July 11, 2013 / 8:17 PM / 5 years ago

UPDATE 2-Spain energy overhaul set to be approved on Friday

By Andrés González and Jose Elías Rodríguez

MADRID, July 11 (Reuters) - The Spanish government will discuss and likely pass on Friday a major reform of the energy sector to plug a growing gap between power prices and generation costs, three sources with knowledge of the matter said on Thursday.

A 26 billion euro (US$33 billion) deficit created by years of mismatched regulated prices and costs has become a growing headache for recession-hit Spain. It is likely to slash renewable energy subsidies as part of the reforms.

Two of the sources, speaking on condition of anonymity, said the energy ministry would present two texts for approval at the weekly cabinet meeting.

One will detail the new regulation of the electricity sector and the other will share the burden of the deficit between utilities, taxpayers and consumers, the sources said.

They also said that renewable energy producers such as Acciona SA and Abengoa SA were expected to suffer most from the reform.

Electricity company Iberdrola SA, power grid operator Red Electrica Corporacion SA, as well as Endesa SA and Gas Natural SDG SA are also expected to take a hit.

The government briefed the utilities on Thursday on the measures and their impact on the industry.

However, last minute changes are likely as a meeting of senior officials who prepare the weekly cabinet meeting’s decisions was cancelled on Thursday and several ministers were still at odds about who should foot the bill.

Subsidies for wind and solar electricity generation, as well as for providing power to remote islands, have been largely responsible for the tariff deficit.

Utilities have funded the shortfall until now and the government has been gradually paying them back through the issuance of state-backed bonds.

The treasury ministry, keen to control any extra spending as it struggles to meet tough deficit targets agreed with the EU, refuses to finance more than 350 million euros of the 4 billion to 5 billion euros a year that the deficit is expected to keep growing unless action is taken, the sources said.

Tensions escalated within the government this week when the treasury ministry dismissed assertions from the energy ministry that a deal had been struck on how the energy deficit would be financed.

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