The European Commission has approved the Iberian mechanism to lower the electricity bill in Spain and Portugal. The system makes it possible to limit the price of gas in the Iberian Peninsula so as not to transfer it directly to the electricity bill and thus achieve lower prices. “The European Commission has approved, under EU state aid rules, a €8.4 billion Spanish and Portuguese measure aimed at reducing wholesale electricity prices in the Iberian market (MIBEL) by lowering of the cost of the inputs of power plants powered by fossil fuels”, explained the Community Executive this Wednesday.
‼️Approved by @EU_Commission - under EU state aid rules - a €8.4 billion temporary Spanish🇪🇸 and Portuguese🇵🇹 measure aimed at reducing electricity prices for the benefit of consumers.https://t.co/PiD6kNTCXz
— European Commission (@EuropeanCommission) June 8, 2022
As explained by the Spanish Government, the BOE will publish this Thursday that the date of application of the mechanism will be next Tuesday, June 14, "and it will affect the matching of the wholesale electricity market that will be held that day to set the prices of the day next, Wednesday June 15. In this way, the electricity companies and the rest of the market agents have enough time to present the economic guarantees that support their operations”.
“The Commission has approved the Iberian mechanism as set forth in Royal Decree-Law 10/2022”, continues the Executive, “whose validation will be put to a vote tomorrow in the Congress of Deputies. During its 12 months of validity, it will reduce the bills of families and companies and will protect them from the volatility of gas prices in international markets”.
According to Brussels, "the measure has been approved recognizing that the Spanish and Portuguese economies are experiencing a serious disturbance." And he adds: “The measure is in line with the Commission communication on security of supply and affordable energy prices, as well as with the conclusions of the European Councilboth of March 2022, which refer to the adoption of temporary emergency measures to reduce spot prices in the electricity market in favor of companies and consumers, which do not affect commercial conditions in a measure contrary to the common interest.
The European Commission argues that “the sustained increase in gas prices following Russia's unjustified attack on Ukraine has led to an increase in electricity prices throughout the EU”.
“In this context”, says the Community Executive, “in May 2022, Spain and Portugal notified the European Commission of their intention to adopt a measure worth 8,400 million euros (6,300 million corresponding to Spain and 2,100 million to Portugal) to reduce the input costs of fossil fuel-fired power plants in order to reduce their production costs and, ultimately, the wholesale market price of electricity, to the benefit of consumers”.
The measure will apply until May 31, 2023.
And how it works?
According to Brussels, “the form of aid will be the payment of a direct subsidy to electricity producers in order to finance part of their fuel costs. The daily payment will be calculated as the price difference between the market price of natural gas and a maximum limit of the gas price set at an average of 48.8 EUR/MWh during the period of validity of the measure. More specifically, during the first six months of application of the measure, the effective price limit will be set at EUR 40/MWh. Starting from the seventh month, this cap will be increased monthly by €5 per month, resulting in a price cap of €70/MWh in the twelfth month.”
The measure will be financed, explains the Community Executive, "through a part of the so-called congestion income, that is, the income obtained by the manager of the Spanish transmission network as a result of cross-border electricity trade between France and Spain, and a quota imposed by Spain and Portugal to buyers who benefit from the measure”.
The European Commission claims to have assessed the measure “in accordance with the EU state aid rules, in particular article 107, paragraph 3, letter b), of the Treaty on the Functioning of the EU, by virtue of which, the Member States may grant aid to specific companies or sectors to remedy a serious disturbance in the economy of a Member State”.
Thus, the Commission has concluded "that the measure complies with EU rules on state aid."
Specifically, the Community Executive has verified that the measure “differs from other forms of price intervention due to the particular circumstances of the Iberian wholesale electricity market. Specifically, the limited interconnection capacity of the Iberian Peninsula, the high exposure of consumers to wholesale electricity prices, as well as the high influence of gas in setting electricity prices have caused a particularly serious disturbance in the Spanish and Portuguese economies.
Brussels, thus, understands that the Iberian measure is “adequate, necessary and proportionate. In particular, the measure will reduce wholesale electricity prices in favor of consumers, without affecting commercial conditions contrary to the common interest. On the other hand, the measure does not go beyond what is necessary to deal with the exceptionally high prices of electricity in the Iberian Peninsula”. And he adds: "It is strictly temporary, since it will only apply until May 31, 2023."
In addition, according to the Community Executive, "the measure approved today [por este miércoles] it minimizes the distortion of competition and avoids possible negative effects on the functioning of the spot and forward electricity markets. On the other hand, in line with the rules of the internal market, the measure does not give rise to cross-border restrictions on trade or discrimination between Iberian and non-Iberian consumers.
Brussels questions for the first time the "structure of the electricity market"
“Gas is the most expensive and defines the entire price. This market system no longer works. We have to reform it”, said the president of the European Commission. There is a new common sense in Brussels regarding the electricity market. For the first time since Spain promoted a year ago the idea of reforming a market that leads to the most expensive energy marking the price of the electricity bill at a time when gas is skyrocketing, the president of the European Commission, Ursula von der Leyen, has made a public plea, before the European Parliament, in favor of a reform that had not even been defended by the Commissioner for Energy, Kadri Simson, or the ACER report itself, the European regulators, who prefer to defend the benefits of the status quo , no matter how much the status quo is increasingly difficult to sustain over time due to the prices of the electricity bill.
“Electricity prices, energy prices are skyrocketing and we are doing a lot about it”, argued Ursula von der Leyen in the closing turn of the debate on the conclusions of the last European summit: “We have published a box of tools that many of our Member States are using to tax windfall profits and help vulnerable households and businesses. But we also know that this is a short-term relief that won't really change the structure of the market at all."
“And what is the problem with the structure of the market?” Von der Leyen wondered: “That we have an electricity market designed in a way that was necessary 20 years ago when we began to introduce renewable energies. Thus, renewables are the ones that enter first because at that time they were much more expensive, and then came the rest of the energy, such as oil, gas, nuclear or coal. And the one that enters last, the most expensive, is the one that defines the price”.
“Today, the market is completely different”, continued Von der Leyen: “Renewable energies are the most profitable and the cheapest. And they go in first and then, last, the gas goes in. Gas is the most expensive, but it defines the entire price. This market system no longer works. We have to reform it, we have to adapt it to the new realities of the domain of renewables. This is the task that the Commission has now taken on. This is not trivial, it is a great reform. It will take its time. It has to be well thought out. But we have to take a step forward to adapt our electricity market to current conditions.”