Fifty days after Spain and Portugal approved Brussels and its European partners to take different steps to manage electricity costs, the two governments have reached a decision. They have agreed on a plan to cap the gas price used to generate electricity and to relieve the burden on millions of households and businesses. The so-called Iberian exception is being put into practice now because the Iberian electricity market operates like an energy island.
Following weeks of technical talks with the European Commission and between Madrid and Lisbon, extraordinary Councils of Ministers were held this Friday. They endorsed measures to intervene directly in the entire electricity market for a year. Rising prices were intensified by Russia’s invasion of Ukraine, and questions remain about how the exceptional mechanism to dampen the energy shock will function in practice.
Gas price cap
The European Commission gave preliminary approval on Monday to Spain and Portugal’s plan to impose a one-year ceiling on the prices of gas and coal used to generate electricity, aimed at lowering overall electricity costs. In the first six months the cap will start at 40 euros per megawatt hour (MWh) — about half of the 80 euros per MWh seen in the last quarter — and will gradually rise toward that level over subsequent months. The annual average expected under the measure is around 48.80 euros per MWh.
Government approves gas price cap to reduce electricity costs
Why push the gas price up to dim the lights?
European wholesale electricity markets can trap consumers because the final price often reflects the most expensive generation available. When gas-fired plants set the marginal price, electricity costs climb sharply, affecting renewable power as well. Higher gas prices directly drive up overall electricity costs.
Spain and Portugal propose to apply the cap to offers from gas-fired combined-cycle plants only. By limiting those bids in the electricity market, the overall price of electricity should stop skyrocketing and become decoupled from gas prices, which have surged due to the war in Ukraine. Teresa Ribera, Deputy Prime Minister and Minister for Ecological Transition, stated at the press conference after the Council that the goal is to pay electricity produced with natural gas at the gas price, not at the higher market price.
How much will prices fall?
With the gas cap in place, wholesale electricity prices are expected to average around 130 euros per MWh, well below the peaks seen in recent weeks and far from the record levels reached in early March. Government estimates suggest the measure will reduce bills for typical consumers by about 30 percent on rates tied directly to the electricity market.
Who benefits from the discount?
The cap targets gas costs of roughly 48.8 euros per MWh to bring down wholesale electricity costs. It aims to lower bills for roughly 37 percent of households under PVPC tariffs and for about 70 percent of industrial customers who buy electricity on the wholesale market. The remaining millions on fixed or market-rate plans will see reductions when their terms are reviewed or renewed. Ribera highlighted that PVPC customers will see immediate relief, with other customers experiencing a gradual impact as rates are updated.
When does it start to apply?
The measure will not take effect immediately. The new mechanism should begin the day after publication in the Official State Gazette, or possibly on Monday if timing shifts. Full operation depends on new final EC approval of the Spanish and Portuguese regulations. EC officials are expected to sign off within about one to two weeks, allowing technical adjustments to align the new supply and demand framework with the gas cap.
Reducing the “windfall profits” of electricity
The main aim is to curb unexpected profits by energy groups and to broaden the benefit to all consumers. There will be a significant reduction in extraordinary income, reversing the pattern of large state subsidies compensating energy firms. The government points to the existence of windfall profits earned when power is sold at high prices while the cost of gas remains comparatively low.
By capping the gas price, the opportunity for such windfall gains diminishes. The amount of these benefits and the scale of discounting will be disclosed in due course. The policy emphasizes that profits earned by large energy players under high wholesale prices should not be treated as automatic gains—those gains will be redirected to lower consumer bills.
The added mechanism is designed to reduce the extra income seen by some nuclear, hydroelectric, and renewable energy contracts signed at elevated prices, with adjustments expected by mid-year.
Who bears the difference?
Setting a cap on gas-used electricity will lower the wholesale price, yet electricity produced by gas plants will still be paid at the market price. The higher gas costs will be reflected in the charges faced by marketers and industrial buyers who source power directly from the market, and these costs will gradually pass through to consumers who update their rates over the next twelve months.
Iberian exception
Last year, Spain coordinated with other EU members to intervene in the electricity market to shield households from spiraling natural gas costs. Some countries, notably the Netherlands and Germany, did not adopt similar market reforms. For now, the Iberian approach remains an exception.
Spain and Portugal secured authorization from EU partners to pursue a plan that treats their shared market as a special case, allowing targeted actions to reduce electricity prices. Critics and supporters alike watch how this special treatment might influence cross-border energy flows and interconnections, including plans to broaden interconnections with neighboring nations.
Brussels weighing limits on EU gas
After months of resisting intervention in energy price settings, Europe faces renewed pressure from the war in Ukraine. The European Commission is weighing a broader, EU-wide gas price intervention, should supply risks loom due to possible interruptions in Russian gas deliveries.