«Iberian exception», Spain and Portugal set a ceiling on the price of gas for electricity

BRUXELLES – The Spanish and Portuguese governments have approved in coordination with each other, respectively in Madrid and Lisbon, the decrees that had been announced to limit the wholesale price of electricity in the Iberian Peninsula, through a temporary mechanism (lasting 12 months) which it imposes a cap on the price of gas consumed by power plants.

The mechanism was previously agreed with the European Commission, which will now have to formally approve the two measures before they can enter into force. The measures were decided in the context of the response to the unprecedented surge in gas prices, and consequently in electricity, which was already underway in 2021 and which was greatly aggravated by the Russian war in Ukraine.

The “Iberian exception”

At the last European Council, on 26 March, after a long negotiation with Spain and Portugal, the heads of state and government recognized the “Iberian exception”, that is the situation of almost total isolation of the electricity market of the two countries from the electricity market of the EU, due to the lack of interconnections, for which only 3% of energy is imported or exported.

This allowed Spain and Portugal to agree on the mechanism, or the ceiling imposed on the price, which would not be possible in the EU electricity market due to the European legislation that governs it. This legislation establishes, in particular, that the marginal reference price for the wholesale electricity market is based on the price of gas. In this way, essentially, users of the European market find themselves paying the price of electricity generated with gas also for electricity from other sources, such as renewables, which now cost much less.

Convergence towards normality

Announcing the approval of the decree, the Spanish Minister for Energy Transition, Teresa Ribera, explained in Madrid that “in principle, the measure uses a mathematical formula to limit the price of gas consumed by thermal power plants which is then transferred to the offers that set the price of the wholesale electricity market, also known as a ‘pool’. ‘ The mechanism “establishes a gas reference price of 40 euros per MWh for six months, with a subsequent increase of 5 euros per MWh per month, up to 70 euros per MWh, so that there is a convergence towards normality “.

“The price of electricity resulting from the application of the mechanism – continued Ribera – will mainly depend on the price of gas on the Iberian market (MibGas) and the price of CO2 emission permits” in the context of the European emissions exchange (system Ets). “Considering 96 euros per MWh for gas and 80 euros per ton for CO2, the mechanism will leave the average price of the ‘pool’ below 130 euros per MWh in the 12 months”. In the absence of this mechanism, the price would increase to more than 210 euros per MWh, as it was on average in the first quarter of 2022, but with much higher peaks.

The Portuguese Minister of Environment and Climate Action, Duarte Cordeiro, explained for his part, in a parallel press conference in Lisbon, that the mechanism will determine “a maximum ceiling, on average, of 50 euros per Mwh, for production electricity »during the 12 months in which it will be in effect.

Compensation mechanism

Duarte Cordeiro also explained how the compensation mechanism will work for the difference between the imposed price of gas for the purpose of producing electricity and the market price that the plants will have to pay for the gas used anyway. To pay for this compensation, in essence, the government will draw on the extraordinary profits that the surge in gas prices has generated for the operators of energy sources (and in particular renewables).

The Portuguese minister said that the government will socialize the cost-benefits, “trying to use the unexpected gains of the system that come from the speculative price increase”, to finance “the reduction of prices for exposed consumers” and “to compensate for the thermoelectric plants that will produce at prices lower than those established by the market price of gas ».

Source: RSS DiariodelWeb.it Economia by www.diariodelweb.it.

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