Econostrum | Economic News in the Mediterranean

Spain and Portugal allowed to reduce wholesale electricity prices

Written by Frédéric Dubessy on Thursday, June 9th 2022 à 17:40 | Read 624 times

The €8.4bn will finance part of the inputs needed to run gas and coal-fired power plants (photo: ENDESA)
The €8.4bn will finance part of the inputs needed to run gas and coal-fired power plants (photo: ENDESA)
SPAIN / PORTUGAL. On Wednesday 8 June 2022, the European Commission authorised €8.4 billion of State aid from Spain and Portugal to reduce wholesale electricity prices on the Mibel (Mercado Iberico de Electricidade - Iberian Electricity Market).

The result of the Santiago de Compostela agreement signed on 1 October 2004 (revised on 18 January 2008), Mibel was launched on 1 July 2007 to promote the integration of the two countries' electricity systems. It has "contributed significantly not only to the establishment of an electricity market at Iberian level, but also at European level, which is an important step towards the establishment of an internal energy market", according to its designers.
Mibel has a Board of Regulators whose members are the Portuguese Energy Services Regulatory Authority (ERSE), the Portuguese Securities Market Commission (CMVM), the Spanish National Commission for Markets and Competition (CNMC, formerly the Energy Commission -CNE-) and the Spanish Securities Market Commission (CNMV). The presidency rotates every six months between the four representatives of these institutions, alternating by state.

Today, the Iberian countries are committed to a temporary cap on the average reference prices of natural gas and coal used in power stations in order to contain the rise in electricity prices on the Mibel. They represent the highest marginal costs of production and therefore determine the price of electricity in this regional wholesale market.
To achieve this result, Madrid and Lisbon will devote €8.4bn to lowering the input costs of fossil fuel power plants.

6.3bn for Spain and €2.1bn for Portugal

In May 2022, the two governments concerned notified the European Commission of their intention to adopt this state aid, which requires approval by the institution. It consists of €6.3 billion provided by Spain and €2.1 billion by Portugal. It will apply until 31 March 2023 and will be financed by part of the "congestion income" (income that the Spanish transmission system operator earns from cross-border trade in electricity between France and Spain), and the levy that Spain and Portugal will impose on buyers benefiting from the measure.

The money will be paid as a direct subsidy to electricity producers so that they can reduce part of their fuel costs and pass it on to consumers. "This daily payment will be calculated on the basis of the difference between the market price of natural gas and a gas price cap set at an average of €48.8/MWh for the duration of the measure. More specifically, during the first six months of the measure's application, the actual price cap will be set at €40/MWh. From the seventh month onwards, the price cap will increase by €5 per month, resulting in a price cap of €70/MWh in the twelfth month," the European Commission said in a statement.

Reducing the price of electricity for consumers

The European Commission found that this state aid fell within the framework of Community rules and mainly within those set out in Article 107 of the Treaty on the Functioning of the European Union. The TFEU provides for aid to be granted to certain companies or sectors to remedy a serious disturbance in their economy.

"The temporary measure we have authorised today will allow Spain and Portugal to reduce electricity prices for consumers, who have been hit hard by the increase in electricity prices due to the Russian invasion of Ukraine. The integrity of the single market will also be preserved", commented Margrethe Vestager. The Executive Vice-President in charge of competition policy notes that "in addition, this measure gives Spain and Portugal time to adopt reforms that will strengthen the future resilience of their electricity systems in line with the objectives of the Green Deal and ultimately further mitigate the effects of the energy crisis on the final consumer.


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