The ‘Iberian exception’ could sentence the European electricity market | companies

The Government opted last week for a binge of measurements framed in a comprehensive plan to deal with the consequences of the war in Ukraine. He had many ready two weeks before and, in fact, he considered the option of approving a first package in the Council of Ministers on March 15, and leaving the less mature ones for the 29th, which would have placated, if the fuel discounts, social unrest and an exhausting transport strike.

In the midst of a fierce crisis, those two weeks took forever, but the Government wanted to wait to see the result of the summit of heads of state that was held in Brussels on March 24 and 25. In it, the star measure was settled, the one that can really have a significant effect on the fall in electricity prices and that can jeopardize the future of a marginal market which, until now, has been considered sacred.

Along with his Portuguese counterpart, Anthony CostaPresident, Pedro Sanchezwrested an unprecedented agreement from Brussels which, although it does not involve direct intervention in the wholesale market (pool), since it does not touch the European matching algorithm, allows the Peninsula to offset the cost of gas to generate electricity, with which the offers of combined cycle plants in the pool will go down and, with it, the marginal price charged by the rest of the energies (the so-called inframarginal: nuclear, hydroelectric and renewable).

Is about a complex mechanism (another one for the tangled ball of electricity regulation), according to which two auctions will be held: one, as up to now, for European demand and another, a replica of the first, but with the price of gas limited. The difference (the gas will charge its real price in any case) will be prorated between the rest of the hours and will be paid by demand. The drawback of this measure (a real test bed was the export pressure from France, which would have demanded the cheapest energy on the Iberian market (Mibel), which would have been counterproductive: the greater the demand, the greater the production with gas, which would have raised the marginal The option of closing the interconnection, which the companies in the sector even raised, it was anathema.

Although the system has been agreed with the European Commission, alleging the electrical insularity of Spain and Portugal (with an interconnection of just 2.8%) and the high development of renewables in both countries (45% of the ca 60% of installed capacity, respectively), the thorniest issue remains to be resolved: the ceiling price (price cap) that will be fixed to the gas and the time period for its application. Spain has proposed the lowest gas price (€30/MWh) which would lead to a wholesale market price below double digits. To obtain the effect on the gas generation pool, it is necessary to multiply this by two and add the cost of CO2, tolls and, in this case, the prorated compensation between the rest of the energies. And they propose that it be applied, at least, until the end of the year, because for less time it is not worth the effort to apply such a complicated system.

And why 30 euros/MWh? Although the European Commission has promised to be flexible in interpreting the regulations, it wants to set a higher price, of about €70/MWh, so that the difference between the Peninsula and the rest of the countries is not very high, and thus avoid highlighting the evils of a marginalist system that, according to the Vice President for the Ecological Transition, Theresa Rivera, “it was designed in the 90s for few operators and very close prices”. By setting the bar very low (or not so low, if one takes into account that the price of gas in the United States stands at 21 euroe/MWh), the Iberian governments aspire to achieve a medium term.

The president of the EC, Ursula von der Leyen assured after the European summit, that a possible reform of the market could be analyzed later, after the proposal that the European sectoral regulators are preparing, through ACER, although the technicians of the CNMC They have already warned that there is not much to expect from this body’s report, which could be released in April.

Be that as it may, the energy crisis unleashed by Russia last summer, and worsened after the bloody invasion of Ukraine, could put an end to a marginal price system, which has been totally contaminated by a gas market in the hands of the Russian president, Vladimir Putin. Among the countries in favor of the reform is France. In fact, the idea of ​​imposing a cap on gas came from the French energy company Engie, which, according to certain sources, acted on behalf of the French government.

Your president, Emmanuel Macron, has publicly expressed its desire to change a market that prevents them from taking advantage of its cheap nuclear energy, which, although it accounts for 70% of production, is being contaminated by the marginal price of gas, which does not reach 20%. Precisely, for today, the wholesale price in France registers a record of 551 euros/MWh on average, with spikes in two different hours that are around 3,000 euros/MWh. This is due to the unavailability of several nuclear power plants and the unexpected cold wave. The situation has led the manager of the French network, RTE, to declare an orange alert and recommend a reduction in consumption.

A similar proportion, between marginal energies (gas, at the moment) and inframarginal energies is that of the Spanish market: in general, 20% and 80%, respectively.

Disappointment of the electric

The Spanish electricity companies, who had defended a cap on the price of gas, for which they have even lobby together in Brussels, have received the proposal with a clear discomfort. Even more than the other harmful measure included in last Tuesday’s package, by which the new contracts that they sign for a price higher than the €65/MWh. At the end of the day, they consider in the sector, this is a temporary measure, for now, until June 30, it is not retroactive and they will always be able to calculate if it is worth paying the reduction or slowing down the signing of contracts.

But in the case of the future gas price cap, it is not the one that had been claimed. The companies wanted the ceiling be applied to the price of Mibgas, but not to OMIE offers, as this considerably reduces the extra benefits they receive for the marginal price of gas. And to this are added the problems of double matching in the settlement of contracts in the forward market. Its intention, moreover, is that gas compensation be subsidized or that consumers pay it on the bill or through a rate deficit.

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