Government’s plan to cut electricity: keys to electricity market intervention amid crisis

After weeks of technical negotiations with the European Commission and between the two countries, the two Iberian governments convened extraordinary Councils of Ministers this Friday and this Friday agreed to plans to directly intervene in the total electricity market for a year. Rising prices were exacerbated by Russia’s military invasion of Ukraine. makeHow will the exceptional mechanism by which Spain and Portugal seek to stop the blow of the energy crisis work??

gas price cap

The European Commission on Monday pre-approved Spain and Portugal’s plan to set a one-year cap on the prices of gas and coal used to generate electricity to lower the electricity price. At the beginning and during the maximum limit for the first six months will be 40 Euros per megawatt hour (MWh) – Half of the average of 80 euros that gas pointed to in the last quarter – and will gradually increase each month until this figure is reached. Average of 48.80 Euros for the whole year when the measure will come into effect.

Why step on the gas to dim the light?

This electricity wholesale markets Europe they work with fringe systemsturns the final supply of production that satisfies demand into production that fixes the price for others. The last offer is in most cases made by gas power plants that support skyrocketing prices due to the exorbitant price of natural gas and either raise the price of all electricity, renewables, or not support them. extra costs due to the increase in gas.

Therefore, the plan of Spain and Portugal comes to life. to apply maximum price to the offers that only combined cycle power plants can submit in the electricity market (burning gas to generate electricity). With this, the price of the electricity market as a whole will stop skyrocketing, decoupling from the gas price, which has sharpened its rise due to Russia’s military occupation of Ukraine. Teresa Ribera, Vice President and Minister for Ecological Transformation, said at the press conference held after the Council, “The goal is to pay for the electricity produced by natural gas only at the natural gas price, not all electricity.” Ministers.

How much will the light decrease?

With this maximum gas limit, The price of electricity in the wholesale market will remain at an average of 130 per MWh, compared to the more than 200 euros he had pointed out in recent weeks, or the record 545 euros in early March, according to the estimation of Vice President Ribera. According to the calculations of the government, to be able to stop the rise in the wholesale market,Reduce the bill paid by typical customers by 30% on average rates directly linked to the development of the electricity market.

Who benefits from the discount?

With an average of €48.8 per MWh for gas, this limit is aimed at reducing electricity in the wholesale market, the evolution of which directly affects the bills of around 37% of domestic customers – 10 million people contracted the tariff or Voluntary Price for Small Consumers, PVPC – and directly from that market. 70% of industrial customers purchasing electricity.

The rest of the millions of customers who normally contract free market rates (about 20 million users of all types) at a fixed or fixed price will enjoy the discount when it’s time to review or update their terms. contracts that electricity companies usually conclude on an annual basis. “The impact on customers with PVPC is immediate and it will be a progressive one for the rest of customers as they need to revise their rates,” Ribera said.

When does it start to apply?

Implementation of the measure will not be immediate, or at least not fully implemented. The new mechanism will officially take effect the day after the royal decree is published in the Official State Gazette (BOE) this Saturday or “if there is a problem” next Monday.

However, the full functioning of the measure will not occur until the European Commission has given new final approval to the content of the new Spanish and Portuguese regulations. European Commissioners will approve the measure “within a week, ten days or two weeks”, As Ribera admits. In addition, technical procedures may need to be adjusted and the effective entry into force extended to be able to combine the new supply and demand system with the gas cap.

Reduce the “side benefits” of electricity

“The main purpose of the measures is rreduce unexpected profits of energy companies and it benefits everyone. “There will be a very significant reduction in extraordinary income,” he said. “For the first time, they will not make the same payment with a larger contribution from the General Government Budgets. It won’t happen this time.”

The government directly points to the existence of extraordinary profits (snow sent from heaven) It is the energy that energy groups buy when they sell some of their electricity at the high prices determined by gas in the wholesale market, but without incurring the cost of gas.

By placing a cap on the gas price, this extra income can no longer be generated. Ribera declined to encrypt the amount of these benefits and how much cuts would be made by the measures. It is insisted that these benefits from the big energy groups do not come from the sky and that they sell all their electricity generation under contracts signed at prices much lower than the wholesale market price.

The new mechanism, approved this Friday, is being added to the system, which cuts down on the extra benefits some companies get amid the price chaos, forcing them to return. part of nuclear, hydroelectric and renewable energy Return extraordinary income from all contracts signed at high prices (over 67 Euros per megawatt hour) by 30 June.

who pays the difference

Setting a maximum price on gas used to generate electricity will lower the price of the electricity market as a whole. However Electricity produced by gas power plants will continue to be paid at the real (and high) price.will reflect the high prices of natural gas to production costs.

The additional cost of electricity generation from gas power plants, after a difficult negotiation process with Brussels and Portugal will be undertaken only by consumers who directly benefit from the price reduction in the wholesale market. The extra cost of gas power plants will be immediately passed on to marketers and industrial customers who buy directly from the market, who offer the regulated price and pass it on to their customers. And gradually it will also be communicated to free market customers who update the terms of their rates over the next 12 months.

Iberian exception

Spain took coordinated action last year in all countries of the European Union to intervene in the electricity market to prevent the exorbitant increase in natural gas from affecting the electricity bill. And this has not been achieved when faced with the refusal of many countries, notably the Netherlands and Germany, to reform their entire continental electricity markets. At least for now.

Spain and Portugal obtained permission from their EU partners to launch their plan B: Recognition of the Iberian exception. An alternative is for the European Union to authorize Spain and Portugal, which in practice have a jointly functioning electricity market, to take special measures to lower electricity prices.

about allowing “Special treatment” for both countries as they are “energy islands”, dominates the rest of the renewable energy continent and does not benefit from the positive effects of existing electricity interconnections between other EU countries (connection with France, the target is to reach 10% of the European Union by 2020 and 15% by 2030) .

Brussels considering limiting EU gas

After months of refusing to intervene in energy market prices, the emergency caused by the war in Ukraine is forcing the European Commission to reconsider its positions. Brussels is considering proposing an extraordinary system of intervention in gas prices across the EU next week, in case there is a serious supply risk due to a possible interruption in the arrival of Russian gas.