OREANDA-NEWS. Fitch Ratings says it sees limited risk in the short term of a reversal of recently implemented electricity and gas market reforms in Spain, even when considering the possibility of a new coalition government that may be reliant on political parties with more radical proposals for the energy sector.

However, political risk remains a key sector driver, particularly if radical energy proposals gain wider acceptance in parliament; pending some regulatory updates, mainly related to liberalised electricity activities; and considering the absence of an independent Spanish regulator.

In our view, regulated energy businesses - electricity and gas transmission and distribution - face lower political risk given that current regulatory periods for these activities run until 2019 and 2020, respectively. We also see the natural gas sector being less exposed to political risk as the promotion of natural gas in the country is an important lever to reach European decarbonisation targets - a view that is generally shared by all political parties.

Fitch views energy reforms, mostly implemented under the Partido Popular (PP) government, as positive for the sustainability and predictability of the gas and electricity sectors despite cuts to the remuneration of utility companies. While those could now be subject to further parliamentary discussion, we see limited risk of them being reversed in the short term given the solid legal framework underpinning these reforms (ie parliamentary majority approval would be required to revoke them) and the demonstrated success on the resolution of structural tariff deficits in Spain.

However, we see potential intervention on specific issues (for example in distributed generation or vulnerable customers) where there could be less acceptance of current legislation or where reviews are pending (ie wholesale market review, national coal plants subsidies, capacity payments, generation taxes or nuclear phase-outs).

The Podemos party supports the most radical energy proposals, including 100% renewable generation capacity by 2050 (ahead of EU targets), gradual coal and nuclear plants closure, derogation of the current utility-friendly royal decree on distributed generation, higher benefits for vulnerable customers (with additional costs borne by utilities) and the end of "windfall revenues" for hydro and nuclear plants. We see most of these proposals as negative for utility companies' cash flows. However, we believe that the Podemos party (20% of the seats in Parliament) would compromise in the event of a coalition government being formed.

Over the long-term, Fitch would look for Spain to define an energy policy that includes a road map to accomplish (or exceed) EU targets on renewables generation, accompanied by adequate remuneration frameworks to attract investments and adequate guarantees for security of supply. We continue to focus on new developments that may threaten the resolution of the tariff deficit in the sector.

If all attempts to form a new governmentby May fail, a new election would be called in June. If a June election re-run fails to deliver a decisive outcome, protracted uncertainty could damage economic confidence, reverse the current benign macro-fiscal dynamics and delay pending regulatory issues, resulting in a worsening operating environment for utilities.