Reduced VAT on electricity could fall back to 10% if current trends continue
The VAT applied to electricity bills may return to the 10% rate, down from the 21% level in place over the last three months, if the present trajectory holds. Unlike March, when the levy rose to its peak as wholesale electricity prices dipped to around 20 euros per megawatt-hour, the recent rise in the average MWh price, now more than double that figure, signals a return to the reduced rate might be on the horizon.
The government has conditioned a year-long 10% VAT on electricity to the wholesale market price staying above 45 euros per MWh. This scenario is looking increasingly likely for June, as the first twelve days show the average wholesale price published by the Iberian Electricity Market Operator (OMIE) at about 53 euros per MWh, with forecasts for the last week of the month around 55 euros per MWh. (Source: OMIE market data)
Analysts note that rain and wind shifts influence prices. A veteran in energy markets, Francisco Valverde, explains that while solar generation can lower prices during sun-heavy hours, there is not enough capacity to push prices down significantly. Even with substantial sun and potential negative prices during peak solar hours, the monthly average would not drop below the 45-euro threshold because other hours still see prices near 100 euros. This is due to reduced wind and higher water costs typical of this season, when abundant water in reservoirs reduces the urgency to release it, which otherwise lowers prices in spring.
The practical consequence is that July’s electricity bill could be about 8.6% higher than April’s for a typical consumer consuming 190 kilowatt-hours per month at a fixed rate of 0.14 euros per kilowatt-hour. This outlook mirrors January’s level when the VAT was also at 10%, according to the consultancy Selectra. In addition to the VAT cut, July will see the electricity tax rise from 3.8% to 5.11% and the production value tax increasing from 5.11% to 7%. (Source: market analysis)
The change will affect the country’s 28 million small consumers, including 19.6 million on free market tariffs and 8.5 million on the regulated PVPC tariff. Meanwhile, 1.6 million people relying on electric social bonuses will maintain a 10% VAT throughout the year, regardless of electricity prices.
What to expect for the rest of the year
Since its first intervention in July 2021, the government has tied the VAT reduction on electricity bills to the monthly average price in the natural month preceding the end of the billing period, using 45 euros per MWh as a benchmark for a typical price path. Yet in March, April, and May the monthly averages were 20.28, 13.67, and 30.14 euros respectively, keeping the VAT at 21% from April through June. (Source: national energy policy records)
From July onward, futures markets project a monthly average price between 75 and 81 euros per MWh. Valverde cautions that predicting exact levels too far ahead is unreliable due to low futures volume, which can exaggerate prices. Still, there is a consensus that getting below 45 euros for the rest of the year would be challenging unless autumn brings unusually strong wind and there is sufficient wind power to pull prices down, something that remains uncertain. (Source: market forecasts)