Spain announces new measures to bring down soaring energy bills

Spanish Prime Minister Pedro Sánchez announced Monday evening a series of measures aimed at bringing down the soaring cost of natural gas and electricity for consumers.

Spain’s wholesale power market, which sets the amount paid by the companies that supply electricity to households, has been recording record-high prices since the beginning of summer. On Monday, the cost reached €154.16 per megawatt-hour (MWh), the highest ever recorded, and more than triple the figure registered one year ago, when it was just €46.

According to the National Statistics Institute (INE), consumers’ electricity bills grew 7.8% in August from a month earlier, and 34.9% from August 2020.

The escalation of prices on the wholesale market has pressured the Spanish government – headed by a center-left coalition of the Socialist Party (PSOE) and junior partner Unidas Podemos – to take action to curb the cost of household energy bills.

Of Spain’s 27.5 million consumers, around 10.7 million are under a regulated electricity tariff called PVPC, which is indexed to the wholesale market and is usually cheaper than the non-regulated alternative. But households on the PVPC tariff are more exposed to the recent price rises, as consumption – one of the items paid when contracting the electricity supply in addition to other regulated costs – oscillates according to the market.

While the government has no control over the wholesale market – which is set by a daily auction – Sánchez told state broadcaster RTVE that he aims to limit the impact of these price rises with a new action plan that will be approved by the Spanish Cabinet on Tuesday.

The plan involves four fronts: structural reform to promote cleaner and cheaper energy, measures to protect the most vulnerable households, cuts on some taxes and redirecting some of the profits made by energy companies back to the consumer.

“There are energy companies that are making extraordinary profits right now. That is not acceptable to me, because they are profits that come from the evolution of energy prices,” Sánchez explained on Monday in a television interview with RTVE.

There are energy companies that are making extraordinary profits right now. That is not acceptable to me, because they are profits that come from the evolution in energy prices

Spanish PM Pedro Sánchez

“We are going to take away these gains of energy companies, they can afford it, and redirect them to consumers [...] to cap the cost of gas and also reduce electricity bills,” said Sánchez.

According to government sources, the Spanish Cabinet is expected to approve a temporary reduction in the excess gains obtained by power plants that are not affected by the rising market cost of gas yet benefit from it on the consumer bill, said government sources. A similar formula will be applied as the one seeking to limit windfall profits for hydro and nuclear plants that have no CO₂ emissions but gain from higher CO₂ prices. This latter initiative is already making its way through Congress, said the same sources.

The spike is due to the rising international prices of gas, which is used in combined cycle plants, as well as CO₂ emission rights, where carbon prices have been rising over the past week to €62/ton. Adding to this is a lack of wind, which has reduced the share of renewable energy in the mix and increased the share of combined cycle energy.

With respect to taxes, Sánchez said the current tariff of 5.11% on electricity will be reduced to 0.5%, the minimum allowed under regional legislation. This special tax is collected by the state and transferred to regional governments. If the tax cut is finally approved, the government will have to compensate the regions for the lost revenue.

Prior to Monday’s announcement, the government also reduced the value-added tax (IVA) on electricity bills from 21% to 10% for consumers with up to 10 kilowatts of contracted power, in cases where the average monthly cost of a MWh exceeded €45, and suspended the 7% tax on energy generation – two measures that will be extended until the end of the year.

English version by Melissa Kitson.

.