The VAT applied to electricity bills is set to rise from 10% to 21% in March for the vast majority of domestic consumers. The trigger for this change lies in the sharp drop in the average price of a megawatt-hour (MWh). In February, that price was already 42% lower than in January and about one third of what it was a year earlier.
Indeed, the government’s decision to maintain a reduced 10% VAT on electricity for the entire year 2024 hinges on the wholesale price of one MWh staying above 45 euros. In its anti-inflation decree approved on December 27, the Council of Ministers established that if electricity prices fall below the 45-euro threshold, the standard 21% VAT would apply in the following month.
And that is what is approaching in March. With February almost over, the average wholesale price of electricity reported by the Iberian Electricity Market Operator (OMIE) stands at 42.44 euros. Since it remains under 45 euros, all indications point to a VAT increase from 10% to 21% on the electricity bill in March. This could add roughly 4.5 euros to the March bill for a typical household consuming 190 kilowatt-hours per month, according to estimates from the home services price comparator Selectra.
“The price for Wednesday and Thursday remains to be seen. Those days will be somewhat more expensive than recent ones because wind generation will ease, but prices won’t spike since solar generation persists. It is highly likely that the month’s end price will be below 45 euros per MWh,” notes energy expert Francisco Valverde. In the last three days, the average price in the electricity auction has stood at 3.51 euros per MWh.
It is important to note that the 45-euro reference applies only to the VAT. The Special Electricity Tax remains at a reduced 2.5% in the first quarter and at 3.8% in the second, while the Impuesto sobre la Producción de la Energía Eléctrica (IVPEE) keeps 3.5% until March and increases to 5.25% from then through June.
The change in bills will impact the majority of Spain’s 28 million small consumers, including those with free market tariffs (19.6 million) and those on the regulated PVPC tariff (8.5 million). The 1.6 million beneficiaries of the electric social bonus will not be affected; they will retain a 10% VAT throughout the year, regardless of electricity prices during the period.
According to Selectra’s calculations, a household using 190 kilowatt-hours per month (2,300 kWh annually) that paid 45.69 euros this year with a 10% VAT and a 2.5% Special Tax would see a 4.56-euro increase when the VAT rises to 21%. If compared with last year when VAT stood at 5% and the Special Tax at 0.5%, the difference would be 7.48 euros.
Returning to ‘normality’
Since his first intervention in July 2021, the government has tied the VAT reduction on electricity bills to the condition that the price of electricity in the natural month prior to the end of the billing period be above 45 euros per MWh, viewing that figure as a typical price amid years of rising costs. The average electricity price between 2015 and 2019 was 49.4 euros per MWh.
Beyond March, the futures market anticipates average prices below 45 euros through May, driven by a drop in gas prices (down from triple digits to around 25 euros per MWh), lower CO2 emission rights (down from around 100 to about 50 euros per MWh), and greater renewable penetration in the energy mix. This would imply an 21% VAT through June and then a 10% rate thereafter, according to Valverde.
Varying impact
In any case, despite the likely rise to 21% in March, it is expected that about one in three users on the regulated market will pay less in the upcoming month than in February. This depends on each consumer’s profile and consumption pattern. Valverde notes that a regulated tariff consumer with 4.4 kW of contracted power and an annual consumption of 3,500 kWh would spend 51.28 euros in February with a 10% VAT and 48.60 euros in March when the VAT is 21%.
“February and March have similar consumption and usage patterns; the difference lies in the wholesale market, which now sits around 44 euros. The forecast for March points to a year-end bill of about 615 euros, one of the cheapest in the past 15 years and close to the 603 euros paid in 2009,” Valverde explains. Prices and projections remain subject to meteorological and market fluctuations, but the trend indicates a cautious return toward more typical levels as energy markets adjust.