Iberian Gas Price Cap and Its Impact on Electricity Bills in Spain and Portugal

Spain has focused on a policy sometimes called the Iberian exception, a gas-price mechanism meant to shield electricity prices from spikes tied to gas costs. The goal is to keep other generation technologies from seeing distorted prices when gas swings up. At present, Mibgas, the Iberian gas market, trades below the cap, so the mechanism has not triggered since February 26.

This Iberian solution—an approach the government led by Pedro Sánchez has begun to frame as a lasting policy—considers compensating gas and coal plants and certain cogeneration firms so electricity can reflect the real cost of natural gas without imposing a cap on other generation technologies. This keeps incentives aligned and avoids wasteful generation.

Spanish consumers have largely funded this compensation through the charges associated with interconnections that send electricity to France, a cost borne by French electricity consumers as well. When gas-market prices stay under the specified limit, the adjustment cost effectively drops to zero and the final bills of households and businesses are not affected.

“The non-enforcement of the law is a good sign. The Iberian exception shows that gas prices stay under the cap and that electricity prices remain affordable without needing a strict upper limit,” notes Juan Antonio Martínez, an analyst with Grupo ASE. After periods of stress in the market, energy prices are easing but remain subject to change as conditions evolve.

Far from the peak price

The cap on gas used for power generation has risen gradually, but the actual gas price on the European market has stayed well below that ceiling. As of May, the cap stands at 57.2 euros per megawatt-hour (MWh), while wholesale gas prices hover around 27 euros. The wholesale market has traded under the cap consistently since late February. The Iberian exception’s impact on prices has been uneven in recent months, occasionally sparing consumers from price spikes, but not always delivering a lasting reduction.

The European Commission has allowed extending the Iberian mechanism through the end of the year, proposing a monthly step-up in the cap that would reach 65 euros per MWh by December. With current market dynamics and investor expectations, it appears likely that prices will stay below the cap for now, suggesting the exception may not be invoked again soon.

No effect all year?

Experts caution that gas prices could rise again before year-end. Official sources stress vigilance in monitoring how the mechanism functions. Market participants watch for potential shocks from regional demand shifts, drought impacts on hydro generation, or renewed stress in gas markets that could push prices higher. Futures markets imply gas may stay under the cap through the year and into 2024, with expectations of 27 to 29 euros per MWh in the summer and potential rises toward 44 euros later in the year. Still, if prices stay under the limit, the mechanism would remain inactive until the scheduled end date.

Analysts from Grupo ASE point out that unforeseen factors could reintroduce volatility. If demand picks up in Asia, or if LNG supply faces disruptions, gas prices could move higher and test the safeguards of the Iberian framework. In such a scenario, renewed consideration of the exception would be warranted, depending on market conditions and policy decisions.

When the ‘Iberian exception’ returns

The intervention was launched in Spain and Portugal on a day when gas prices surged and fed into electricity costs. For several months, most Spanish households financed the adjustment through bill surcharges designed to backstop the mechanism, though in some periods the adjustment yielded refunds to customers instead of higher charges.

With declining natural-gas prices, less reliance on thermal plants and continued electricity exports to France, refunds have appeared on bills in periodic fashion. Higher interconnection charges reflect costs from bilateral gas trade and energy flows, with some refunds reaching consumers as small credits on invoices, depending on the timing and magnitude of interconnector-related prices.

Effect on the electricity bill

According to OMIE, the operator of the wholesale electricity market, compensation payments to gas-fired plants totaled several billion euros between mid-2022 and spring 2024. The aim is to operate these plants at the true gas cost while preventing other technologies from chasing the same price without bearing their own costs, thereby avoiding distortions in the wholesale market.

Spanish households and firms still paying regulated or market tariffs contributed most of these payments through their bills. Some refunds were issued in February, with March, April, and May showing smaller or no disbursements. The framework also draws on congestion rents—charges tied to using international interconnections—where a portion is funded by electricity buyers through cross-border trade.

Since last year, energy exports to France have risen, and adjustments to interconnection revenues have partly shifted the burden to French consumers. With the Iberian exception not currently in force, congestion revenues no longer fund the adjustment during recent months.

Ministry estimates indicate net savings for Spanish consumers from the lower market price, alongside sizable compensation disbursed to gas and coal plants. The balance of these effects points to substantial shifts in the overall electricity bill across the affected period.