Cap gas to cut inflation in half | Economy

The European Commission approved on Tuesday the mechanism designed by Spain and Portugal to stop the rise in electricity prices under the protection of the so-called Iberian exceptionality. Given that the factor behind much of this increase is the high price of gas —exacerbated after the Russian invasion of Ukraine—, the proposal presented by Minister Teresa Ribera and her Portuguese counterpart, Duarte Cordeiro, involves untying the price from both. Specifically, it consists of limiting the price offered by the plants that use this fossil fuel (or coal), which will significantly reduce the market price during the hours that these are the marginal plants.

In the economic sphere, the most visible effect of the measure will be on inflation. In March, the CPI stood at 9.8% pushed by the rise in the price of oil, gas and electricity. The latter contributed almost half of the increase with 4.5 percentage points. Taking into account the almost perfect relationship between the price of the megawatt hour (MWh) and its contribution to inflation, electricity would contribute around 0.7 points to the index in May, almost four points less than in March. If we add to this the lower contribution of fuels after the discount of 20 cents per liter approved by the Government, half of inflation could be erased almost with a stroke of the pen in the coming months.

Given that, among other things, pensions are updated with the CPI, the impact of the proposal on public coffers is more than considerable. At the social level, the importance of the agreement lies in the fact that 40% of residential consumers —among them the most vulnerable, as it is a requirement to access the electricity social bond— are covered by the regulated rate (PVPC) that reflects the prices of the wholesale market. Despite the fact that the Government has extended the discount on the social bond, it is likely that the rise in prices in recent months has erased the reduction, leaving it without effect. In this way, the general drop in prices resulting from the implementation of the mechanism will help to alleviate the impact on the population.

However, the mechanism also presents a risk of decoupling between the long-term decarbonization objectives and those of reducing the aggregate and redistributive impact of short-term energy price increases. In a context of opportunity for policy change such as the current one, that the direction taken has focused on damaging the price signal, the main instrument for advancing in the ecological transition, is not the most recommendable thing to do. It would therefore be necessary to advance in more sustainable modifications with the transition process while considering an increase or modification of national policies aimed at cushioning the impact on the most vulnerable.

Natalia Collado She is an expert in regulated markets at the Center for Economic Policies EsadeEcPol.