Disappointment in first week of energy cap

The limitation on the price of gas came into force last Tuesday, intended to reduce the price of electricity in homes and businesses. However, its first week in operation has given “disappointing” results for the Government, which, despite continuing to defend the so-called ‘Iberian mechanism’, has seen how the heat wave and the consequent high demand for gas contained the effects of his long-awaited measure, and frustrating for the citizens, who have had to continue to face an increase in the price of electricity that has taken four days to give a truce.

On Monday, the last day without a gas price cap, the electricity auction closed with an average price of 214.05 euro MWh, on Tuesday the cost of electricity for the following day rose to 224.86 MWh and it did so despite the fall in the price of electricity in the market. The explanation for this paradox had to be found in a new element that entered the scene due to the implementation of the so-called ‘Iberian exception’: compensation for electricity companies.

This additional amount is an adjustment that consumers must pay to electricity companies that produce electricity with natural gas for the difference between the new limit of 40 euro and the real price of that energy source on the market. In this way, to the 165.59 euro MWh that the auction set on average for Wednesday, a compensation of 59.68 euro had to be added, which gave a final average price 10 euro more expensive than the previous day, on the first day of the application of the cap on gas.

The initial disappointment was confirmed in the following days, in which the upward trend in the price that end consumers would pay for electricity continued. On Thursday electricity cost 259.01 euro MWh and on Friday, 266.38 euro MWh. It was necessary to wait until the auction on Friday, which fixed the prices for Saturday, to attend a small truce. Thus, the weekend began with a decrease of 20.41% in the price of electricity, thanks to both the decrease in the price of the ‘pool’, which fell to 146.54 euro MWh, and that of compensation to electricity companies (65.48 euro MWh). However, the resulting 212.02 euro MWh hardly represent a saving of two euro compared to the price set on the last day without gas limitation.

The reason for the bad start of the ‘Iberian mechanism’ is due to the fact that it has coincided with a few days in which a large amount of natural gas has been consumed due to the high energy demand in the midst of a heat wave and the impossibility of resorting to alternative energies. The more gas needed to meet energy demand, the greater the compensation that must be paid to electricity companies for the difference between the regulated price and the market price, which has been increased by the reduction in Russian supplies to the European Union.

With wind energy practically non-existent and photovoltaic entering the energy mix only during daily hours, it has been necessary to resort to gas as the main energy source, reaching a power of 17,500 KWh on Thursday. The meteorological circumstances have frustrated the forecasts of the Government.

On Tuesday, at the press conference after the Council of Ministers, the Government spokeswoman, Isabel Rodríguez, did not hesitate to celebrate the entry into force of the cap on the price of gas, a measure that she described as “historic”, and to affirm that she was going to “cushion the effects of the rise in the CPI, reducing it by around one point”. On the other hand, Rodríguez herself acknowledged on Thursday that the effects of the ‘Iberian mechanism’ were not being noticed.

However, the Government has insisted that, without the limit, energy prices in Spain would have risen to around 280 euro MWh, for which reason they argue that the effectiveness of the ‘Iberian exception’ to reduce the price of electricity, limit the windfall profits of electricity companies and function as a “firewall” against high gas prices. Ministerial sources also emphasise that the mechanism that came into operation on Tuesday makes the price of electricity in the Iberian Peninsula the lowest in Europe.

For the Foundation for Applied Economics Studies (Fedea), “the initial impact” of the limit on gas prices “has been positive, but modest.” In a report on the first days of the mechanism, they agree with the Government that the light would have risen even more, but denounces the effect of compensation to electricity companies, which he calls “subsidy”, and points to future effects that must be confirmed as the weeks and months go by.

Taking as an example what happened on the first day, June 15, Fedea compares the market price plus the compensation to the electricity companies, 224 euro in total, with what would have happened without the limit and concludes that the electricity would have been paid at 238.2 euro MWh, because in that case the subsidy received by each electricity generator with affected gas had been 72 euro, higher than 59. “The entry into operation of the mechanism would have allowed a 5.6% reduction in the market price against a counterfactual of non-existence of the mechanism”.

Fedea also notes the effect that the heat wave has had on the demand for energy, which has increased and has had to be supplied largely with gas instead of a renewable energy such as wind, practically non-existent these days, but adds as a reason for the high price not only because we have needed more gas, but because of this, it has been necessary to resort to more inefficient combined cycle plants – to convert natural gas into electricity. “Due to the high need for thermal generation due to high demand and low wind generation, companies with higher costs have necessarily entered the match, so that the market price has been higher than the one initially estimated by the Government”, indicates their report.

Another element that has also motivated the increase in demand is something that was already foreseen, that, since the price of gas is limited in Spain but not in France, purchases from this country have increased due to the limited interconnection, which has been saturated every day. This, conversely, has a positive effect. Traditionally, Madrid and Paris share the result of these mutual purchases of electricity in half, once one pays more than the other and vice versa. But the gas limit decree establishes that this flow of money – called congestion rents – will be used to pay compensation to electricity companies, so that, without this element, it would have been higher than what consumers are bearing. “That income will already be discounted in the price of the adjustment,” says the report.

Another of the considerations that Fedea makes about the effect of limiting the price of gas is that the number of consumers in the regulated market will foreseeably increase to the detriment of the liberalised one, just the opposite of what Brussels or the CNMC ask for and the trend of the last year, which in turn reflects that, although disappointing, the measure contains prices. This forecast is based on the fact that at the moment only consumers in the regulated market, with a Small Consumer Sale Price (PVPC) -37% of households- are now accusing the mechanism.

The rest of the consumers, from the free market, will be incorporated as they review their term contracts, generally for one year. As the forecast is that the marketers will have to make calculations with a more expensive gas price than a year ago, Fedea anticipates that its offers will not be better than the wholesale price of the regulated market. “With high probability, the purchase of energy in the markets by the retailer will be made at prices higher than those obtained at the time. Therefore, a probable effect of the measure is that it increases the incentives for domestic consumers to move from the free market to the regulated market,” the report explains.