Madrid In the tug-of-war over an “Iberian special path” in energy policy, Spain and Portugal have reached an agreement with the EU Commission: For one year they can set a state-set upper limit for the gas price for electricity generation in their countries.
“We have reached a political agreement with the European Commission,” said Spanish Minister for Ecological Transition Teresa Ribera in Brussels on Tuesday. She and her Portuguese colleague Duarte Cordeiro met with EU Competition Commissioner Margrethe Vestager to discuss the details of the planned upper price limit. The last open questions should be clarified this week, said Ribera.
The price cap is to apply from May, starting at around EUR 40 per megawatt hour and averaging EUR 50 over the term. This is far below the market price for gas, which has been more than 100 euros per megawatt hour in the wholesale trade in recent weeks. At the same time, the price cap is higher than the 30 euros per megawatt hour that Spain and Portugal had demanded.
The agreement was preceded by a month of intensive negotiations over the details. At the end of March, Spanish Prime Minister Pedro Sánchez had already secured basic support for the plan in the European Council.
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However, the EU had concerns that Spain and Portugal would de facto exit the European single market for gas prices with an exception rule. They are now the only countries in the Union with a gas price cap, while the rest of Europe has a market price.
Beware of imitators
The governments in Madrid and Lisbon 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 Spanish Prime Minister Pedro Sánchez. A special rule therefore does not affect the European internal market.
However, that is only partially true. If the price of electricity in Spain and Portugal 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.
>>Read here: Gas from Spain is supposed to help northern Europe – but a pipeline is missing
The most expensive form of energy currently determines the price of all types of energy in Europe. The gas has been there for months. 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.
“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 the electricity based on the price of gas, that doesn’t make sense, so we need a reference price.”
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.
The record electricity prices had regularly filled the front pages of Spanish newspapers even before the Ukraine war. Sánchez therefore promised the Spaniards a remedy and fought hard in Brussels for the special route. Since Spain and Portugal are closely linked in the energy sector, they joined forces on the gas price cap initiative.
High energy prices in the country are a national uproar.
(Photo: Caro / Goettlicher)
Madrid wants a double auction
Spain had proposed a double auction to Brussels: one for the price that should apply to the export of electricity from Spain to France and which 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 only apply to electricity production, but not to gas that is used for heating, for example.
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The energy suppliers are to be reimbursed for the difference between the market price and the price cap. 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 Spanish suppliers, who fear for their margins, have opposed the plans. They assume 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.
The unclear situation of the past few weeks has ensured that the market for long-term electricity contracts is idle. All participants had waited for the agreement – and were still afraid that everything would change again, it is said. 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.
More: Why high energy costs in Spain are a warning for Europe