Iberian exception: how the gas price cap shaped Europe’s electricity bills

Spain and Portugal introduced what is commonly called the Iberian exception, a mechanism to cap the gas price used to generate electricity with the aim of lowering consumer bills. The policy took effect on 15 June as prices spiked, attempting to prevent a cascade of high gas costs from lifting all power sources during the energy crisis.

The Iberian mechanism allowed for compensation payments to gas and coal-fired plants, and now (besides cogeneration) the price for electricity is based on the actual gas price, while other generation technologies such as renewables, nuclear, and hydroelectric are not capped. The idea was to limit the impact of gas on wholesale prices, with compensation largely financed by Spanish households and, to a lesser extent, by electricity companies benefiting from interconnections with France. French consumers were affected through the interconnection payments used to move electricity across borders.

Last month, after seven consecutive months of higher bills to finance this adjustment, the Iberian exception appeared to be easing. Many customers began seeing small bill reductions again, with the average drop around a small fraction of a euro. In recent weeks, lower natural gas prices and reduced thermal generation, combined with robust electricity exports to France, helped push down costs. This helped return some of the costs to consumers who had faced higher charges due to the interconnection framework, as exports to France often carried higher prices than those used for compensation.

Reduction in electricity bill

Overall, thermal plants have earned compensation totaling several billions of euros, allowing them to operate nearer to the real gas price while keeping other technologies from charging inflated prices. The wholesale market operator, OMIE, tracks these payments, which occurred from June of the previous year through February of the current year, and these funds were used to align plant costs with gas prices without letting renewables, nuclear, or hydroelectric power take on the same burden without incurring costs.

Spanish households with a PVPC tariff, along with some on free-market contracts, paid a substantial portion of these costs on their electricity bills between June and January. In February alone, a portion of the compensation was returned to consumers. The remaining portion of the adjustment related to congestion rents—the charges electricity companies pay to use international interconnections—amounted to hundreds of millions of euros between June and February. Since last year, France has been a major destination for exports, and congestion rents are effectively borne by French consumers through these cross-border flows.

The latest snapshot in February shows congestion rents exceeding the total compensation paid to gas plants, with thermal plants receiving a smaller slice of compensation than the rents collected from exports to France. This is why some consumers saw returns on their bills, even as others faced ongoing adjustments based on their contract terms, whether regulated or market-based.

Cheapest fare

More and more electricity customers pay surcharges on their bills to cover the costs of compensating gas plants under the Iberian exception. The government has indicated that these costs should be spread fairly and that consumers still achieved a net saving overall, because the wholesale market price dropped, reducing the average price of electricity across the board. During the seven months in which the exception operated, regulated tariff customers faced a surcharge on the energy term of their bills, while free-market customers saw a differentiated surcharge added by their suppliers. The final surcharge varied with consumption.

For an average household using about 3,500 kilowatt-hours per year and a contracted power of around 4.4 kilowatts, the surcharge fluctuated with gas prices and plant activity. The CNMC rate-tracking data shows costs peaking in late summer and easing in subsequent months, with a notable reduction in February as gas prices fell and costs shifted with the overall market dynamics.

Depends on how low the gas is

The February adjustment turned negative, meaning consumers received a small rebate because congestion income outweighed compensation owed to thermal plants. Even with falling gas prices, the cap remained in effect as long as the gas price stayed above the fixed limit. If the price dipped below that ceiling, the Iberian mechanism would pause, and compensation to plants would cease, with no further adjustments to bills.

That creates a paradox: a potential refund when gas costs are low but still above the cap, yet no possibility of reverting if prices fall too far. The mechanism hinges on maintaining a floor-then-ceiling dynamic that can abruptly change the bills depending on the gas market and interconnection flows.

Who pays for the Iberian exception?

Industry players acknowledge the policy’s goal of limiting wholesale prices while pressing for changes in its operation. They want reforms about who bears the extra costs of compensating gas plants and the extent of interconnection-based payments. Spain and Portugal have signaled a desire to extend the Iberian exception beyond its current expiry date while pursuing reforms to its financing structure. The sector argues that the distortion affects the retail market, since the extra costs are passed to consumers who are on fixed-price contracts or regulated tariffs, creating tension between price signals and consumer stability.

As the sector contemplates revisions, debates center on whether the extra costs should be funded through state budgets or by market participants. The goal is to maintain affordability while ensuring the electricity system remains financially sustainable across Europe, even as different countries study similar mechanisms to shield households from volatile gas prices.

5,000 million net savings

For more than twenty years, European wholesale electricity markets have operated on a marginal pricing framework. That means the last unit offered to meet demand—often gas-fired generation during the energy crisis—sets the price for all other producers, including renewables, nuclear, and hydro. The Iberian exception caps the gas price at an average of around 48.8 euros per megawatt-hour for a year, lowering wholesale prices by decoupling gas cost from the price of other technologies. Yet the actual electricity paid to generators remains tied to their real costs, with compensation funded by customers who benefit from lower prices across the market.

In this setup, Spain and Portugal cap gas offers only for gas-fired combined-cycle plants. By doing so, the wholesale market gradually decouples from the direct gas cost, while still incorporating gas-influenced dynamics. Government assessments have shown substantial net savings for Spanish consumers, even after accounting for more than 6.6 billion euros paid in compensation to gas and coal plants. These mechanisms aim to stabilize bills while keeping the broader energy system responsive to global gas price movements, a balance that continues to be refined as markets evolve and interconnections persist.