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The Spanish government has until the European Council on March 24 and 25 to try to change the minds of the northern countries. Together with Portugal, Greece and Italy, he will defend that the market must be intervened with the aim of decoupling gas and that it does not mark the price of electricity. On repeated occasions, the Executive of Pedro Sánchez has defended that, despite only accounting for 15% of the supply, gas is setting the price of the total as it is the last to enter. As it is a marginal system, all those who have sold in the auction take the price of the last unit of energy purchased that has bid the highest.
The most hackneyed metaphor now is that you are buying 85% of the cheap ham and 15% of the expensive one, but everything is paid at the price of five jacks. However, that is not the opinion of the European Commission, which in the document it published about ten days ago did not show itself willing to touch the wholesale market. This communication was written as a guide so that countries can take measures to tackle the current energy crisis. And in several points it squeaks with the position of the Spanish Government. President Sánchez will have to make important advances these days to get Europe to allow him to do what he wants: intervene in the wholesale market by putting a price cap of 180 euros. This already existed until mid-2021, but the Commission insisted that it be abolished. The Vice President of Ecological Transition, Teresa Ribera, has already admitted in public that if they do not get the EU to accept it, then they will have to regulate outside Europe.
According to government sources, the role of the Commission fell far short of what the Spanish Executive wanted. It seemed that Brussels was going to give its arm to twist. But Berlin intervened at the last minute and the text was diluted. Hence the tour of President Sánchez to try to add a sufficient majority in favor of his thesis. In the declaration of the informal council of Versailles a week ago, a mention was made to which the Spanish Government clings: “We invite the Commission to present a plan by the end of March to ensure the security of supply and energy prices affordable next winter. An attempt is being made for the Commission to open the door to Spain’s intentions in this new document.
In the communication published before the Council, the Commission is not in favor of touching price formation on the wholesale market. Moreover, it speaks of not distorting it. What it does allow is touching the retail market by establishing regulated prices for households and SMEs, or compensating vulnerable households with measures such as the social bonus. But he insists that it must be done minimizing the effects for the wholesale market.
Although on paper it says that the design of the market could be optimized, it refers to a report from the European regulator that assured that the marginalist system was the best that could be used. The Commission and the northern countries are reluctant to intervene in the market for various reasons: they consider that it is a necessary signal to encourage investment that ensures supply in the medium term and decarbonisation. They also believe that it is a signal to encourage the search for efficiency and savings in energy consumption. Although only limited amounts of electricity are traded between countries, the Commission has never wanted to touch the marginal system because it is the basis for setting up a European market in which the cheapest energy goes from one country to another. Not to mention that it could generate distortions in the competition between industries of different countries for energy.
On the other hand, the Brussels document does support that the extraordinary profits of electricity companies can be taxed to compensate consumers. Only that this tax should last until June 30 at most and be limited only to the benefits that may arise as a result of the conflict, not because of the previous rise that had been occurring since the summer. “It should be noted that part of the global increase in gas prices has a structural component (which could be defined on the basis of average prices). The tax should not deal with the effects of the structural component,” the communication says.
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The Spanish Government already approved a tax on these benefits last year. However, he had to redo it up to twice and left it very watered down. According to the role of the Commission, that tax established by the Executive would not be valid as it was prior to the crisis due to the invasion of Ukraine. However, the government could legitimately argue that prices were actually already being altered since September as Russia restricted its gas supply.
Under the Commission’s document, the Government could redefine and tighten this tax. One possibility would be to do so through corporate tax benefits, but this option has the drawback that it would take a year to collect.
In addition, the Commission expressly mentions that the income from the carbon emission rights system, some 2,000 million euros in Spain, can be used to compensate the increases to citizens and companies. Those 2,000 million is what it costs in France to lower gasoline by 15 cents per liter. The EU will also relax the state aid framework again in order to subsidize energy-intensive companies.
That is to say, the Commission offers a whole package to try to mitigate the energy blow with subsidies, bonuses and tax cuts. But without touching the wholesaler. The problem for the Government is that compensation requires a lot of fiscal muscle at a time when public finances are stressed after the pandemic and when the ECB is going to stop buying debt. By setting a cap, the price would be limited and money would only have to be spent on compensating the gas for the cost that has not been paid. There would be a deficit but the savings that would be achieved would be much greater. It would serve to satisfy the demands of Podemos not to lower taxes. And the image of getting involved in the electricity market would be transferred.
Market sources maintain that the government is right that the system needs reform. However, they do not like the price cap because of the problems it may generate: in the medium term, a lower incentive to invest; In short, the compensation mechanism must be well designed so that there is no lack of gas, because the companies take it to where they can earn more and not where they only pay the costs. Another problem they point out is that since there is more supply than demand below that limit, the price will tend towards 180 euros.
