The Council of Ministers approved at an extraordinary meeting this Friday an expected cap on natural gas electricity generation to lower electricity bills. This came almost 50 days after the European Commission adopted the so-called “Iberian Decision” and after several weeks of negotiations with Brussels and Portugal, where it would simultaneously apply to wholesale electricity market integration. The Iberian Peninsula.
A “very extraordinary measure”, according to government spokesman Isabel Rodríguez, which will “achieve the very important goal of capping the price of gas and thereby lowering electricity bills for all Spaniards” and will allow “to stop the upward trend of the IPC.
With this decision, “for the first time they don’t pay the same,” Teresa Ribera, third vice president and minister for ecological transition, said at a press conference after the Council of Ministers meeting. The unprecedented mechanism aims at a “highly significant” “reduction” in the “extraordinary profits of energy companies” that “will continue to make profits.” It will be an “umbrella” that will benefit “everyone” and protect domestic consumers, companies and large industry from extremely high energy price volatility.
The mechanism, which will in principle be published by the Bank of England on Saturday and enter into force on Sunday, will benefit 37% of domestic consumers and 70% of industrial consumers in Spain, Ribera explained, it still needs to be approved by the European Commission, and this will be when it will become “fully operational”, which may even take “weeks”.
Thus, following the approval by the governments of Spain and Portugal of their respective councils of ministers, which met this Friday in an extraordinary meeting, the mechanism will be “immediately” sent to the European Commission, which “must take the decision of the college of commissioners to make its application effective”, as explained by Vice the president in the last days.
The price to be applied, Ribera explained, will be 40 euros “over six months” and “on average rise slightly until it reaches 48 euros.” Thus, the reference gas price set in the mechanism will be variable and after the first six months it will increase from 40 EUR/MWh to a monthly increase of 5 EUR/MWh until it reaches 70 EUR/MWh. MWh for the last month. The goal is a gradual and phased exit from the measure, allowing agents to adapt to the scenario in which the mechanism ceases to apply.
The end result in the wholesale market, according to Ribera, is that in the wholesale market “the average price during the year will be 130 EUR/MWh compared to 210 MWh this quarter.”
Prime Minister Pedro Sanchez already said Thursday at a conference hosted by elDiario.es that the cap would result in an average gas price of €48.8 per megawatt hour (MWh) throughout the year, slightly below the original price. €50/MWh announced.
“The mechanism will operate for one year, guaranteeing an average price during this period of 48.8 euros, which will also provide important protection against future increases in global energy prices in a geopolitical scenario of huge volatility,” explained Sánchez, who warned. that the current energy context, marked by the war in Ukraine, “will drag on for a long time.”
The initial proposal by Spain and Portugal was to set a price of €30/MWh for natural gas generation. They eventually agreed with Brussels to raise this limit for combined cycles to around €50/MWh, starting from a lower figure of €40/MWh. To achieve this political agreement, the idea that this price would be different for energy exports to France also had to be abandoned.
In Spain, this measure will have a direct impact on consumers covered by the Voluntary Small Consumer Price (PVPC), an adjustable rate, with a reduction in final prices of around 30%. This modality, the “foolish” modality, as Iberdrola President Ignacio Sánchez Galán (who had to apologize a week ago after being reprimanded by the government) put it in an unfortunate phrase, directly reflects fluctuations in the wholesale electricity market. Ribera said this Friday that Galan’s statements made him “deeply embarrassed”, and he reminded that in order to have discounts on social bonuses, “definitely” you need to have PVPC.
In December 2021 (latest available data that has just been published), just under 10 million households and SMEs were covered by this tariff. In particular, according to data published this Thursday by the National Commission on Markets and Competition (CNMC), PVPC covers 9,999,491 deliveries, representing 36% of low voltage contracts (signed up to 15 kilowatts).
This measure will also directly benefit the Spanish industry, which for the most part goes directly to the pool to provide itself with electricity (70% of the demand in this sector gets energy from it), and which openly supported the approval of this cap.
This measure was highly questioned by the electricity companies, who tried to overthrow it with an intense campaign in Brussels, which Spain and Portugal managed to push through, arguing that the relationship with France is far below that advocated by the EU itself. .
However, as the situation in Ukraine worsens and the possibility of cutting off gas supplies from Russia opens up, the European Commission is even ready to impose a restriction on gas on a European scale.
The approval of the Iberian decision has been delayed more than expected due to negotiations with European Commission technical specialists and with Portugal, where the measure will have a much less noticeable effect than in Spain, since the rates of home users in the regulated market are set annually.
In Portugal, where the “Iberian solution” has not received a tenth of the media attention it has in Spain, it will apply to consumers directly affected by price fluctuations in the wholesale market, who are buyers there in the liberalized market. For the most part, the opposite of Spain.
As explained in one of the latest drafts of the decree-law, which elDiario.es had access to, “this measure is set up as a mechanism for adjusting the cost of production of marginal fossil technologies, which has a reduction effect equivalent to the specified adjustment of the offers that said technologies make on the market, with subsequent decline in the market price. The amounts corresponding to this adjustment are funded by those consumers who benefit from the aforementioned reduction, with the result that the final price is in any case lower than what would have been given in the absence of such a measure.
Thus, those who are going to finance this will be the consumers who will benefit from this measure, who will pay the difference between this limit and the real price of the raw material, using the MibGas Iberian market as a benchmark. The result will be net savings “for all consumers,” Ribera explained. Endesa CEO José Bogas has estimated the cost of this gas subsidy at 6 billion euros.
Teresa Ribera’s Portuguese colleague Duarte Cordeiro assured this week that the measure “represents a way to capture some of the windfall profits of these companies and combine these windfall benefits in the system.”
Which, due to the marginal design of this market, imposed over two decades ago by the European Commission, are selling electricity “much more expensive than they expected” due to the exponential rise in gas prices due to the geopolitical crisis with Russia and the unrelated war in Urania by their production costs (Cordeiro explicitly mentioned the hydroelectric plant), “they have extraordinary and unexpected profits. With the help of the mechanism, they see that this profit is captured, used and socialized in the electricity market to reduce the price,” the minister explained.
Thus, as indicated in one of the latest drafts of the Royal Decree-Law establishing a mechanism for temporary adjustment of production costs to reduce the price of electricity on the wholesale market, in the first fourth month of 2022, the price of gas was at the level of 95.98 euros / MWh, which in nine times the average price for a specified product in 2020 and twice as high as in 2021.
And contaminating gas at the end price in the wholesale market is a “regulatory design problem” because both countries don’t benefit from the high weight of renewables in their electricity mix.
Portugal has also opened the door to an emergency tax on energy companies on these windfall profits. The measure is still under study.
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