The European Commission approved the Iberian mechanism in June 2022. Spain and Portugal negotiated the plan to curb electricity bills by capping gas-based power generation, aiming to manage high gas prices driven by the Ukraine conflict. The measure began taking hold on June 15 and was planned to continue through May of the following year. Spain later moved to extend the policy through year-end, subject to Brussels approval as discussions progressed.
How does the mechanism work?
The Iberian mechanism places a ceiling on the gas price used to generate electricity. Generators that run on gas, including combined cycle plants, some coal plants, and certain cogeneration units, receive compensation equal to the difference between the cap and the actual gas price. Consumers benefit because the overall price, which blends the cap with other technologies such as renewables and nuclear that do not rely on gas, remains lower. The compensation comes from gas utilities and overall electricity revenues, with the discount applying to all consumers. Gas exports to France help fund the scheme. In practice, the wholesale price plus the cap stays below what it would be without the mechanism, offering relief during periods of high prices.
Why was it extended until the end of the year?
Early in the year, the authorities signaled the plan would stay in place at least until the end of 2024 or as long as the war persisted. Technical and political talks between Spain, Portugal, and the European Commission, led by Margrethe Vestager, kept the discussion active. At a late-January meeting, Vestager suggested the extension could run to December 2023 under the temporary framework for Ukrainian war support. That remains the current deadline for the extension.
Ribera celebrates Brussels’ open support to extend the Iberian exception to gas until December
What are the new changes?
The extension covers the end of May through December this year, including both summer and the next winter, the periods when price pressure is greatest. The existing rule set a ceiling of 40 euros per megawatt-hour (MWh) from June to December 2022 and increased by 5 euros monthly from January to May, reaching 65 euros per MWh. The Council of Ministers planned to approve a bill outlining how prices would reach the 65-euro cap by year-end, with monthly increases typically ranging from 2 to 2.5 euros, as explained by Teresa Ribera, the third vice president and Minister for Ecological Transition.
How much will consumers save?
Official figures from the Ministry of Ecological Transition show cumulative savings of about 5.1 billion euros for consumers since the Iberian exception began on June 15, 2022. This reflects the difference between payments to gas-fired generators without the cap and those with the cap, offset by the reduced costs from other plants that do not burn gas. A study by ESADE, covering June 15 to December 31, 2022, found that regulated rate customers saved an average of nearly 32 percent, roughly 209 euros per household, totaling about 1.88 billion euros for nearly 9 million customers. Those on the free market also benefited indirectly from lower wholesale prices, though individual protections depend on each retailer’s pricing model.
What happens if gas prices fall?
The extension was intended to have an impact even if gas prices dip, but practical effects hinge on actual price movements. If natural gas remains low, the mechanism may have limited activity; however, if prices rise again, electricity may stay affordable. Current gas costs hover around 40 euros per MWh, well below the 300-euro peaks seen previously, though volatility remains. Industry leaders note that price fluctuations will continue shaping the market and consumer bills. The gas group Naturgy has suggested the year could be challenging due to ongoing volatility and uncertainty in prices.
Twenty-seven extends 15% reduction in gas consumption until March 2024
Why does the European Commission have to approve?
The commission reviews state aid rules to prevent measures in one member state from harming others. Spain and Portugal collaborate with the European Commission’s Competition Department under Vestager to find a formula that benefits the Iberian partners without unduly affecting other member states. The approach also lowers electricity exports to France, which benefits from cheaper Iberian prices due to cross-border interconnections. Initially, Spain proposed export pricing without a cap, but the Commission rejected that extreme option.
So does France also benefit from it?
Yes. France enjoys lower electricity prices as a result of cheaper Iberian generation. Spain recorded a historic electricity export surplus, with substantial gains from interconnections to France. The resulting inter-market rents are shared between the two countries. Usually, Spain uses these revenues within its electricity system, but the framework considers them alongside the gas cap to reduce overall costs for consumers.