Price of electricity in Spain breaks record after record

by Lorraine Williamson
price of electricity

MADRID – Spanish energy bills keep rising. The price of electricity in August even surpassed the peak in July. That was the month already crowned the most expensive in history. 

There seems to be no end to the summer storm in which electricity prices in Spain find themselves. At an astonishing pace, the price of electricity is breaking record after record. On Thursday, the price reached another record high of €122.76 per megawatt-hour (MWh). This is 5.2% more than Wednesday’s 116.73 MWh. Per time slot, the price will vary from €129.81/MWh between 10 pm – 11 pm and €119.95/MWh between 5 am – 6 am.  

High prices affect everyone 

Prices are set through a mechanism, similar to the system used in all European countries. It matches bids from electricity producers and trading companies for each hour of the following day. Therefore, the balance between supply and demand ultimately determines the price. 

As such, the price set by the wholesale market directly affects consumers in the state-regulated market. In Spain, this is known as PVPC and has 10.6 million customers. In addition, the 16.2 million in the free market also end up paying this high price. Supply is adjusted according to the evolution of the wholesale market. In other words, these historically high prices will affect all consumers in one way or another.  

In the so-called electricity pool, the cheapest energy sources, such as renewable energy sources or nuclear energy, have priority. Then the most expensive energy sources, which use fossil fuels, are also included. The final price paid to all power stations for this energy is determined by the supply that comes in last. And that is the most expensive. However, if demand can be met with the cheapest sources, a lower price is paid.  

How long will the price of electricity continue to rise? 

Experts warn the rise in the cost of electricity is likely to continue for a few more months. Probably until the end of February or March 2022. Furthermore, in times of high demand for energy (for example, during the last heatwave or during storm Filomena), the price tends to shoot up.

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But there are other factors determining the high prices of the past weeks. For example, the price of gas is sky-high – more than €40/MWh and thus 5 times more expensive than last year. And the cost of CO₂ emission rights is rising – more than €50/tonne. Also gas will certainly remain expensive until next spring. The gas price is high on the futures market and is not forecast to fall until February or March next year. Moreover, the cost of CO₂ emission allowances, within European environmental policy, aimed at caring for the planet and cleaner energy sources, will also definitely rise. 

Fierce political debate 

The government has been trying for months to curb the price increases. The main measures to limit the short-term impact on consumers’ pockets were the reduction of VAT from 21% to 10% and the suspension of the generation tax. In addition, the Minister of Ecological Transition, Teresa Ribera, has two structural measures in hand to reduce the bill by 15% in the coming years. Firstly, a formula to reduce the so-called windfall profits that non-polluting power plants – mainly nuclear and hydroelectric – receive as a result of the increase in CO₂ emissions. Secondly, the establishment of the National Fund for the Sustainability of the Electricity System (FNSSE) to exclude the costs of renewable energy sources from the bill within five years and distribute them to all energy suppliers, including those of gas and hydrocarbons. 

Clash with opposition 

The government and the opposition disagree on the price of electricity. The opposition is using the upward price spiral to attack the government. Positions are also divided within the government. Unidas Podemos has, since the beginning of the electricity crisis, argued for the creation of a public energy company (the socialist wing is now open to this option). And for emergency intervention in the market by decree.  

What do the electricity companies say? 

The electricity companies claim they do not benefit from these increases and the Spanish Association of Electricity Companies Aelec argues the regulated tariff should be decoupled and indexed to stable prices to avoid the current volatility. This is also happening in other European countries.  

The government and the energy companies disagree on the limitation of windfall profits. In addition, Teresa Ribera described it as ‘scandalous’ that at least two Spanish reservoirs have been drained by Iberdrola in order to produce electricity cheaply at a time when record amounts are being paid. On Wednesday, Spain’s National Commission of Markets and Competition, CNMC, advised some electricity distributors have been charging up to 30% more for energy – after the hourly tariff came into force on June 1 – without informing consumers. 

What is happening in the rest of Europe and UK? 

Other European countries also have high prices per megawatt-hour, such as Germany (€106.54), France (€104.94), the United Kingdom (£103.55 – €123.13), Italy (€118.93), and Portugal (price in line with Spain). 

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