Commission Decision (EU) 2025/1014of 16 May 2025granting the Kingdom of Spain a derogation from certain provisions of Regulation (EU) 2019/943 of the European Parliament and of the Council and of Directive (EU) 2019/944 of the European Parliament and of the Council as regards the Balearic Islands(notified under document C(2025) 3174)(Only the Spanish text is authentic)(Text with EEA relevance)

(55) Regarding Article 6, Articles 7(1), 8(1) and (4), Articles 9, 10 and 11, Spain highlights that although the electricity system in the NPT is governed by a dispatch system that operates in a way similar to the Union electricity markets, for example with daily and intraday dispatches, it constitutes a regulated system. The purchase price is based on the mainland price and not on the recognised costs incurred by generators in carrying out their electricity generation activities, including the balancing services. On this basis, Spain requests a derogation from Article 6, Articles 7(1), 8(1) and (4), and Articles 9, 10 and 11 of Regulation (EU) 2019/943, since there is no balancing market in the NPT, including the Balearic Islands, and neither is there the possibility of integration with the Union day-ahead and intraday markets due to their limited connection with mainland Spain.

(56) With regard to Article 7(1) and Article 8(1) and (4) of Regulation (EU) 2019/943, Spain notes that due to the isolated nature of the NPT, dispatches are operated independently of the mainland and Union markets – aside from the reference price for the purchase of energy being based on the mainland price – with the dispatches being based on hourly schedules.

(57) Likewise, in accordance with the above, the integration of forward markets, technical bidding limits and the value of lost load referred to in Articles 9 to 11 of Regulation (EU) 2019/943 are considered by Spain as not applying to dispatches in the NPT.

5.3.2.2.

Assessment

(58) Concerning the request for derogation from Article 3, first paragraph, of Regulation (EU) 2019/943, the Commission considers that:

the reasons set out in recitals 10 to 13 currently entail that electricity prices in the Balearic Islands are not formed following a market-based approach but via a special regulated mechanism whereby the system operator carries out the generation dispatch for each of the NPT, and a derogation from Article 3, first paragraph, points (a), (b), (e), (k), of Regulation (EU) 2019/943 is justified;

the reasons set out in recitals 10 to 13 currently entail that there is no forward market in the Balearic Islands and the system operator’s dispatch involves weekly, daily, intraday forecasting as well as deviations in real time, and a derogation from Article 3, first paragraph, points (o) and (p), of Regulation (EU) 2019/943 is also justified;

while acknowledging that the current regulated system and particular characteristics of the Balearic Islands might render more difficult the development of more flexible generation, low carbon generation and more flexible demand, the application of the market rules is still required to incentivise their development to the extent possible. Thus, the Commission considers that a derogation from Article 3, first paragraph, point (c), of Regulation (EU) 2019/943 is not justified;

(63) Article 16(1) and (2) of Regulation (EU) 2019/943, which contain general principles regarding congestion management, apply to the Balearic Islands because those principles provide guarantees to market participants that the TSO is to address congestion problems with non-discriminatory market-based solutions and use transaction curtailment procedures only in emergency situations. Hence, the Commission considers that a derogation from Article 16(1) and (2) of Regulation (EU) 2019/943 is not justified.

5.3.4.

Chapter IV of Regulation (EU) 2019/943: Resource adequacy – Articles 20(3) to (8), Article 21(7) and (8), Article 22(1), points (f) and (h), Article 22(2), (3) and (5), and Article 25(2) to (4)

5.3.4.1.

The Application

(64) Spain explains that, due to the geographical isolation of the NPT resulting from the low degree or lack of connection to the mainland, the resource adequacy assessments carried out by the system operator for each of the NPT are independent, and they are not integrated into the European resource adequacy assessment or into the Spanish mainland resource adequacy assessment. Therefore, Spain considers that some of the provisions in Chapter IV are not applicable to the NPT. Spain underlines nevertheless that the current national rules aim, in so far as possible, to provide for an equal treatment between the NPT and the mainland market, for example, as regards the levels of security of supply or the methodology for carrying out resource adequacy assessments.

(65) Spain argues that adequacy in the NPT is ensured by the specific mechanism for allocating new capacity set out in Royal Decree 738/2015 as described in recitals 22 to 24. Spain considers that this mechanism should be maintained given the unique nature of the NPT, and thus requests for a derogation from Articles 20(3) to (8), Article 21(7) and (8), Article 22(1), points (f) and (h), Article 22(2), (3) and (5), and Article 25(2) to (4).

(66) Spain argues that the resource adequacy assessments in the NPT comply with the principles included in Article 20(1) and (2) of Regulation (EU) 2019/943. Spain further explains that where adequacy concerns are identified, those are tackled with a call for a competitive bidding procedure (as set out in Royal Decree 738/2015) combined with the assessment of auctions of capacity of renewable origin. These are procedures for which, according to Spain, the requirements in Article 20(3) to (8) of Regulation (EU) 2019/943 cannot be applied.

(67) Spain explains that the provisions included in Article 21(7) and (8) of Regulation (EU) 2019/943 are not compatible with the mechanism set out in Royal Decree 738/2015. It states, however, that for any future new capacity mechanisms the requirements in Article 21(7) and (8) of the Regulation will apply.

(68) Spain notes that the mechanism set out in Royal Decree 738/2015 is also incompatible with the following provisions of Regulation (EU) 2019/943:

Article 22(1), point (h), which sets that capacity mechanisms must be open to the participation of all resources that can provide the required technical performance, because according to Spain the mechanism is applied only to dispatchable installations;

Article 22(2), which sets a list of design features that strategic reserves must comply with, since according to Spain it makes reference to balancing markets that do not exist in the NPT;

Article 22(3), which sets additional requirements to capacity mechanisms other than strategic reserves, since according to Spain the existing mechanism does not comply with those requirements: the retribution does not tend to zero when the capacity level supplied is adequate, the retribution is not only linked to the capacity and the capacity obligations are not transferable;

Article 22(4), which incorporates CO2 emission limit requirements on capacity mechanisms, since according to Spain the current mechanism does not include any requisite of this nature, but it does allow to set technical limitations;

Article 22(5), which requires the adaptation of capacity mechanisms that apply on 4 July 2019.

(69) Spain explains that the reliability standards for the non-peninsular territories are not aligned with the requirements in Article 25(3) of Regulation (EU) 2019/943, since they do not take into account the cost of new entry. Spain adds that even if the standards were the same, they might evolve to stricter values at a different pace, based on which they request a derogation from Article 25(2) to (4) of Regulation (EU) 2019/943.

5.3.4.2.

Assessment

(70) Article 20 of Regulation (EU) 2019/943 addresses resource adequacy in the internal market for electricity and sets out obligations for Member States on how to monitor resource adequacy and how to act when resource adequacy concerns are identified, namely by developing an implementation plan with the aim of removing regulatory distortions, ensuring market-based balancing procurement, or removing regulated prices, among others. The Commission notes that, as part of the State aid process, Spain has already developed and submitted to the Commission an implementation plan in accordance with Article 20(3) and (4) of Regulation (EU) 2019/943. In accordance with Article 20(5) of Regulation (EU) 2019/943, the Commission has issued an opinion on the Spanish implementation plan on 13 March 2024. Therefore, the Commission considers that a derogation from Article 20(3) to (8) of Regulation (EU) 2019/943 is not justified.

(71) Article 21(7) of Regulation (EU) 2019/943 was repealed by Regulation (EU) 2024/1747 of the European Parliament and of the Council

Regulation (EU) 2024/1747 of the European Parliament and of the Council of 13 June 2024 amending Regulations (EU) 2019/942 and (EU) 2019/943 as regards improving the Union’s electricity market design (OJ L, 2024/1747, 26.6.2024, ELI: http://data.europa.eu/eli/reg/2024/1747/oj).

. Therefore, it no longer applies to the NPT. With regards to the request to derogate from Article 21(8)

As amended by Regulation (EU) 2024/1747.

of Regulation (EU) 2019/943, the Commission notes that while this provision no longer specifies that capacity mechanisms are to be temporary, it sets out that capacity mechanisms are to be approved by the Commission for no longer than 10 years. Moreover, it is not possible to predict the evolution of the electricity system of the Balearic Islands over time. Accordingly, the duration of the regulated remuneration mechanism set out in Royal Decree 738/2015 should be limited to the period up to 31 December 2025 as approved in the case of the Balearic Islands under State aid decision in case SA.42270.

(72) Article 22 of Regulation (EU) 2019/943 sets out the design principles applicable to capacity mechanisms. The Commission considers that a derogation from Article 22(1), points (f) and (h), of Regulation (EU) 2019/943 applicable after the expiration date of the regulated remuneration mechanism set out under the State aid decision in case SA.42270 would hinder the transition towards renewable energy, increased flexibility, energy storage, electromobility and demand response as these provisions aim to allow the participation by all technologies on a competitive basis. Therefore, the Commission considers that a derogation from Article 22(1), points (f) and (h) is not justified. This should be without prejudice to commitments and contracts concluded with regards to the Balearic Islands under the remuneration mechanism in Royal Decree 738/2015 as approved under the State aid decision in case SA.42270.

(73) Based on the information provided by Spain (recital 68), the Commission considers that a derogation from the requirements in Article 22(2) of Regulation (EU) 2019/943 is justified because the specific design requirements for strategic reserves are intrinsically linked to the establishment of a well-functioning balancing market. Conversely, a derogation from Article 22(3) of Regulation (EU) 2019/943 is not justified because the specific design requirements for capacity mechanisms are intended to apply independently of a sufficiently developed balancing market.

(74) With regards to the request for derogation from Article 22(5) of Regulation (EU) 2019/943, the Commission considers that a derogation is not justified given that Article 22(5) of that Regulation is not applicable to capacity mechanisms approved after 4 July 2019.

(75) Regarding Article 22(4) of Regulation (EU) 2019/943 which sets out the CO2 emission limit requirements on capacity mechanisms, the Commission considers that the CO2 emission limit requirements are not applicable to the current regulated remuneration mechanism approved under State aid decision in case SA.42270, in light of the small size of the electricity system of the Balearic Islands, the constraints linked to obtaining the necessary environmental permits for new generation capacity and of the higher need for dispatchable generation to ensure the integration of renewables in the Balearic Islands and guarantee security of supply. The Commission considers that a derogation from Article 22(4) of Regulation (EU) 2019/943 applicable after the expiration date of the regulated remuneration mechanism set out under the State aid decision in case SA.42270 would hinder the transition towards renewable energy, increased flexibility, energy storage, electromobility and demand response as these provisions aim to allow the participation by all technologies on a competitive basis. Therefore, the Commission considers that a derogation from Article 22(4) of Regulation (EU) 2019/943 is not justified. This should be without prejudice to commitments and contracts concluded with regards to the Balearic Islands under the remuneration mechanism in Royal Decree 738/2015 as approved under the State aid decision in case SA.42270.

(76) In the Commission’s view, based on the explanations provided by Spain (see recital 69) a derogation from Article 25(2) to 25(4) of Regulation (EU) 2019/943 for the operation of the electricity systems in the Balearic Islands is not justified. This should be without prejudice to commitments and contracts concluded with regards to the Balearic Islands under the remuneration mechanism in Royal Decree 738/2015 as approved under the State aid decision in case SA.42270.

5.3.5.

Derogation from Articles 14 to 17, 19 to 27, 35 to 47 of the Regulation (EU) 2019/943 for the mechanism in Royal Decree 738/2015

(77) In its Application, as amended by the second set of clarifications sent by Spain on 17 January 2022, Spain stated that for the existing mechanism in Royal Decree 738/2015 a derogation from Articles 14 to 17, 19 to 27, 35 to 47 of the Regulation (EU) 2019/943 is needed. The Commission deems that such an ample derogation is not necessary to ensure its application. The Commission view is that only the derogations stated in the sections above are justified.

5.4.

No obstruction to the transition towards renewable energy, increased flexibility, energy storage, electro-mobility and demand response

(78) Pursuant to Article 64(1), fifth subparagraph, of Regulation (EU) 2019/943 and Article 66(2) of Directive (EU) 2019/944, a derogation decision is to ensure that it does not obstruct the transition towards renewable energy, increased flexibility, energy storage, electro-mobility and demand response.

(79) As regards the transition towards renewable energy and increased flexibility (including demand response) and energy storage, it is important to note that well-functioning forward, day-ahead, intraday and balancing markets, in line with the requirements set in Regulation (EU) 2019/943 and Directive (EU) 2019/944, should provide the necessary dispatch and investment signals to maximise the potential development of those technologies. By way of example, the development of demand response that can be activated in periods when the electricity system of the Balearic Islands is under stress in principle would be achieved more easily in a system where the demand prices reflect the hourly situation of generation in the Balearic Islands, instead of that of the mainland generation. This does not automatically prevent developments of demand response or other forms of flexibility in the current regulatory setting. However, it cannot be excluded that the derogation decision may have a negative impact on such potential developments.

(80) On the other hand, Article 64 of Regulation (EU) 2019/943 does not require that derogation decisions maximise the potential for flexibility or energy storage. A derogation under Article 64 of that Regulation only aims to ensure that it does not obstruct such transition. In other words, the derogation must not prevent developments which, without the derogation, would occur naturally. It is unlikely that, absent the derogation, well-functioning forward, day-ahead, intraday and balancing markets would develop in each of the electricity systems in the Balearic Islands. This is due to the challenges linked to the operation of NPT, the very low levels of competition in the generation segment, and the low degree of connection to the mainland market described in section 2. It is however necessary to ensure that once the conditions for the development of functioning wholesale markets are present, the derogations are phased-out. This is why the Commission is setting out in this decision a limited derogation period and strict conditions for a prolongation of the derogation, as set out in section 5.5 below.

(81) The derogation does not appear to have noticeable impact on electromobility.

5.5.

Duration of the derogation and conditions aiming to increase competition and integration with the internal market for electricity

(82) Article 64 of Regulation (EU) 2019/943 and Article 66 of Directive (EU) 2019/944 expressly set out, as regards small connected systems, that the derogation is to be limited in time and that it is to be subject to conditions aiming to increase competition and integration with the internal market for electricity.

(83) Regulation (EU) 2019/943 and Directive (EU) 2019/944 provide for a mandatory limitation for several purposes. First and foremost, they assume that the general regulatory framework can be applied to all situations in the internal market, and that such a general application is beneficial for society. While Article 64 of Regulation (EU) 2019/943 recognises that derogations may be required for specific situations, these derogations are susceptible to increase complexity of the overall system and can constitute barriers to market integration also in neighbouring areas. Furthermore, the justification of the derogation is generally based on the technical and regulatory framework at the time, and on a given network topology. All these situations are bound to change. Finally, it is important for market participants to be able to predict regulatory changes sufficiently in advance. Thus, all derogations need to be limited in time.

(84) The new cables increasing the connection between the Balearic Islands and the Spain’s mainland are expected to become operational by the end of 2030. Once these cables start to operate, the regulatory framework applicable to this territory should be amended, this territory should be incorporated to the mainland electricity market and the requested derogations should be phased out. Spain argues that once that the cables are commissioned, additional time will be needed in order to incorporate these territories to mainland market rules, and to make the necessary regulatory changes and testing. Following this, Spain requests the derogations for the Balearic Islands at least until 2030.

(85) In light of the reasons put forward by Spain, the Commission considers proportionate to grant the derogations for the Balearic Islands until 12 months after the day the new cable becomes operational.

(86) To ensure the timely phase out of the requested derogations, by six months after the day the new cables between the Balearic Islands and Spain’s mainland are commissioned, Spain is to provide to the Commission a clear plan detailing all the regulatory and system changes needed in order to incorporate the Balearic Islands to the mainland electricity market. The plan is to clearly identify the different actions required and include a timeline identifying the most notable milestones.

HAS ADOPTED THIS DECISION:

Article 1

A derogation is granted to the Kingdom of Spain from the provisions of Article 3, first paragraph, points (a), (b), (e), (k), (o) and (p), Article 6, Articles 7(1) and 8(1) and (4), Articles 9, 10, 11, Article 22(2) of Regulation (EU) 2019/943 and of Article 40(4) to (7) of the Directive (EU) 2019/944 as regards the Balearic Islands.

Article 2

The derogation granted under Article 1 shall apply until 12 months after the day the new electricity cable interconnecting the Balearic Islands with mainland Spain becomes operational.

Article 3

This Decision is addressed to the Kingdom of Spain.

Done at Brussels, 16 May 2025.

For the Commission

Dan Jørgensen

Member of the Commission