How Spain and Portugal want to implement the special route

Madrid Nervousness is growing in Spain. By the end of April, the government in Madrid had hoped for the green light from Brussels for its “Iberian special path” – a state-set upper limit for the gas price in Spain and Portugal. But after EU Commission President Ursula von der Leyen spoke out in principle in favor of a temporary price cap for energy costs in the two countries a month ago, the negotiations are now stalling.

The EU has concerns that Spain and Portugal will de facto drop out of the European single market for gas prices with an exception rule. They would be the only countries in the Union with a gas price cap, while the rest of Europe would have a market price.

This Tuesday, the Spanish Minister for Ecological Transition, Teresa Ribera, and her Portuguese colleague Duarte Cordeiro are with EU Competition Commissioner Margrethe Vestager to find a solution to the conflict.

The background to the special solution that has been urgently demanded is a Spanish peculiarity: in the country, the regulated energy tariff is linked to the continuously changing price on the spot market. The 40 percent of households that use such a tariff feel price increases immediately.

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The record electricity prices had regularly filled the front pages of Spanish newspapers even before the Ukraine war. Prime Minister Pedro Sánchez therefore promised the Spaniards a remedy and fought hard in Brussels for a special path. Since Spain and Portugal are closely linked in the energy sector, they joined forces on the gas price cap initiative.

Beware of imitators

The governments in Madrid and Lisbon consider Brussels’ concerns to be unfounded. They argue that only 2.8 percent of the electricity generation capacity installed in their countries could be exported to France and thus to the rest of Europe. Portugal and Spain are thus an “energy island,” said Sánchez. A special rule therefore does not affect the European internal market.

But that is only partly true. If the price of electricity in Spain becomes significantly cheaper than in other EU countries due to the national upper limit for gas, the intervention is likely to quickly find imitators.

Ultimately, this could set in motion a movement that might necessitate a new price-fixing mechanism in Europe. That’s the big concern in Brussels and Sánchez’ big goal.

The price of gas currently determines the price of all types of energy in Europe. Sánchez has been wanting to change the system for years and stated this in the 2019 coalition agreement with his left-wing populist coalition partner Unidas Podemos.

Power lines in Spain

High energy prices in the country are a national uproar.

(Photo: Caro / Goettlicher)

“We have to reform the energy system in Europe from the ground up because it doesn’t work,” Sánchez said in a recent interview. “We pay for electricity based on the price of gas, that’s not logical, that’s why we need a reference price.” But both other EU members such as Germany and the European agency for the cooperation of energy regulators, Acer, keep it up to date despite its weaknesses system fixed.

Diego Rodríguez, an energy expert at the Complutense University in Madrid, is critical of Sánchez’s move. “It’s about how to isolate countries without them exiting the single market,” he said. “There is no European standard for a gas price cap that is only being introduced in a few countries.”

Madrid wants a double auction

According to informed circles, Madrid wants to solve the problem with a double auction: one for the price that should apply to the export of electricity from Spain to France and follows the previous market mechanisms. This is to prevent the cheaper Spanish electricity from being exported to France and then affecting the market price in the rest of Europe.

There will also be a second auction in Spain and Portugal for the price of electricity produced using gas. The gas price cap should therefore only apply to electricity production, but not to gas that is used for heating, for example.

More Handelsblatt articles on the European energy debate:

Madrid wants to cap the gas price for power generation to 30 euros per megawatt hour. This is many times lower than the market price for gas, which has been over 100 euros per megawatt hour in recent weeks. The difference between the market price and the price cap is to be reimbursed to the suppliers.

It is still unclear who exactly is to pay for this subsidy. In view of the strained budget situation, it is very unlikely that the state will pay for this from its budget. The most likely solution is that the costs are passed on to all electricity customers.

The utilities expect that the gas price subsidy will cost ten billion euros. If this money were distributed to all electricity customers in Spain, everyone would have to pay 40 euros more per megawatt hour of electricity.

The bill would drop significantly for Spanish households that have a regulated electricity tariff. The same applies to companies that buy their electricity on the spot market.

The market for long-term electricity contracts is idle

The remaining 60 percent of households and the rest of the companies have concluded long-term contracts on the open market, some of which are well below the currently high market prices. They would also have to pay 40 euros more, since all electricity customers would probably participate in the subsidy. “This means that the problem of one group is passed on to everyone, that’s dramatic,” says the industry.

The suppliers are therefore demanding that Madrid separate the regulated tariff from the price on the spot market. “The government intervenes the market price instead of admitting the political error in the design of the regulated tariff,” criticized an industry representative.

>>Read here: Gas from Spain is supposed to help northern Europe – but a pipeline is missing

The unclear situation ensures that the market for long-term electricity contracts is idle. Everyone waited until the details were clear – and were afraid that everything would change again, they say. According to a survey by the investment bank BNP Paribas, investors consider the regulatory risk for utilities in Spain to be greater than in any other EU country. In addition, customers would not conclude long-term electricity contracts because the price was completely unclear.

The solution to the tug-of-war between Madrid, Lisbon and Brussels is likely to be a much higher price limit than the 30 euros per megawatt hour of gas that the Iberians are demanding. “It has to be at least 50 euros,” said energy expert Rodríguez.

The industry, on the other hand, only considers values ​​between 70 and 100 euros to be acceptable as long as this is only a temporary measure. Brussels is also much closer to 70 euros than 30 euros, Spanish newspapers report.

More: Why high energy costs in Spain are a warning for Europe

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