This measure will introduce a cap on the price of the electricity generated using natural gas (combined cycle power plants) in the Iberian daily energy auctions. This should allow household electricity bills to be reduced by between 15% and 20%, according to government calculations
The European Commission has finally approved the so-called Iberian exception this week, which will allow both Spain and Portugal to limit the price of gas in electricity production plants, thus drastically reducing bills for thousands of households and businesses.
The measure came into force on Tuesday, June 14, setting an average limit of 48.8 euros per megawatt for the gas used to generate electricity. This system allows for the reduction of the electricity bill by between 15 and 20%, and it will begin to be noticed by the end of July, according to government calculations.
How much will the electricity bill be lowered in the electricity market?
According to Government sources, for an average receipt of 100 euros, introducing a cap on the price of gas will imply a reduction in the energy bill of around 15 euros. In percentage, the forecast of the Government is that the reduction of the receipt will reach from 15 up to 20%. The government had to correct this figure since the first calculation estimated a reduction of 30% of the total energy bill.
How long will the “Iberian exception” be in force?
The limit on gas prices was agreed with the European Commission for its application in Spain and Portugal up until May 31, 2023. No extensions of this period are contemplated, so theoretically, Spain will have to abide and give up this mechanism by that date.
How will the daily price at which gas is paid to generate electricity be calculated?
The price is calculated as the difference between the market gas price, minus the reference gas price set by the Government (48, 8 euros/MWh) divided by an efficiency coefficient of 0.55. As a result of this formula, the amount that will be paid to the combined cycle gas plants is obtained (being deducted from the final auction price). However, from the seventh month until the end of the mechanism, the reference price will increase by five euros per month and will progressively reach 70 euros in the twelfth month of application of the measure.
How will this measure be financed?
The gas cap will be financed through so-called "congestion revenues" and a charge imposed by Spain and Portugal on buyers who benefit from the measure. According to estimates by the Community Executive itself, the electricity system will have to assume an extra cost of 5,500 million euros to compensate the combined cycle plants that generate gas to produce electricity.
Which electricity price levels are to be expected from now on?
According to European estimates, electricity prices in the wholesale market of 213 euros per MWh are expected over the next 12 months, without the application of the price cap.
With the introduction of the new mechanism and counting with an average price of 48.75 euros per MWh for gas, the price of electricity will drop down to 126 euros MWh without including the extra cost of compensation to the plants and by 174.4 euros MWh, if we take into account the cost compensation mechanism.
