Energy
Business 07/06/2021

The war over the electricity bill

Minister Ribera seeks to reduce energy companies' gains to make electricity cheaper for users

3 min
Maintenance work on a high voltage power line.

BarcelonaThe price of electricity in the wholesale market in May closed at €67.12 per megawatt hour (MWh) on average, 3.2% higher than in April and 70% higher than the average for this month in the last five years. A record figure within existing data. The prices are soaring despite the fact that renewables increasingly weigh more in the power generation mix, 50% in May, according to data from Red Eléctrica.

The Minister for Ecological Transition, Teresa Ribera, has reformed the bill to try to promote efficiency among users. Now, in addition, she is proposing a reform to lower the price of electricity in the wholesale market - an attempt in which all her predecessors have failed- and cut the revenues of big electricity companies. But how does the market work and how can this be done?

The three parts of the business

Generation, transmission and distribution, and commercialisation of electricity

The electricity business has three stages: generation, transmission and distribution, and commercialisation. Only large electricity companies participate in all three parts, transmission is carried out by Red Eléctrica and distribution depends on geographical area - in Catalonia it is basically carried out by Endesa. It is in trading that many new companies have entered, although their market share is still small. The generation in large power plants is done by the big electricity companies, despite the fact that the irruption of renewables has substantially increased the number of generators. In order to avoid depending on the wholesale market, many small traders are signing long-term agreements with these new renewable generators.

Price formation

A marginalist market with a lot of weight from large electricity companies

The scarce interconnection with the continent forces the formation of an Iberian electricity market. To form the price of electricity in the wholesale market, a marginalist system is used. There is an auction, and the last technology to enter the market - which is the most expensive - is the one that sets the price for all electricity. Thus, there is nuclear power, which cannot be stopped and always goes to market; then cheaper technologies, such as wind, photovoltaic and hydro, enter the market, followed by the most expensive ones: coal (in the process of closing down) and combined cycle gas plants.

When demand is high - as has happened this May, when it grew by 11% - most often, gas sets the price of MWh. Therefore, as all production is paid at the same price regardless of the technology it comes from, the cheaper production means create more income for the generators, because they still charge a higher price per MWh placed on the market.

Moreover, this May, two factors have come together. On the one hand, the rising price of gas. On the other hand, the price of emission rights per tonne of CO2 is soaring. These two factors mean that generation with the most expensive technology, which often sets the price, has become even more expensive.

The cut

The minister wants to put an end to 'godsend' profits

Before they used to be called godsend profits, now they are called CO2 dividend. The Spanish government defines it as "the remuneration of CO2 not emitted from the electricity market". That is to say, MWh generated without CO2 emissions - nuclear, renewables and hydro - are paid at the price set by gas, which pays emission rights. Now, the minister wants to stop companies receiving income for CO2 emission rights for plants that do not generate emissions, i.e. nuclear, hydro and wind before 2005, when there was still no CO2 market.

This cut will mean a minimum of about €1bn per year for large generators, especially Endesa, Iberdrola and Naturgy, but that may increase if the price of emission rights continues its escalation.

The Spanish government estimates that the affected plants earn about €4bn per year for their production, and that 25% of it corresponds to this carbon dividend. That is, about €1bn, which is what would now have to be returned each year. But the impact is progressive. If the price of a ton of CO2 reaches €100, this would be about €2bn.

Impact on bills

Initial reduction of 4% and up to 15% in five years

The measure would mean, according to the calculations of the Spanish government, a 4% bill reduction for users. But there is another added measure underway, the National Fund for the Sustainability of the Electricity Sector (FNSSE), which aims to remove, the oldest premiums to renewables (about 6,500 million per year) from the bill, which the entire energy sector would pay for. The combination of both measures, carbon dividend and FNSSE, would bring the bill down by 15% in five years.

The sector, on the warpath

The State is already preparing for a long period of litigation

The two measures have put the major energy companies on the warpath. The FNSSE has especially riled oil and gas companies, such as Repsol and Naturgy, which will have to pay for premiums for renewables. For the others, it is the carbon dividend. Endesa, Iberdrola, Natrurgy and EDP are the owners of nuclear power plants. Through Foro Nuclear, the sector's employers say that nuclear power plants are running at a loss and decreasing their income will bring them to bankruptcy and early closure.

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