Sánchez will cut energy companies' "windfall" to reduce energy bill

The council of ministers is expected to approve an action plan on Tuesday to put an end on the upward spiral of energy prices

3 min
Electric towers

MadridThe president of the Spanish government, Pedro Sánchez, has announced that he will cut energy companies' "windfall" to limit the price of gas and lower the electricity bill in an interview on Monday evening on TVE. Specifically, the measure the Spanish executive is considering seeks to confiscate firms' extraordinary profits and redirect them to consumers with the aim of "capping" the gas bill and thus reducing the electricity bill.

["Companies] can afford it and we will redirect it to consumers," Sánchez said during the interview, while defending that "it is not reasonable" that energy companies get these extraordinary benefits. However, Sánchez has not specified how he will carry out the measure, that is, how much of the "windfall" he will confiscate to truly limit the price of gas and lower the electricity bill.

The Minister of Ecological Transition, Teresa Ribera, already had on the table a bill that aims to make electricity companies pay for "windfall" profits, which will soon be discussed in Congress. In the Spanish wholesale energy market, the price is set by the most expensive energy required. This same price is applied to all the energy produced, regardless of its production cost. This means energy companies make huge profits from the cheapest energy sources (i.e. wind and nuclear). It is these profits, popularly known as "windfall" or "fallen from the heavens" that the government seeks to curtail.

Unidas Podemos members of the Spanish government have not been slow to react to Sánchez's announcement. The second vice president and Minister of Labour, Yolanda Díaz, has stated on Twitter that "the common good is above the large companies' bottom line". The Minister of Social Rights and Agenda 2030, Ione Belarra, has also spoken in favour of the announcement and has defended Unidas Podemos's role in the move: "It is good news that our partner in government has accepted some of our proposals to regulate the electricity market".

Fiscal measures

The measure is part of a shock plan to end the upward spiral of energy prices. It will be passed this Tuesday at the Council of Ministers, as confirmed by Sánchez. It also adds other fiscal measures, already announced by the Minister of Ecological Transition, Teresa Ribera, and which Sánchez has confirmed. On the one hand, the Spanish president has stated that the suspension of the electricity sales tax and the reduction from 5.1% to 0.5% in the special tax on electricity production will be extended, meaning the State will collect €1.4bn less in taxes.

The social and political pressure, as well as that from coalition minority partner Unidas Podemos, has forced the Spanish President to stand up to a problem that is causing great damage. Sánchez has made a commitment to keep the average price of electricity bills in 2021 at 2018 levels. In this sense, the spokesperson of the Spanish government, Isabel Rodríguez, already pointed out that short-term measures would be approved "immediately".

Action plan

Up until now, the Ministry of Ecological Transition was exploring forcing large energy companies to sell renewable energies in a separate market, to avoid prices being affected by rising gas prices. In addition, the ministry is looking to strengthen coverage of vulnerable consumers and encourage self-consumption. Nevertheless, it remains to be see whether all of these measures will be included today. So far, only the reduction in VAT and the temporary suspension of the electricity tax are certain.

The average cost of electricity in the wholesale market will fall 0.47% today to €153.43 per MW/h, a little below Monday's all-time record of €154.16 per MW/h. Even so, Tuesday's price will be the second highest recorded after Monday's price.