The rise in electricity prices pushes more than 1.2 million households from the regulated market to the free market | Economy
The brutal increase in the price of electricity that began last summer accelerates the exodus of customers from the regulated market to the free market. In 2021 alone, more than 1.2 million households left behind a PVPC-type contract (Voluntary Price for Small Consumers), which fluctuates to the sound of the wholesale market, to directly agree on a price with their marketing company, according to published data this Monday by the National Commission of Markets and Competition (CNMC). This flight from the regulated market —historically cheaper for the customer and less profitable for the electricity companies, but which at times of high prices, like now, is preying on users— has accelerated exponentially compared to previous years: in 2020 those who took that road were less than half (575,000 users) and a year before the pandemic, in 2019, they were 660,000.
In October 2021, the latest data available, 60% of electricity consumers – some 18 million consumers out of a total of 29 million – had contracted a free market rate at a fixed price, which allowed them to maintain the agreed costs until the date of review of their contracts. By contrast, 40% of consumers had regulated contracts indexed to the spot market price, which is where prices have skyrocketed in recent months. The increase in prices suffered by these has been around 45% in 2021 (+229 euros compared to 2020 for an average consumer), according to figures from the CNMC.
The agency recalls that opting for the regulated market, “although it implies that the consumer is exposed to variations in the cash market at all times, in return, it does not incorporate the cost of coverage added by other products available on the market that provide greater stability. For this reason, the CNMC appeals to consumers to be “fully aware of the risks and benefits that this type of contract entails” and recalls that, “if there is currently a change in the PVPC formula including references to term prices , would also reflect the tension of rising prices transferred to the entire price curve”.
In other words: a domestic consumer who had switched to the free market at the beginning of the price crisis would have clearly paid less; if the change were made now, however, his new contract would already incorporate a much higher cost of electricity. Today, most marketers are offering free market contracts at more than 20 cents per kilowatt hour (KWh), which means internalizing current wholesale market costs. However, those who made the transition from regulated to free in the middle of last year obtained rates of between 10 and 15 cents per KWh, much more competitive than those offered by the PVPC.
For its part, the employers of the large electricity companies (Aelec) have advocated in recent months to end regulated rates, which would be restricted to vulnerable households, the beneficiaries of the social bond aid. The association alleges that Spain is the only country in Europe in which there are regulated electricity rates linked to the daily market, while in the rest of the bloc the rates tend to show more stable prices. In the long term, supply companies are the most benefited by this change from regulated to free, where the return per customer is much higher. In recent months, the big names in this sector have launched powerful commercial campaigns to accelerate this transit.
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An increasingly volatile market
The CNMC recognizes, yes, that the volatility of the regulated market “predictably will be more and more common in the future due to the high incorporation of renewable energies foreseen”. The entry into a storm of wind and solar power will mean that, during more and more hours of the day, prices will fall to minimum levels, two or even single digits. At the same time, however, in the sections in which they do not give themselves to cover the demand, it will be the combined cycles (which burn natural gas) that set the price and it will skyrocket. The volatility of the last few months may thus be the appetizer of what is to come when green sources take over most of the market.
The body, however, links the contribution of the PVPC rate —due to its dynamic nature: the price changes depending on the time slot— to the proper functioning of the market and a “more sustainable” energy transition, since it encourages spending in the hours in which the weight of renewables is greater. “They allow consumers to adjust their consumption to price signals in real time, which reflect the value of electricity at any given time.” Although these types of rates —such as night rates or those that discriminate by hours in which consumption is made— are also available on the free market, they are much less common than those that offer the same price at all hours of the day.
Notice about price gouging clauses
A good number of electricity companies include a clause in their free market supply contracts that allows them to adjust prices in the event of higher prices in the wholesale market, as has occurred in recent months. Some of them, underlines the CNMC, “have chosen to unilaterally modify their conditions”, a practice that “does not comply with the obligation of transparent information on prices and conditions of the European directive”. The regulator claims to be “supervising such conduct within the scope of its powers” and warns marketers that they must “notify in a transparent and understandable manner of any intention to modify and of the right to terminate the contract at no cost.”
