The price of electricity on the wholesale market will fall by more than 30% over the next 12 months. This is a commitment made this Friday by the Ministry of Ecological Transition after an extraordinary Council of Ministers approved a mechanism for separating the paths of electricity and natural gas. “We are insured for one year, this is an umbrella that allows us to protect against the current high volatility in the energy markets. From now on, the only electricity for which consumers will pay at the price of gas will be electricity generated by gas-fired power plants,” said Teresa Ribera, third vice president of the government, head of this ministry. However, the entry into force of the measure will not be immediate: we will have to wait for the final approval of the European Commission. And this will entail a far-reaching reform in the design of the managed tariff, or PVPC, at the request of Brussels, early next year.
The system, devised by the governments of Spain and Portugal – with the still “preliminary” approval of the community’s executive branch – will place a cap on the cost of gas that feeds thermal power plants in order to force a general price reduction. electricity. This cap will initially be €40 per megawatt hour (MWh) and will then gradually increase to an average of €48.8 over the entire period.
Being well below the current price on the Iberian gas market (about 80 euros per MWh), the limit will allow the wholesale market to be sharply reduced from the current more than 200 euros to a range of “between 120 and 130 euros”, according to executives. The gap will be wider the higher the price of gas, which has quintupled in less than a year and soared on Thursday after Russia cut off supplies of fuel it sells to Europe via Poland.
Nearly four out of every 10 households — those with a regulated tariff, the ones most affected by recent price increases — and seven out of 10 industrial consumers will “immediately” benefit from the measure, according to the government. But Ribera promised that the reduction would also apply to those who have a contract on the free market: “It will affect everyone, as they must renew [su contrato con la comercializadora]”. Compensation for the difference between the new gas price limit and the price of this fuel on the market will also come from the pockets of all consumers. The executive branch, however, insists that the net result will be positive for them. “They will clearly win,” they emphasize, without giving any further details of their calculations.
The Iberian electricity market intervention will be published on Saturday in the Official State Gazette (BOE) after months of negotiations between the Spanish and Portuguese governments and the community executive. However, its final entry into force will have to wait: “It is subject to official approval by the European Commission, which may take a week, 10 days or two weeks,” added the third vice president. This interval will operate in parallel to the specified one, so that the electric utilities and system operators (five and seven days respectively, which will work consecutively) adapt to the new mechanism. “The actual and final date will be the later of the two: these 12 days or official authorization from the Commission,” ministry sources say.
He thoroughly knows all sides of the coin.
In addition to the cuts, Ribera predicted a “very significant” cut in emergency profits for electric utilities. However, a few words that contrast with what has been announced in recent weeks by the sector companies themselves, which have ruled out a material impact on their income statements. “Holders of infra-marginal technologies [la nuclear y una parte de las renovables, sobre todo la hidroeléctrica] they will see their net benefit diminish,” the ministry insists.
The logic is this: with the price of gas through the roof, gas stations (combined gas and cogeneration) raise the marginal price at various time intervals of the day, and these other sources of generation receive a much larger reward than your operating costs. Now, with artificially lowering the cost of gas, these windfalls will fall.
In this sense, the government does not rule out an avalanche of legal appeals from large electric companies, which happens every time changes are made to the electricity supply system. And this time the changes are significant. “We are used to all the contested rules, but getting approved gives us peace of mind. [preliminar] Brussels,” say sources in the department, which is headed by Teresa Ribera.
Compensation to consumers for export to France
In negotiations with local authorities, the government attempted to introduce a system of double auctions with France to try to avoid selling subsidized energy. However, at the end of April, the European Commission forced Spain to cancel it. Without this clause, and given the huge difference in prices between the two countries, the restriction on gas will cause the flow of electricity between the southern and northern walls of the Pyrenees.
“It can be foreseen that the export balance will be larger; This will be a side effect,” the executive branch admits. So far in 2022, the shutdown of part of the French nuclear park for technical reasons has increased Spain’s surplus on the stock exchanges, but at purely market prices. Now, on the other hand, electricity produced in Spain will be sold at a price indirectly subsidized by Spanish consumers. To prevent harm to local households and companies, Brussels allowed them to be compensated using the so-called congestion rent, which reflects the difference in prices between the two markets. This money should be directed according to the general criteria for investments in the network.
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