The debate that will affect the electricity bill: How much should be paid to improve the electrical grid?

MadridA technical debate has been raging in the electricity sector for months and is now entering a decisive phase: how much will have to be paid in the coming years to deploy and improve the electricity grid that allows light to reach our homes? The question involves a significant portion of the sector's companies, including Red Eléctrica, the electricity system operator, but also the National Commission of Markets and Competition (CNMC) and the Ministry for Ecological Transition and the Demographic Challenge. But the answers differ widely among the companies and the CNMC. One of the underlying reasons is the fact that it is the consumer who is directly affected by the final decision: the cost of the grid is passed on to the electricity bill.

These are the keys to understanding where the debate stands and where it is headed.

What is being discussed?

Spain needs a new electricity grid remuneration rate for the period 2026-2031. This rate is basically a cap on investment to improve and deploy the transmission grid, but also the distribution grids. The Spanish government sets a maximum investment amount, but the CNMC (National Commission for Energy and Mines) establishes profitability, through this rate, over a period of six years.

The first network, the transmission grid, consists of the high-voltage or very high-voltage lines managed by Red Eléctrica (it transports the energy produced in the power plants to the distribution companies' networks). The distribution networks (medium and low voltage) are the wiring that allows that energy to travel from the transmission substations to the end customer, that is, to reach homes. In this case, the main state utilities (Endesa, Iberdrola, Naturgy, and EDP), as well as some small distributors, are in charge.

What is the current limit?

The current remuneration rate for the electricity transmission and distribution network business is 5.58% and was negotiated and approved in 2019. It came into effect on January 1, 2020, and will remain in effect until December 31 of that year. Therefore, a new rate must be approved before the end of the year. The 2019 figure represented a reduction compared to the previous rate (6.5%).

Why is the CNMC speaking out?

The role of Competition is essential because the electricity grid business is a regulated activity: companies such as Endesa make their investments based on this rate of return, as they are paid for it through the so-called access tolls included in the electricity bills of the sectors. This also includes protecting the end customer from skyrocketing bills. Specifically, the CNMC's premise is that the rate should incentivize investment "without compromising the economic sustainability of the [electricity] system or affordability for consumers." What rate is proposed?

The Competition Authority has published a proposed remuneration rate for the next six years, which will remain open for public hearing until August 7. Specifically, it sets the remuneration rate at 6.46%. The CNMC estimates that with this increase, if the level of investment made by companies to date is maintained, Red Eléctrica would receive an additional 471 million euros through 2031 for the transmission network, and distributors an additional 1.355 billion euros compared to the previous six years.

Why doesn't the sector like it?

The sector rejects the Competition Authority's proposal. Aelec, the employers' association that encompasses Endesa, Iberdrola, and EDP, considers the Competition Authority's proposal "insufficient," in the words of its director of regulation, Marta Castro, during a briefing this Friday.

The sector criticizes the rate as leaving Spain at the bottom of the European Union in terms of investment in the electricity grid and calls for it to be raised to 7.5%. Furthermore, it also criticizes the change in the methodology used to calculate this remuneration rate. In the opinion of the employers' association, the methodology is not credible in terms of investment recovery: "We must have guarantees that ensure 100% recovery of the investment in the grid [...], we don't have them now," Castro denounced.

From the outset, companies point to the increase in interest rates from 2019 until now, which would have been a blow to profitability. But beyond the financial costs, they also cling to Spain's plans for the electrification of the economy. If this goal is to be achieved, the sector argues, a multi-million-dollar effort is required by the companies responsible for building and managing networks to deploy new ones and modernize current ones.

End-customer protection

For Competition, the impact on consumers is key in all of this, although the Spanish government also has these obligations on the table, which require the electricity grid to be improved and expanded: the rise of renewables; and finally, the path to achieving the electrification of the economy.

These obligations also serve as a defense for the electricity companies, ensuring that an increase in the rate will not mean an increase in tolls on electricity bills, but quite the opposite, and, therefore, the pie (tolls) must be shared more widely. "There is consensus on what needs to be done, but not on how to do it," noted the president of EDP Spain, Manuel Menéndez, at a conference almost a year ago.