in December we paid over 50c euro per kw/hour in some time slots. This has ignited an important debate on fundamental aspects of the electric system:

  • The risks of continuing to rely on natural gas – in Europe, the price of natural gas increased six-fold during 2020. While renewables account for more than half of Spain’s electric generation capacity, in recent years the country has paradoxically increased its consumption of natural gas for electricity generation as it has moved to replace coal-fired generation with natural gas. The dramatic increase in the price of natural gas has led Spain to accelerate the transition to renewable energy sources: the country will devote 40% of its allocated European post-pandemic recovery funds to implement the so-called green or ecological transition. This process will undoubtedly provide lessons for Puerto Rico and for the reconstruction/transformation of the island‚Äôs energy system.
  • The costs of the transition to renewables – Over the past few years, the cost of electricity produced from renewable energy sources has become dramatically lower worldwide: it is increasingly cheaper than that from fossil fuels (see the report from the International Renewable Energy Agency here). However, the process is not devoid of short- and medium-term costs; in Europe there are ongoing discussions ‚Äď with no consensus so far – on how to minimize their impact.¬† The carbon emissions tax – implemented in 19 European countries as a way to incentivize the decarbonization of their economies – was responsible for half of the increase in the price of electricity in Spain during 2021, according to a report by the Bank of Spain. Similarly, the country has yet to make significant investments in energy storage capacity. This has opened a debate on how to minimize the social costs of the energy transition, particularly among the most vulnerable consumers and industry sectors, something that could have important lessons for the island.

Public Spending and Fiscal Rules

In 2016, CNE proposed the adoption of local fiscal rules as an alternative to the imposition of a fiscal control board. Now that the debt restructuring process is coming to an end and the issue of fiscal responsibility will come back into focus, the ongoing debate in Europe could inform the discussion in the island.

Fiscal rules have been one of the mainstays of the European Union’s (EU) fiscal governance system. With the onset of the pandemic in 2020, however, the EU put fiscal rules on hold. The hiatus has served to intensify calls – led by France and Italy – to modify the system so that fiscal discipline, public spending regulation and debt control do not become straitjackets. Among the proposals are: simplifying the rules; strengthening the institutions in charge of compliance; making the fiscal space more flexible to allow for long-term structural investments; and ensuring its counter-cyclical use, creating margins during the peaks of the economic cycle in order to generate buffers for periods of deceleration.

For Spain – like for Puerto Rico – the way in which the rules are structured and the fiscal space they provide is crucial. Since the 2008 crisis, the country has been dealing with a reduction in the public capital stock that, according to the Economic and Social Council, must be remedied with increases in public investment in both infrastructure and the knowledge pool. At the same time, the expenses related to the protection of businesses and workers during the pandemic caused a significant increase in public debt (to 122% of Gross Domestic Product/GDP), which would require an extraordinary fiscal reduction effort if Europe were to enforce the current fiscal rules once again; these allow a debt level of only 60% of GDP.

Reconstruction and Transformation Programs

Spain – like Puerto Rico – is set to receive a massive influx of European post-pandemic reconstruction funds: ‚ā¨60 billion in non-refundable transfer payments to boost the country’s ecological and digital transformation.¬† During the year ahead, many of the questions that have been raised in the Spanish context and are relevant to Puerto Rico will be elucidated: does the country have the capacity to absorb an influx of funds of such a magnitude ? Will the strategic projects outlined by the government succeed in correcting the economy‚Äôs structural deficiencies?

Last December, during the CNE Growth Policy Summit 2021, we discussed this incipient debate with √Āngel de la Fuente, Executive Director of Spanish think-tank FEDEA.¬† De la Fuente outlined some initial lessons that Puerto Rico can draw from Spain and the country‚Äôs efforts to transform its economy. These include: transitioning away from activities that have lost competitiveness; taking advantage of the new opportunities offered by a changing environment; and outlining plans in conjunction with social actors.

Click on the following image to hear √Āngel de la Fuente
(video in Spanish)