Green light for Spain’s plan to lower the price of electricity. Today the European Commission has given its formal authorization to the Royal Decree Law approved three weeks ago by the Government to establish a cap on the price of natural gas to produce electricity, a measure that will translate into a drop in prices in the wholesale market and, in turn, the regulated rate on which almost 10 million households and businesses depend.
“The temporary measure approved today will allow Spain and Portugal to lower prices for consumers, who have been hit so hard by the increase in electricity prices caused by the Russian invasion of Ukraine”, declared the Vice President of the Commission and head of the Competition portfolio, Margrethe Vestager. Even acknowledging that the economies of both countries are experiencing “serious disturbances”, the community services had to verify that the measure did not negatively affect the previous market, so the authorization comes hand in hand with the commitment to make reforms at the national level to increase resistance of the respective electrical systems.
The plan will allow, for twelve months, to limit the price of gas in the wholesale electricity market. It is the so-called “Iberian exception”, an exceptional mechanism accepted by the rest of the countries of the Union under cover of the condition of energy islands of both countries. “The measure is in accordance with European rules on State aid” and “does not go beyond what is necessary to respond to the exceptionally high prices of electricity in the Iberian Peninsula,” the community executive announced. The intervention is “appropriate, necessary and proportionate” and “will make it possible to reduce the price of electricity in the wholesale market for consumers without affecting market conditions to the point of being contrary to the common interest”.
The Government has announced that the Official State Gazette will publish tomorrow an Order from the Minister for the Ecological Transition and the Demographic Challenge, Teresa Ribera, which will specify the date of application of the mechanism, next June 14 with a view to its being applied directly and already determine the price of electricity for the next day, June 15. Although the extraordinary Council of Ministers approved the mechanism on May 13 and both Spain and Portugal hinted that it had already been approved by Brussels, to enter into force it needed to be examined in the light of European rules on State aid, hence that has not yet been implemented and consumers have therefore not benefited from it.
The current reference price is 100 euros per megawatt hour. During the summit held in March, shortly after the start of the war in Ukraine, Spain and Portugal asked their European partners to be able to lower the maximum price of natural gas for electricity generation to 30 euros per megawatt hour. The final agreement was capped at 40 euros per megawatt hour for the rest of 2022. As of January 2023, recalls the Commission, it will progressively increase five euros per month until it reaches an average of 48.8 euros per megawatt hour During the twelve months that the mechanism plan will be in force in principle, until May 31, 2023, with a maximum price of 70 euros at the end of this period.
By lowering the average price of the ‘pool’, the wholesale electricity market, the price of regulated contracts will be lowered. According to the calculations of the Spanish Government, the measure will translate into a reduction of between 15% and 20% in the cost of electricity for families and companies. The financial impact of the measure, a direct subsidy to electricity producers to finance part of the cost of the fuel they use, amounts to 6,300 million euros in Spain and 2,100 million in the case of Portugal, explained the European Commission in a release.
Precisely today the president of the European Commission, Ursula von der Leyen, an institution that at the end of last year was very reluctant to the demands for change presented by Spain, this morning criticized the structure of the European electricity market, designed 20 years ago. “This system no longer works”, she has sentenced, thus aligning herself with the theses of Spain and other peripheral countries. “We have to reform it, we have to adapt it to the new realities of the dominant renewables. This is the task that the Commission has now. It is not trivial, it is a huge reform. It will take time and it has to be well thought out, but we have to take a step forward to adapt our electricity market to modern conditions.”
