Electricity: Spain and Portugal fall out of the European system

Green light to reduce electricity prices. Madrid approved on Friday a decree capping the price of gas, which is included in electricity generation, in order to reduce the cost of electricity for households such as industry. “This time it will not be the same people who will pay,” said Ecological Transition Minister Teresa Ribera, explaining that the tariff cuts will be funded by cutting the profits of energy companies.

This new system, which is being fiercely negotiated with Brussels, will come into force simultaneously in Spain and Portugal. It recognizes the “Iberian exception” and sets a precedent by allowing the two countries to abandon the European tariff system. The European Commission has indeed opened the door to this particular scheme by acknowledging the lack of linkage with France. Flows from one side of the Pyrenees to the other account for only 3% to 5% of installed capacity in Spain. This isolation prevents the Iberian Peninsula from sharing and accessing renewable energy from Northern Europe, forcing it to function essentially like an island.

We reduce the electricity bill from 25% to 20%.

The Iberian mechanism provides for limiting the price of gas, which is used to generate electricity. Gas producers will be compensated and receive the difference between the market price and the cap tariff at which it will be included in the electricity mix. This compensation will be financed by reducing the extraordinary profits generated by the electricity companies thanks to the increase in prices. “Only gas will be paid at the price of gas,” the minister explained, insisting that the price hike should stop polluting the price of the rest of the mobilized energies, whether nuclear or renewable.

Madrid’s goal is to cut bills for households by 25-30%, as well as for SMEs and industrial enterprises, whose production costs have risen sharply since the summer of 2021. decide to develop their Iberian sites, especially in the steel industry.

Under the rules agreed with Brussels, Spain and Portugal will be able, as an exception, to withdraw from the European energy market for at least twelve months.

Limited to 40 euros per MWh for six months.

The price of gas will be capped at €40/MWh for the first six months and then gradually increased to an average of €50/MWh over the course of the year, which is half the price for the last three months. The Spanish government has calculated that the system will lead to a direct reduction in electricity bills by 30%, with a megawatt hour costing an average of 130 euros instead of 210 euros in recent months.

This arrangement faced direct opposition for several months from major energy companies led by Iberdrola and Endesa. Hostile to diminishing profits from the high volatility of gas, 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 the price of power plants. .

Substantial profit

The gains for them have been particularly significant, as renewable energy, including wind, hydraulic and solar, accounted for 46.7% of production in 2021. So far, Spanish consumers have not taken advantage of these investments, which were supposed to produce green energy at a lower cost. The introduction of a new tariff system should change the situation. This is a victory for Teresa Ribera, Minister for Ecological Transition, who fought for nearly ten months to demand that Brussels reform the European electricity market.

“Consumers don’t understand why renewable energy efforts don’t more directly lead to lower energy bills,” she insisted last summer in a letter to the Commission. Pending a major overhaul of the European system, she at least received an Iberian exemption. Hoping that this will have a domino effect and reduce inflation, which reached almost 10% in March last year.