Business 13/09/2021

Spain's electricity among the most expensive in Europe

The price of gas, poor connectivity, taxes and little competition are particularly detrimental to consumers

4 min
European energy markets

BrusselsThe bill that citizens living in Spain pay to plug in any appliance or turn on a light at home has already become a political issue that runs the risk of shifting the focus from the underlying problem: Spain has been, for some time, one of the EU countries with the most expensive electricity. This summer prices have escalated across the continent and are expected to continue to do so, but in the State a set of factors have combined to further damage its citizens's pockets every time. There is no single cause to explain it, nor is there a simple, single solution to solve it

The price of gas

The most expensive energy sets the final price of the bill across the EU

With the end of lockdowns, demand for electricity has risen across Europe at a time when the lack of wind and high temperatures mean that renewable energy sources are insufficient to produce the kilowatts demanded by households and manufacturers. So demand has to be met by fossil fuels, mainly gas. After a very cold winter, gas reserves are at very low levels. In addition, Russia (the main supplier) limits its flow and directs it mainly to Asia. The price of gas is so high that, unusually, it is higher than crude oil, as Bloomberg agency recalled this week in an article this week that warned that winter will be even worse.

That gas is skyrocketing is relevant because although only 10% of the electricity consumed in Spain comes from this energy, the pricing system (marginalist) means that it is the most expensive type of energy that establishes the price for the whole market. And this is getting worse. As Tim Schittekatte, an expert on the European electricity market at the Florence School of Regulation, reminds us, "if gas prices are high because it is scarce, more coal has to be used, which produces twice as much CO₂ per MWh". CO₂ emission rights (ETS) are more expensive because they want to penalise polluting energies and this adds to the exorbitant price of gas. Therefore, although we are using more renewable sources than ever before, it is non-renewable sources are driving up prices.

Isolation and taxes

Spain is poorly connected and taxes burden the bill

Almost no EU country recorded wholesale prices below €130 per Mw/h last Friday, when Spain and Portugal exceeded €150 . But why is the problem worst in the Iberian peninsula? It is a problem of connectivity that Italy also suffers to a similar extent due to its isolation. "The Spanish market is very disconnected from the rest of Europe because France's transmission capacity is very low," explains Bruegel expert Georg Zachmann.

Leaving this cocktail of external and temporary factors out, the electricity bill in Spain is, since the last decade, one of the ones that has a higher component of taxes in Europe, which leaves the consumer at a disadvantage when there are episodes of exceptional price hikes like this summer's. Eurostat statistics prove that only Denmark, Germany and Portugal have a higher portion of taxes than Spain in their electricity bill, where it is over 45% of the cost. With 2019 data 2019, only Danish, German, Belgian and Irish households paid more money for electricity than Spain, and all of them are countries with better salaries. Zachmann, moreover, adds that the Spanish market has little internal competition and that the pre-eminence of the regulated tariff also means higher prices.

Europe's role

Brussels says Spain has room for manoeuvre within the common regulation

Facing runaway prices, Spain has tried to take some measures that have been quickly neutralised by an unchecked escalation. The Minister for Ecological Transition, Teresa Ribera, has even turned to Brussels to ask for changes to reform market regulations she approved herself. She has defended herself stating the Commission does not allow certain interventions.

A spokesman for the EU executive claims that they are in contact with the Spanish government in case it wants to take further measures. Brussels argues that the current system is the most efficient and effective both to ensure competitiveness and to redirect investments towards renewable technologies. The experts consulted agree. "The market is European and is well designed, if it were not for this system energy would be even more expensive," says Schittekatte, who insists that the system "gives the consumer the idea that you have to consume electricity based on production and not demand" to make consumption more sustainable. "The market is sending out the right signals," says Zachmann.

This is not to say, however, that a government has no room for manoeuvre. "European legislation allows states to apply safeguards, such as public interventions in pricing for vulnerable households or consumers," stresses the Commission spokesman. "Spain can modify national rules while complying with those of the European internal market," he adds.

"France, which has a public electricity company and sets prices for nuclear energy, and other EU countries show that it is possible to adjust electricity prices for consumers. The question is whether this is a good idea. I would say that it makes sense to reduce the cost of electrifying heating and transport, for example by reducing taxes. At the same time, I think one would have to encourage a reduction in consumption when supply is scarce (in winter, bananas are also more expensive). In this case, the government could be advised to give a lump-sum compensation to households based on the extra income generated by high electricity prices (VAT, electricity tax, state-owned companies)," says the Bruegel expert.

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