The Government approves the cap on gas to lower the electricity bill

The Council of Ministers has approved this Friday, in an extraordinary session, the expected cap on the generation of electricity with natural gas to lower the electricity bill. It has done so almost 50 days after the European Commission opened its hand to the so-called "Iberian solution", and after weeks of negotiations with Brussels and Portugal, where it will be applied simultaneously for the integration of the wholesale electricity market. of the Iberian Peninsula.

Compensation to electricity companies for the gas cap will be charged first to households at a regulated rate and large industry

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"A very extraordinary measure", according to the Government spokesperson, Isabel Rodríguez, which will allow "a very important objective, which is to put a cap on the price of gas and thereby lower the electricity bill for all Spaniards" and will allow "stop ” the upward trend of the IPC.

With this solution "for the first time they do not pay the same", said the third vice president and minister for the Ecological Transition, Teresa Ribera, at the press conference after the Council of Ministers. The unprecedented mechanism seeks to "reduce" in a "very significant" way the "extraordinary profits of energy companies", which "will continue to make profits". It will be an "umbrella" to benefit "everyone" and protect domestic consumers, companies and large industry from the extremely high volatility of energy prices.

The mechanism, which in principle will be published in the BOE on Saturday and will come into force on Sunday, will benefit 37% of domestic consumers and 70% of industrial consumers in Spain, explained Ribera, it still has to be approved by the European Commission, and it will be then when it becomes "fully effective", which may even take "two weeks".

Thus, after the approval of the Governments of Spain and Portugal in their respective councils of ministers, meeting this Friday in an extraordinary session, the mechanism will be sent "immediately" to the European Commission, which "must adopt a decision of the college of commissioners to make its application effective”, as the vice president has explained in recent days.

The price that will be applied, Ribera explained, will be 40 euros "for six months" and "will grow little until reaching 48 euros" on average. Thus, the gas reference price established in the mechanism will be variable, and once the first six months have elapsed, it will go from €40/MWh to increase each month by €5/MWh, until reaching a value of €70/MWh. MWh in the last month. The objective is a gradual and staggered exit from the measure to allow agents to adapt to the scenario in which the mechanism ceases to be applicable.

The final result in the wholesale market, according to Ribera, is that in the wholesale market "the average price throughout the year will be 130 euros/MWh compared to 210 MWh this quarter."

The President of the Government, Pedro Sánchez, already advanced on Thursday, in a conference organized by, that this cap will translate into an average gas price of 48.8 euros per megawatt hour (MWh) for a yearslightly below the initially announced €50/MWh.

"The mechanism will be valid for one year, guaranteeing an average price during that period of 48.8 euros, which will also provide important protection against future increases in international energy prices in a geopolitical scenario of enormous volatility," he explained. Sánchez, who warned that the current energy context, marked by the war in Ukraine, “is going to last for a long time”.

The initial proposal from Spain and Portugal was to set a price of 30 euros/MWh for generation with natural gas. They finally agreed with Brussels to raise that cap for combined cycles to around 50 euros/MWh, starting with a lower figure of 40 euros/MWh. To achieve this political agreement, the idea that this price would be different for energy exports to France also had to be discarded.

In Spain, the measure It will have a direct impact on consumers benefiting from the voluntary price for small consumers (PVPC), the regulated rate, with a drop in final prices of around 30%. This mode, the "fools"in the unfortunate expression of the president of Iberdrola, Ignacio Sánchez Galán (who a week ago had to apologize for those words after the reprimand of the Government), directly collects the fluctuations of the wholesale electricity market. Ribera said this Friday that those statements by Galán caused him "a deep embarrassment" and he recalled that in order to have the social bonus discounts "necessarily" you have to have the PVPC.

In December 2021 (the latest available data, which has just been published), a little less than 10 million households and SMEs were covered by this rate. Specifically, and according to data published this Thursday by the National Commission for Markets and Competition (CNMC), there are 9,999,491 supplies covered by the PVPC, which account for 36% of low-voltage contracts (up to 15 kilowatts contracted ).

The measure will also directly benefit Spanish industry, which, for the most part, goes directly to the pool to supply itself with electricity (70% of the demand in this sector obtains its energy from it), and which has openly supported the approval of this ceiling.

The measure has been highly questioned by the electricity companies, who have tried to knock it down with an intense campaign in Brussels and that Spain and Portugal have managed to move forward by arguing their poor interconnection with France, much lower than that advocated by the EU itself.

However, as the situation in Ukraine becomes entrenched and the possibility of a gas supply cut-off from Russia opens up, the European Commission is even open to putting in place a cap on gas on a European scale.

The approval of the Iberian solution has been delayed more than expected due to the negotiations with the technicians of the European Commission and with Portugal, where the measure is going to have a much less visible effect than in Spain because the rates of domestic users in the regulated market are set on an annual basis.

In Portugal, where the "Iberian solution" has not received even a tenth of the media attention that it has in Spain, it will be applied to consumers directly exposed to price fluctuations in the wholesale market, who are customers there in the liberalized market. For the most part, the opposite of Spain.

As explained in one of the latest drafts of the decree-law to which has had access, "the measure is configured as a mechanism for adjusting the cost of production of marginal fossil technologies, which has the effect of reducing the equivalent of said adjustment in the offers that said technologies make in the market, with the consequent reduction in the market matching price. The amounts corresponding to said adjustment are financed by those consumers who benefit from the aforementioned reduction, resulting in any case in a final price lower than the one that would be given in the absence of the measure.

Thus, those who are going to finance it will be the consumers who are going to benefit from the measure, who will pay the difference between that cap and the real price of the raw material, using the MibGas Iberian market as a reference. The result will be net savings “for all consumers”, explained Ribera. The CEO of Endesa, José Bogas, has estimated the cost of this gas subsidy at 6,000 million euros.

This week, Teresa Ribera's Portuguese counterpart, Duarte Cordeiro, assured that this measure "is a way of capturing part of the unexpected profits of these companies and mutualizing those unexpected benefits in the system".

Who, due to the marginal design of this market imposed more than two decades ago by the European Commission, are selling electricity "at a much higher value than they expected" due to the exponential rise in gas prices due to the geopolitical crisis with Russia and the war in the Ukraine, unrelated to their production costs (Cordeiro expressly cited the hydroelectric plant) “they have extraordinary and unexpected profits. With the mechanism they see those profits captured and applied and socialized in the electricity market to lower the price”, explained the minister.

Thus, as stated in one of the latest drafts of the Royal Decree-Law establishing a temporary adjustment mechanism for production costs to reduce the price of electricity on the wholesale market, in the first In the fourth month of 2022, the price of gas stood at €95.98/MWh, a value nine times higher than the average price of said product in 2020, and double that of 2021.

And the contagion of gas at the final price of the wholesale market is "a problem of regulatory design" because both countries are not benefiting from the strong weight of renewables in their electricity mix.

Portugal has also opened the door to introduce an extraordinary tax on energy companies for those windfall profits. The measure is still under study.

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