Electricity: Spain and Portugal are leaving the European system

Green light to reduce electricity prices. Madrid on Friday approved a decree limiting the prices of gas entering electricity production to reduce electricity consumption by households as industrial enterprises. “Currently, the same people will not pay,” said Environment Minister Teresa Ribera, explaining that the reduction in tariffs will be financed by reducing the profits of energy companies.

This new system, negotiated with Brussels, will enter into force simultaneously in Spain and Portugal. It recognizes the “Iberian exception” and sets a precedent by allowing the two countries to abandon the European tariff system. The European Commission has indeed opened the door to this particular scheme by acknowledging the lack of ties with France. Flows from one side of the Pyrenees to the other make up only 3-5% of the installed capacity in Spain. This isolation prevents the Iberian Peninsula from exchanging and accessing renewable energy sources from Northern Europe, forcing it to function essentially as an island.

Reduce electricity bills from 25% to 20%

The Iberian mechanism provides for limiting the price of gas used for electricity production. Gas producers will receive compensation and receive the difference between the market price and the limited tariff at which it will be introduced into the electricity balance. This compensation will be financed by reducing the extraordinary profits generated by electricity companies due to price escalation. “Only gas will be paid for at the price of gas,” the minister explained, insisting that the surge in prices should stop polluting the price of the rest of the mobilized energy, nuclear or renewable.

Madrid’s goal is to reduce bills for households by 25-30%, as well as for small and medium-sized enterprises and industries whose production costs have increased since the summer of 2021. With such an increase, some sectors, which are large consumers of energy, had to decide to establish their Iberian enterprises, in particular in the steel industry.

Under the rules set by Brussels, Spain and Portugal will be able to withdraw from the European energy market for at least twelve months.

Limit of 40 euros per MWh for six months

The price of gas will be limited to 40 euros per MWh for the first six months and then gradually increase to an average of 50 euros per MWh during the year, or half of what it cost in the last three months. The Spanish government estimates that the system will lead to a direct 30% reduction in electricity bills, with an average of 130 euros per megawatt-hour instead of 210 euros in recent months.

For months, the mechanism has faced head-on opposition from major energy companies, led by Iberdrola and Endesa. Hostile to the idea of ​​reducing profits from high gas volatility, they hoped to maintain the European marginal price system, which means that all energy is sold at the price of the most expensive technology, namely gas for power plants. .

Significant profits

The profits were especially significant for them, as in 2021 renewable energy sources provided 46.7% of production between wind, hydraulic and solar energy. Until now, Spanish consumers have not taken advantage of these investments, which were supposed to produce green energy at a lower price. The introduction of a new tariff system should change the situation. This is the victory of the Minister for Ecological Transition, Theresa Ribera, who has been fighting for almost ten months to demand that Brussels reform the European electricity market.

“Consumers do not understand why efforts to use renewable energy sources do not lead to lower electricity bills,” she insisted in a letter to the Commission last summer. Pending a major overhaul of the European system, it has at least received an Iberian exception. Hoping this will have an initial effect on reducing inflation, which reached almost 10% in March last year.