The European Commission gave its approval this week to the so-called Iberian exception, a price-cap scheme negotiated by Spain and Portugal to lower gas costs and, in turn, reduce electricity bills. After months of deliberation and weeks after formal approval by the Council of Ministers, the measure moves to parliamentary debate. If no unexpected events occur, the policy is expected to take effect on Wednesday, June 15, and could remain in place through May 31 of the following year.
How does the mechanism work?
Based on the Spanish and Portuguese government notes submitted to Brussels, the scheme initially caps gas costs at 40 euros per megawatt-hour (MWh). The model projects a wholesale electricity price near 110.63 euros per MWh on average, instead of the market price around 213 euros per MWh. The cap does not determine the final consumer price directly; instead, a compensation payment bridging the gap between the actual gas price and the cap is applied. This balancing payment is estimated near 73 euros per MWh, with a portion around 7.12 euros per MWh thought to be linked to electricity sales to France. As a result, the consumer price could be around 176.60 euros per MWh, a reduction of about 40 euros per MWh compared with uncapped prices, reflecting a generation mix that uses less gas.
When will it start showing?
The first auction operating under a 40 euro per MWh cap is scheduled for Tuesday, June 14, with the limited price applying on Wednesday, June 15. Third Vice President and Minister for Ecological Transition, Theresa Rivera, indicated that Portugal observes a holiday on Monday, so the border will be fully operational on Tuesday. The measure is designed to last roughly a year, ending on May 31, 2023, though the 40 euro cap is planned to remain in place only for the initial six months. From December onward, the cap would step up by five euros each month, reaching 70 euros per MWh by the end of the period. The price projection for this energy input in 2023 is around 81.9 euros per MWh on average, according to the government’s 2022-2025 Stabilization Plan.
How low will the bill go?
Domestic consumers are expected to see an average electricity price decline of about 15 percent, while industrial users without direct market power purchases could see reductions around 18 to 20 percent, according to government estimates. Initially, the government had projected a 30 percent reduction by including compensation from the start. Ultimately, the benefit will be more limited, applying primarily to consumers with PVPC rates, industrial users, and those with indexed or variable rates. The reform aims to make free-market offers more competitive as fixed-price contracts are renewed under the new framework.
Who will benefit from the discount?
About 37 percent of Spanish households use PVPC pricing, and around 70 percent of industrial customers source their energy directly from the market. These groups stand to gain most because they face the highest exposure to price spikes in recent months. If fixed-price contracts are renewed within the framework, they should see reduced costs as reference prices fall for marketers to set prices.
Originally, compensation was meant to be applied uniformly to all energy buyers, including those on the free market. The plan estimated roughly 6.3 billion euros in compensation to cover the difference between the gas cap and actual prices. In the end, compensation will be allocated according to specific conditions. Those who renewed fixed-price contracts before April 26, 2022, may be exempt from compensation, while others would not be. According to the European Commission document, compensation would be paid in the initial phase for about 41 percent of consumption in Spain and would gradually rise to 100 percent over time.
Why one year?
The measure is designed as temporary relief for electricity users and to adjust the PVPC ratio to reduce exposure for vulnerable households and small and medium-sized enterprises at market prices. The European Commission green-lighted the Iberian exception, and the royal decree shaping the gas cap targets an effective start date in early 2023. The goal is to ensure that the share of the most vulnerable consumers tracks only daily price movements and projected future prices. The program bases this on a basket of futures market products—annual, quarterly, and monthly—together with the wholesale daily market price. The Commission notes that low market liquidity and high price volatility delayed earlier implementation, with a plan to extend the 40 euro per MWh cap over the next six months as market conditions improve.
Why does gas determine electricity prices?
The Iberian market, like much of Europe, uses a marginal pricing system where the most expensive generating technology sets the price for a given period. Generators bid their offers, and cheaper sources such as renewables or nuclear plants typically determine the price, while more expensive gas and coal plants set the upper bound. Iberian market operator OMIE reports that in 2021, hydroelectric plants set the price for 54.9 percent of hours, while renewables, cogeneration, and waste-to-energy accounted for 23.6 percent. Gas-fired plants contributed 15.9 percent, pumped-storage 10.2 percent, and coal 1.5 percent. Gas has a pronounced impact on prices because hydro facilities have minimal operating costs and can choose when to produce, influencing opportunity costs. As a result, gas often governs price movements, even as coal’s role diminishes. With coal phased out in Spain and Portugal, gas remains a dominant factor in shaping electricity prices across the region, according to the European Commission’s explanation.