The price of electricity falls by 22% in the wholesale market at the premiere of the Iberian cap on gas

The average price of electricity in the wholesale market will fall 22.6% this Wednesday compared to Tuesday, to 165.59 euros/MWh, according to provisional data from the Iberian Energy Market Operator (OMIE), in the first day of application of the Iberian exception to limit the price of electricity generation with natural gas.

In the harshest heat wave in a month of June in two decades (which triggers the use of air conditioning equipment), the price of the pool this Wednesday is 48.46 euros below this Tuesday. It is the lowest for a weekday since April 21.

The most expensive hour will be between 12 at night and one in the morning, when it will exceed 194 euros/MWh. The cheapest will be between three and four in the afternoon, when it will be around 144 euros.

However, the reference for the electricity auction for this Wednesday still does not take into account the adjustment that will be applied to compensate the electricity companies for the real price of natural gas. That "hourly adjustment price to consumers in the OMIE market" will be known after 2:00 p.m.

According to data from the Iberian market operator Mibgas, the price of gas is going to be 80 euros/MWh on Wednesday. It trades just twice as much as the ceiling set by the Government with this mechanism. Each euro of increase in gas translates into about two euros in the price of the wholesale electricity market.

The mechanism of the Iberian stop was authorized last Wednesday by the European Commission and validated a day later by the Congress of Deputies. It will be in force until May 31, 2023. The Royal Decree-Law establishes that this limit on the price of gas for electricity generation will be at an average of 48.8 euros/MWh until then. The limit will be lower in the first six months of application: 40 euros/MWh. Then it will rise at a rate of 5 euros/MWh each month.

The measure, described as "historic" by the Government, after a long negotiation with Brussels, aims to be a kind of shield to protect consumers from what may happen in the coming months with the price of natural gas, as a result of the war in Ukraine. Its objective is to prevent the price of this raw material from continuing to contaminate the prices of the wholesale electricity market, as has happened up to now.

By imperative of the EU (which already openly acknowledges the shortcomings of this design dating from the end of the last century), the so-called pool works based on the so-called marginalist model: the latest technology is what sets the price every hour. And this is usually determined by the price of natural gas, which has skyrocketed in the last year, contaminating the rest of the technologies.

With the cap on gas, which the Government defends will reduce the so-called fallen profits of electricity companies (the companies deny that these exist), the price at which combined cycle, cogeneration and coal plants can offer is limited ( already very residual in Spain). This will allow the wholesale market price to fall in the coming months to levels well below the more than 200 euros/MWh of recent weeks or the 700 euros that it punctually reached in March.

The cap does not mean that gas plants have to operate at a loss: the difference between the real price of the raw material and the Iberian cap will be charged against the electricity system. The compensation will be paid by consumers, who will however notice a net saving on their bill. Brussels calculates that the measure will cost 8.4 billion euros. 6,300 million will correspond to Spain and 2,100 million to Portugal.

The savings on the bill will depend on the price of natural gas in the coming months and other factors such as the contribution of renewables, which make the wholesale market cheaper. But the Government affirms that the reduction for Spanish consumers will be between 15% and 20% with respect to current prices, less than 30% initially calculated.

The reason is that, in the negotiations with Portugal and Brussels, it was agreed that contracts not linked to the wholesale market did not have to finance the compensation in the first place to the electricity companies for the cost of gas, and that they do so as these contracts expire.

reflection in july

The mechanism has begun to take effect this Tuesday in the pool and will be reflected in the bills received in July by consumers covered by the regulated rate, the so-called PVPC, in which the price of energy is directly linked to the wholesale market. In this modality, the one that has suffered the most from the increases of the last year, it had welcomed in December something less than 10 million supplies.

And industrial customers, who cover 70% of their electricity demand by going directly to the pool, will also benefit directly from the gas cap, and who have applauded this measure. Subsequently, the compensation will be extended to clients in the free market, who have contracts valid for one year, as they expire, and they will have to finance it as well.

As compensation for obtaining the authorization of this measure, Spain has promised Brussels to change the regulated electricity tariff and make it less volatile, an old request from the electricity companies. Predictably, the mechanism is going to spur exports north of the Pyrenees, although the Government has denied that it represents a "subsidy" for French consumers.

The consultants Jorge Sanz (former director of Energy Policy) and Óscar Arnedillo, from the firm Nera, calculate, in an article published in The Energy Newspaperwhich "will translate into transfers of income to our neighboring countries, mainly France and Portugal, for an amount of around 1,000 million euros over the next 12 months", although the mechanism plans to use the so-called income of congestion in electricity exports to France to pay part of the compensation to electricity companies for the gas.

It is foreseeable that electricity exports to the north of the Pyrenees will skyrocket, given the technical problems that drag about half of the powerful French nuclear park. However, we must remember the limited interconnection of the Peninsula with France, which does not reach 3%. This is the main argument that Madrid and Lisbon have put on the table for the European Commission to give its arm to twist and accept this exceptional mechanism.

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