On Tuesday, Spain’s Council of Ministers approved the reform of the regulated electricity tariff, known as the PVPC (Voluntary Price for Small Consumers). This will no longer depend entirely on daily energy auctions.
The tariff will be based not only on the daily market, but also on one-month, three-month and one-year forward contracts. With this, the government hopes to avoid price spikes like last year’s. The Spanish government is putting large companies out of the regulated electricity tariff and will apply a surcharge to those who do not switch to the free market. ‘Consumers do not have to do anything, they will continue to receive their bills as before,’ the government said.
And while the government previously assumed a total saving of nearly €300 million a year with this new method, it now acknowledges that it is uncertain whether the new PVPC will reduce bills or not.
Who will this new rate apply to?
The new PVPC tariff will apply to household consumers. Currently, around 9 million households use it. Having a regulated tariff is a mandatory requirement for households that meet the conditions of being considered vulnerable or very vulnerable to apply for the social electricity and heat voucher discounts. Currently, about 1.5 million of the nine million households have a regulated tariff. Moreover, they do not have to do anything to apply the new method of calculating the price of electricity consumed, according to government spokesperson Isabel Rodríguez, who spoke from Moncloa.
Until now, all holders of voltage points not exceeding 1 kV and with a contracted power of less than 10 kW were eligible for the PVPC tariff. These can be private individuals or, in the business sector, micro-enterprises that meet this power requirement and have no more than 250 employees and with an annual turnover of no more than €50 million. However, larger companies are required to switch to the free market by early 2024. If they do not, their electricity supply will be maintained, but they will have to pay a 20% surcharge.
How is the electricity price calculated?
Until now, the regulated tariff -PVPC- fixed the daily price of electricity based on auctions from the 24 energy auctions held at any hour of the day. As a result, consumers suffered from daily and historical spikes in electricity prices last year. These resulted from the rise in gas prices due to Russia’s challenge to the EU and the war in Ukraine. Unlike consumers with the regulated tariff, free market consumers saw no change in the price they paid for electricity, which was often agreed with their suppliers a year in advance.
What does the reform entail?
The reform adopted on Tuesday will gradually reduce the participation of the daily market in determining the electricity price and combine it with forward markets, i.e. calculations of the electricity price for one month, three months and one year based on the behaviour of a shopping basket of different products.
This integration of the futures market takes place gradually and will reach 25% in 2024, 40% in 2025 and eventually 55%. The weight of the daily market will drop from 75% in 2024 to 45% in 2025.
With this reform, the government wants to give “stability” to prices and reduce “volatility” and has abandoned the idea they also had at the beginning that the new PVPC tariff would also mean savings for consumers. In an initial proposal, it arrived at a calculation of €297.1 million. However, this was before the National Commission for Markets and Competition (CNMC) warned that the new system could even lead to a price hike. It did so in an opinion on the proposal that questioned some technical aspects of the government’s plans, which have been taken into account in the final version approved by the Council of Ministers.
Asked about this issue, the third vice president, Teresa Ribera, alluded to ‘market expectations’ as the factor that will make forward prices higher or lower. ‘What we are definitely going to get is a much more stable rate. It could be that this means a small increase in average costs or that there will eventually be a reduction,’ she said at a press conference together with Dutch environment minister Rob Jetten.
Price of electricity
Moreover, also new is that the regulated tariff will now allow consumers to contribute to the financing of the social bonus, which electricity production, distribution and marketing companies currently only pass on to consumers on the free market.
As prices are no longer fully linked to the daily energy auction, which is subject to occasional fluctuations, the electricity price in households with regulated tariffs is expected to be more predictable.
When will the new scheme take effect?
The first new bills for the regulated market will be issued from 1 January 2024. The government argues that this will give marketers time to make the necessary changes and the required forward contracts from 1 July 2023. However, the truth is that the reform comes a year late, as the government promised to implement it in March 2022 as a “condition” for getting the green light from Brussels for the Iberian mechanism. Therefore, its entry into force, in January 2024, will be a year later than planned, at the beginning of 2023.
This is what Aelec thinks of the reform
The Association of Electricity Suppliers (Aelec) has taken a “positive” view of a reform that “ensures greater price stability for small consumers” but also does not completely lose the hourly price variation of the daily market “so that demand shifts its consumption to the hours with the lowest prices”.
Review in 2025
The European Commission requires a review of regulated tariffs by 2025. To this end, the National Commission for Markets and Competition (CNMC) will monitor the transitional application of the reform approved by the government on Tuesday as the changes take effect. The aim is to have enough information to justify maintaining or abolishing the regulated tariff in 2025.