In the absence of the final technical details, Spain and Portugal have started a key pact in Brussels on Tuesday to lower the electricity bill of homes and businesses. Both countries will be able to limit the price of the gas used by thermal power plants to generate electricity, a measure that will drag the entire electricity system to much lower levels than those registered in recent months. These are the main keys of the agreement:
How much is finally the top?
Spain and Portugal had proposed that the gas price limit for power plants be 30 euros per megawatt hour (MWh), but both governments were aware that this figure was only a starting point for negotiations with the community authorities. In the end, the cap will be somewhat higher: 40 euros per MWh in the first stages of application of the measure and 50 euros in the average period of application of the mechanism (12 months). Even so, this final threshold will allow a more than substantial reduction in the price of electricity in the wholesale market. Today, the price of gas is around 80 euros in the Iberian market Mibgasthe peninsular reference.
Why 12 months?
The Executive of Pedro Sánchez trusts in being able to close in the next few days all the pending technical fringes with the European Commission to approve the measure in the Council of Ministers next Tuesday. If the deadlines are met, the cap on gas should be in force as early as May and would extend its validity until May 2022. In this way, it would cover both the summer —when the demand and, therefore, the price, usually shoots up the greater need for air conditioning—like, above all, next winter—when the pressure doubles. It is the closest thing to a safety net for what may come in the coming months.
How much will prices drop?
He knows in depth all the sides of the coin.
Much. Once the cap on gas is in place, the average daily price of electricity should be around 130 euros on an expensive day, in which the newly minted renewables (by far the cheapest sources set a price in very few or no band time and gas imposes its law). In the hours in which the combined cycle plants close the price —directly or indirectly—, it should not exceed 140 euros, according to three specialists consulted by this newspaper. These figures contrast both with the current values - this Wednesday more than 220 euros per MWh are paid, with peaks of almost 270 – and with the values of the recent past – in March, the most expensive month in history, electricity cost more than 280 euros per MWh—.
Which customers will the drop affect?
Households and companies that have a regulated rate, approximately 40% of the total. The price paid by these users is directly linked to the wholesale market, which is where the discount will take place but also where the brutal explosion in prices has taken place since last summer. Those most affected so far will therefore be the most benefited when the measure comes into force. The rest of the consumers, those who have a free market rate, will not achieve any price improvement in the short term. What’s more: the electricity companies have threatened to charge those customers compensation for the gas cap. In any case, if the incentive in recent months was for customers to switch from the regulated market to the free market, now this dynamic will take a 180-degree turn.
How will it be financed?
The plan of the Ministry for the Ecological Transition happens because it is the electricity system itself that covers that difference between the current price of gas (around 80 euros per MWh) and the cap of 40/50 euros. Consumers would have to pay a higher amount for electricity generated with other technologies, beyond thermal, but the net balance would be positive for them, since the maximum hourly price would fall drastically from current levels. There will be, according to the active and passive Government, no compensation charged to the General State Budgets. Nor a greater tariff deficit.
What about the interconnections with France?
The initial proposal from Spain and Portugal included a double price matching system that prevented consumers from other member countries from benefiting from the mechanism that makes electricity cheaper on the Iberian Peninsula. This mechanism was also accompanied by restrictions on electricity exports. But these precautions have been dropped during the negotiation with the European Commission. The third vice-president and minister for the Ecological Transition, Teresa Ribera, affirmed this Tuesday that the agreement with Brussels maintains “the interconnections, the exports of electricity from the Iberian Peninsula to France” and that the French consumer will have to pay the same than the Iberian consumer in this setting”. However, there is still much to be specified on this point: how will Spain avoid the sale to France of energy subsidized by the national consumers themselves?
Will other countries follow the path of Spain and Portugal?
The interest is maximum, but very few can demonstrate to the EU —as the Iberian Peninsula has done— their status as an energy island, both due to the low level of interconnections and the high penetration of renewable energies. All in all, the Spanish government believes that its plan may end up opening a spigot through which other member states pass: “If it works, there will be other member states that consider it,” said Ribera in a recent interview with EL PAÍS.