Green light for lower electricity prices. Madrid approved Friday by decree the limitation of the prices of the gas which enters the electricity production, in order to reduce the note of electricity of the households like industries. “For once, it will not be the same people who will pay,” said the Minister for Ecological Transition, Teresa Ribera, explaining that the drop in tariffs will be financed by a reduction in the profits of energy companies.
This new system, bitterly negotiated with Brussels , will enter into force simultaneously in Spain and Portugal. It recognizes “the Iberian exception” and sets a precedent by allowing the two countries to opt out of the European tariff system. The European Commission has indeed opened the door to this special scheme, recognizing that the lack of interconnections towards France. Flows from one side of the Pyrenees to the other represent only 3% to 5% of the installed capacity in Spain. This isolation prevents the Iberian Peninsula from exchanging and having access to renewable energies from northern Europe, which forces it to function, in fact, like an island.
Reduce the electricity bill from 25% to 20%
The Iberian mechanism provides for a cap on the price of gas that goes into electricity production. Gas producers will be compensated and will receive the difference between the market price and the capped tariff at which it will be introduced into the electricity mix. This compensation will be financed by a reduction in the extraordinary profits received by the electricity companies thanks to the escalation of prices. “Only the gas will be paid at the price of gas”, explained the minister, insisting on the fact that the surge in prices must stop contaminating the price of the rest of the energies mobilized, nuclear or renewable.
Madrid’s objective is to reduce the bill for households by 25 to 30%, but also for SMEs and industries, which have seen their production costs soar since the summer of 2021. With an increase such that certain sectors that are large consumers of energy had to resolve to adjust the activity of their Iberian sites particularly in the steel industry.
According to the rules defined with Brussels, Spain and Portugal will be able to exceptionally withdraw from the European energy market for at least twelve months.
Capped at 40 euros per MWh over six months
The price of gas will be capped at 40 euros per MWh during the first six months, before rising gradually to reach an average of 50 euros per MWh over the year, or half of what it had cost over the past three months. The Spanish government calculates that the system will result in a direct reduction of 30% in the electricity bill, with a megawatt hour at 130 euros on average, instead of 210 euros in recent months.
This mechanism ran up against frontal opposition from the main energy companies for months, Iberdrola and Endesa in the lead. Hostile to the idea of seeing the profits from the high volatility of gas reduced, they hoped to maintain the European marginal pricing system, which means that all energy is sold at the price of the most expensive technology, namely that of power plants gas.
Substantial profits
The profits were particularly significant for those, since in the year 2021, between wind, hydraulic and solar, renewables provided 46.7% of production. Until now, Spanish consumers had not taken advantage of these investments, which were supposed to generate green energy at a lower cost. The implementation of the new tariff system should change the situation. It is a victory for the Minister for the Ecological Transition, Teresa Ribera, who for almost ten months has fought to demand from Brussels a reform of the European electricity market .
“Consumers do not understand why efforts to deploy renewable energy do not translate more directly into lower electricity bills,” she insisted last summer in a letter to the Commission. While waiting for the overhaul of the European system, it has at least obtained an Iberian exception. Hoping that it will have a knock-on effect in reducing inflation, which has reached almost 10% last March .