The government aims to shield itself from sharp electricity price spikes during the energy crisis. The simplest path is to keep the current gas price cap mechanism in place in the Spanish market for several more years, while awaiting a broad overhaul of wholesale electricity market regulation by the European Union.
The Iberian exemption, which caps gas costs used to generate electricity in Spain and Portugal, is set to expire on May 31. Officials want to extend it at least through 2018, possibly into 2024, and will seek permission from the European Commission for a longer duration.
Major electricity providers acknowledge that the government designed mechanism has helped restrain wholesale electricity prices since its June implementation. Still, industry voices caution that such a heavy-handed measure should remain strictly temporary. Sources from several companies say keeping it for two additional years would compromise its exceptional nature.
The electricity sector argues that Brussels approval is being sought to extend the Iberian exemption, while changes to how the system operates are being pursued. Reforms focus on who bears the extra costs, notably the activation of a gas price cap, which could gain traction if the mechanism lasts through 2025.
Critics from power companies describe the distortion caused by the Iberian exemption for the retail electricity market. They point to the added costs faced by gas plants still receiving compensation for generation, costs which are ultimately borne by customers who see fixed price contracts become involved in variable-rate terms.
Fixed prices turned into volatile
The Iberian exemption imposes an upper limit on the gas used to generate electricity, with an average cap around 48.8 euros per megawatt hour for one year, intended to lower overall market prices. Yet the actual electricity produced by plants is paid at real market prices, ensuring they avoid losses and receive compensation funded by customers who benefit from lower wholesale prices.
From the moment the mechanism started, the extra cost for gas-powered plants has been passed on to customers at a regulated rate. Over time, this cost-sharing shifted to free-market customers as they updated or renewed their contracts. That shift moves a variable extra charge, tied to gas prices and plant utilization, onto fixed-rate customers. Big power firms see this as an unfair trading distortion and press the government to remove it.
The sector still needs a clear plan on who covers the extra gas-plant costs if customers do not shoulder the burden, while several European peers note similar approaches under consideration. Some countries suggest transferring excess costs to the state budget or the broader electricity system.
Keep the upper limit at 45 Euros
The mechanism, agreed by the Spanish and Portuguese governments and Brussels, envisions a cap of 40 euros per megawatt hour for the first six months, followed by gradual increases of 5 euros per month until it reaches 70 euros per MWh. The price limit in force from January 1 is 45 euros.
The government seeks not only an extension of the Iberian exemption but also to keep the gas cap near its current level. The aim is to stay as low as possible, roughly 45 to 50 euros per MWh, according to Teresa Ribera, vice president and minister for Ecological Transition, remarks made recently.
European wholesale electricity markets operate on a marginal pricing model, meaning the last plant to meet demand sets the price for others. In many cases that last offer comes from gas-fired plants that amplified price rises during the energy crisis, pushing up costs across all power generation as natural gas prices soar.
Spain and Portugal set maximum prices for offers that only gas-fired combined-cycle plants can submit in the market. This approach decouples the market price from the gas price while incorporating gas costs. Government estimates indicate that Spanish households have saved more than 4.5 billion euros through the gas cap due to lower market prices.
Invoice Changes
The government required electricity providers to redesign how bills are presented, removing biased information from utilities about the Iberian exemption and clarifying its impact on final electricity charges after identifying data considered insufficiently transparent regarding the gas cap.
In the free market, providers rely on usual consumption charges plus any additional compensation paid to gas plants under the Iberian exemption to prevent losses. They describe this compensation with various terms, at times even calling it a tax.
Among other changes, the government now demands that companies present data in a unified terminology, alongside information about what the market price would have been without the Iberian mechanism and the resulting savings for customers. This helps consumers understand the true effect of the cap on their bills. [Citation: European energy regulators and national authorities]