Energy
Business 30/03/2022

The keys to emergency plan against energy prices

Treasury technicians calculate fuel rebate will cost €1.4bn

3 min
The Third Vice-President and Minister of Ecological Transition, Teresa Ribera, at a press conference after the Council of Ministers on Tuesday.

MADRIDThe Council of Ministers gave the green light to a series of measures to counter the economic shock, especially the upward spiral of energy prices – electricity and fuels – which the war in Ukraine has fuelled. However, the problem of rising prices had been dragging on for a long time because of the base effect – a year ago the scenario was completely different – as well as bottlenecks and problems with the supply chain.

Therefore, of all the blocks included in the plan, which the Spanish Prime Minister, Pedro Sánchez, announced on Monday, the most important is the energy block, although it still needs the endorsement of the European Commission and some details are yet to be decided on.

Cap on gas

The Minister of Ecological Transition, Teresa Ribera, has explained that the executive is negotiating on two sides, that is, with Portugal and Brussels, in order to be able to send a document with the proposals affecting the Iberian Peninsula this week. In a press conference after the Council of Ministers on Tuesday, Ribera confirmed that they are discussing figures on the cap on the price of gas, so that its current increase in price does not affect other technologies that are part of the wholesale market and which are more economical, such as renewables or nuclear.

"What is clear is that it will be much lower than [the current price]. It is important to explain what figure is chosen and this requires technical work. The lower the price that Brussels considers it can back, the better for us," Ribera reiterated. The Minister of Ecological Transition has recalled that the price of gas has normally been at around €20 per MWh, while in 2021 it climbed to €50 euros MWh and is currently at around €120.

Once the cap is determined, combined cycle power plants will not be able to sell gas-generated energy above this cap and will be compensated to cover the difference with the real price of the fuel.

Electricity, on two scales

Another of the formulas that Spain wants to propose to Brussels is to sell electricity to France at a normal price. The sale and purchase price of the day will be fixed without limit, at a price that will determine the type of energy that is exchanged. Another price will then be set for Spain and Portugal, taking into account the limit on the price of gas. This will ensure that this technology, which is the most expensive, does not exorbitantly affect other energy sources, such as renewable energies, which are cheaper, and thus reduce the price of the electricity bill.

Windfall profits

Until Monday night, the two partners of the coalition government, PSOE and Unidas Podemos, were negotiating how to strengthen the decree that cuts so-called "windfall profits". Finally, the executive has strengthened the measure, in force since September last year, which cuts these profits for some companies.

Ribera has explained that the reduction, that is to say, the "cutting" of extraordinary profits, will not affect contracts which have already been signed and neither will it be retroactive, as the European Union requires. This reduction will be applied to new contracts through a cap. That is to say, if up until now companies fixed the price of a contract according to what the futures market determined, now they will not be able to do so above a "reasonable" threshold, which will be €67 euros/MWh. The aim is for companies to reduce their extraordinary profits. Thus, the government will cut the profits of companies that sign contracts above this price, money that will go "directly to the consumer", sources from the Ministry of Economy explain.

The increase in the price of gas is directly transferred to the electricity bill paid by consumers, and that of fuels, such as diesel, to drivers' pockets. This is causing a loss of workers' purchasing power, who have seen how salaries have remained stable. That is why, to a large extent, Sánchez's government's action plan seeks to remedy the situation, starting with energy.

€1.4bn for fuel

Ministry of Finance technicians calculate the fuel rebate will cost the Treasury €1.4bn. This is part of the €6bn in direct aid and tax reductions included in the emergency plan. A figure to which the €473m which oil companies will pay (5 cents on the litre) should be added. The calculation is based on the consumption statistics of the Corporation of Strategic Reserves of Petroleum Products (CORE) and take into account the 20 cents per litre subsidy for the whole population between April and June.

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