Energy
Business 28/04/2022

Gas price cap will reduce regulated electricity bill by 30%

Spanish government wants new conditions to be in force by next Wednesday, May 4

4 min
Electricity meters

MADRIDIf everything goes according to the Spanish government's forecasts, as of Wednesday, May 4, consumers who have contracted a regulated electricity tariff, also known as PVPC (voluntary price for small consumers), will see a reduction in their bill of around 30%. This has been anticipated by the Minister of Ecological Transition, Teresa Ribera, on Wednesday. The Spanish government intends to approve the measure next week, limiting the price of gas to around 50 euros for 12 months , which received the go-ahead from Brussels yesterday. The goal is for the measure to come into force as soon as possible, in all likelihood next week.

Although the energy sector remains cautious – "you have to read the small print to understand the measure and be able to make calculations correctly", insiders told ARA – the agreement between the Spanish and Portuguese governments and Brussels allows us to begin to see how the cap will affect PVPC consumers. These types of customers, despite being only 40% of the total, are the ones who have suffered the most from the increase in the price of electricity because the regulated tariff is linked to the wholesale market, where the limit on gas in combined cycle plants will have an impact.

Initially (and ambitiously), Spain and Portugal proposed a limit on gas for electricity production of €30 euros/MWh, which would have resulted in an electricity price of around €100/MWh, as this newspaper explained . Finally, the Commission has opted for a €40 cap, which will evolve to an average limit of €50. The Ministry of Ecological Transition says this was not "the optimal result", but they believe that it is compensated by the fact it will stay in place for 12 months. The fact is that this will make it possible to control the price of this technology over next winter, which is when electricity prices usually shoot up. Thus, the pact with Brussels would leave the price of electricity at around €150/MWh, at most, on the wholesale market. An important difference if it is taken into account that it could leave behind the €200+ the wholesale market has been registering these last few months on average. According to Ribera, this would also have a direct impact on inflation .

What about France? In the end, the proposal to set a different price to sell energy to France has fallen through. This has always been an element of concern for the Commission in case it could distort the European free market. France will also benefit, but in exchange a commitment has been made to increase interconnections with this country. In fact, this is one of the elements that have allowed Spain and Portugal to become "an energetic island". The goals set out by the Commission estimate electricity interconnections with member states at 10%. But the cables connecting Spain with France have a capacity of 6%

Who will pay for it?

One of the technical issues still to be resolved is the compensation to the combined cycle power plants for the price at which they will continue to pay for gas. This is where customers with a free or unregulated tariff (60% of the total) come into play. For these consumers, the marketers set a price that is not strictly linked to the wholesale market and can modify it, i.e., lower it, but also raise it. However, as these companies will also be able to access this cheaper energy, the logic is that they will also opt for reasonable prices and, therefore, despite the surcharge, the final bill will still be low.

"If the price of the pool goes down and your supplier does not change your tariff, perhaps you should consider changing companies," sources from the Ministry of Ecological Transition explain, arguing that what would be reasonable is that they do not raise their prices. However, the electricity companies have always been more in favour of this compensation being paid for by the state or by all consumers.

A rocky road

Despite the current energy crisis, the result of unprecedented electricity and fuel prices, negotiations with Brussels have not been easy. Not only because the Commission has always looked askance at any modification of the European electricity market, but also because the main electricity operators - who have even put pressure on Brussels to overturn the agreement - did not like the idea of a cap on gas. In fact, the president of Iberdrola, Ignacio Sánchez Galán, one of the first to publicly criticise the measure, insisted on Wednesday that "the solution would have to be a joint one for all European territories, because Spain is not an energy island", contrary to what the government maintains. Galán, however, said that the measure does not affect the company's benefits either.

On the other hand, consumers and businesses have applauded the announcement. Business organisation Cecot considers that the agreement is "good news" and that it was "the most feasible measure in the short term" to lower electricity prices. "Now, we must continue to promote measures to restructure the energy market in Spain," said Josep Casas, director of the Office for Energy Transition of the employers' organisation. The Association of Financial Users (Asufin) considers that the agreement is a stopgap solution and wants a "real" reform of the electricity bill, with a "transparent" pricing system that does not depend so much on gas or oil.

Energy aid package until June

All in all, "the Iberian exception" will be added to a series of measures already in force that the Spanish government passed a month ago to counter the increase in inflation and, in particular, in energy prices. The government expects to obtain some €1.8bn to lower the electricity bill. It has also reinforced the tax on "windfall profits" for electricity companies and implemented a fuel subsidy, among other measures which will be in force until June 30 at least.

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