Energy
Business 24/06/2021

Council of Ministers approves VAT reduction on electricity from 21% to 10%

The emergency measure will reduce the electricity bill, which has soared in June due to the increase in production costs

3 min
The minister of Transició Ecològica, Teresa Ribera, yesterday 
 at La Moncloa.

MadridVAT on electricity will be 10% until the end of the year. The Council of Ministers has approved this Thursday a royal decree with urgent measures in the energy field that includes the reduction of VAT on electricity, which is usually set at 21%. The Spanish government expects the tax reduction to translate into lower electricity bills for consumers at a time when the price of electricity has skyrocketed due to rising production costs.

The VAT reduction will be applied to all consumers, individuals and companies, who have contracted power of up to 10 kW, provided that the average monthly wholesale electricity market price is above 45 euros per MWh. The average contracted power of domestic consumers is 4.1 kW, so the government believes that "practically all" households will benefit from the measure. As for companies and businesses, 72.5% also have a lower contracted power. According to the executive, the measure will mean families will save up to 10% of the bill, which will mean a total of 877 million euros and 400 million for companies.

In addition, for severe vulnerable consumers, the 10% VAT will be applied until the end of the year regardless of their contracted power and market price. The third measure included in the royal decree is the suspension of the 7% tax on the value of electricity production during the third quarter of this year.

Economic recovery

The Spanish government admits the danger to economic recovery that the price of electricity could soar, but believes that the measures approved will help to avoid this. "Today's measures are extraordinary measures to put an end to the problem of the price of electricity and ensure that the economic recovery can be consolidated", said the Minister of Finance, María Jesús Montero.

According to Facua - Consumidores en Acción, the electricity bill of an average user has soared 46.5% during the first three weeks of June, compared to the same period last year, and threatens to make the bill for the month of June the most expensive in history. Forecasts suggest that prices will remain very high throughout this year and 2022. In fact, Unidas Podemos has been pressuring its government partner so that the VAT reduction is not a temporary measure and is extended at least until next year, but for now it is planned that the VAT of 10% will remain only until December 31. Even so, Montero has not ruled out that it could be extended later.

Why the bill soars

Energy production costs are rising because Europe is adapting to the fight against climate change and has doubled the cost of CO2 emission rights. The increase in tolls has translated directly into an increase in the cost of electricity - also gas - and consumer bills, although only 23% of the bill corresponds to variable costs, such as production, transport and distribution of electricity. "We are in a complex situation. There is an upward tension in the European market with an increase in CO2 emission costs far beyond what the European Commission had predicted", stressed the Minister of Ecological Transition, Teresa Ribera. "The electricity markets in France and Germany exceed the price of the Spanish market", she said.

At the same time, the change in the electricity tariff model, which establishes time slots with cheaper rates - especially at night - and others with more expensive rates so that consumption is not concentrated in the same hours of the day, can also lead to an increase in the bill if habits are not changed and the time slots are taken into account. The Spanish government, however, attributes the rise in electricity prices exclusively to the increase in CO2 emission rights.

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