Brussels forces Spain to change the regulated electricity rate as a condition for approving the gas cap

Brussels has forced Spain to reform the semi-regulated electricity rate to decouple it from the hourly price of the wholesale electricity market. As confirmed by government sources, this is a requirement of the European Commission to give the green light to the Iberian cap on gas that has been approved this Friday by Spain and Portugal. The mechanism has already been approved by both governments and now needs the definitive approval of Brussels, which may take up to "two weeks," according to Vice President Teresa Ribera.

Ribera opens a public consultation on the reform of the electricity rate

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The change in the calculation methodology of the PVPC will have to be implemented "at the beginning of 2023", as explained in one of the drafts of the Royal Decree-Law that will be published this Saturday in the BOE.

"One of the conditions for the approval of the mechanism by the European Commission is the reform of the current voluntary price for small consumers (PVPC)", indicates the text.

As confirmed by government sources, it is "one of the issues that the European Commission has established for us in the pre-notification process" of the mechanism and allows "convergence in a reasonable manner" with other countries, protecting consumers for the coming winter and before "what can happen" with the gas markets, alluding to a possible cut in Russian supply. It also makes it possible to give “more liquidity” to futures markets.

The draft to which has had access indicates that "the rise in prices on the daily and intraday market and its high volatility have particularly harmed small domestic consumers with contracted power less than or equal to 10 kW, who are covered by the voluntary price for the small consumer, among whom are vulnerable consumers entitled to the application of the social bonus”, recalls the text.

"This direct translation of the volatility and the high price of the daily and intraday market to the PVPC is due to the fact that the methodology for establishing the cost of energy uses exclusively the price of the daily and intraday market for each hour."

This system was introduced by the PP government in 2014 and has received strong criticism from the electricity companies, who have been calling for its elimination for years. Being directly indexed to the wholesale market, the PVPC carries strong volatility, although many experts believe that it fully transfers the price signal to the consumer. But the exponential rise in the wholesale electricity market as of last summer has already led the Ministry for the Ecological Transition to open a public consultation last October, with the aim of gathering proposals for the reform of this rate.

To "reduce the volatility" of the PVPC, the Government must "introduce a reference to the prices of the futures markets, incorporating a price component based on a basket of products from the futures markets -annual, quarterly and monthly- and a component price of the daily and intraday market in such a way that the new formula for setting the cost of energy of the PVPC can begin to be applied at the beginning of 2023”. The system would be more similar to the system for fixing the regulated tariff in Portugal.

Thus, before October 1, 2022, the Government must introduce a reference to forward market prices, incorporating in the formula for calculating the voluntary price for small consumers "a price component based on a basket of products term and the daily and intraday market”.

“The basket of products will include futures market products, among them, annual futures, quarterly futures and monthly futures may be used, and will include a price component of the daily and intraday market that guarantees a certain exposure of these consumers to the price signal in the short term and encourage energy efficiency, storage and demand management”, says the draft.

"Regulations will establish the weighting coefficients of each of the products in the basket that will be considered in the calculation of the voluntary price for the small consumer", adds the text.

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