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    Gas cap records negative costs that will be offset in the electricity bill

    January 19, 2023 - CE Noticias Financieras


      The storm that has inaugurated this week the real winter in the Iberian Peninsula has had two immediate consequences: on the one hand, the undisputed prominence of wind power production and, on the other, its effect on wholesale electricity market prices, which have collapsed to 34.5 euros/MWh for today in the pool auctions, which represents a decrease of more than 60% compared to the average price of last year, 105.48 euros/MWh.

      Only yesterday, according to data from the system operator, REE, 82% of the energy demand (in total, 35,440 MW planned) were covered with emission-free capacity, mostly wind energy: 15,200 MW planned. This was followed by solar photovoltaic, nuclear and hydro.

      Thus, the practical disappearance these days of combined cycle plants from the market is preventing consumers from paying (or paying very little) compensation to these plants within the framework of the so-called Iberian derogation, a mechanism that Spain and Portugal have been applying since last June.

      Both countries, with the authorization of Brussels, imposed a price limit on the marginal price of gas in the electricity market to prevent the rest of the energy sources(nuclear, hydro and renewables) from benefiting from the extraordinary income from the high prices of this fuel after the Russian invasion of Ukraine. However, although these energies do not receive this price, gas does receive the price it offers on the market through compensation in consumers' electricity bills.

      But, in addition to the advantage of replacing an expensive technology, such as gas, with renewables, Spanish consumers benefit from the so-called congestion rents from the interconnection with France. These rents (the difference in the price of electricity between Spain and France multiplied by the energy that passes through the interconnection) were used until June to defray the costs of the system, which meant a cut in the fixed part of the bill, comprising charges and tolls.

      It is estimated that, since the application of the Iberian exception last summer, these revenues amount to around 2,000 million euros, 50% for each country. An amount that, as it was destined to subsidize the gas cap, ceased to benefit the user in the charges, but which, as it was not used on the days when gas does not require compensation (negative cap), will be subtracted on successive days, benefiting the users. It is not so much a refund, but a compensation on the days when the gas does have to be paid.

      The cost of financing the gas cap has been negative on several days this month (between -0.03 euros/MWh and -1.75 euros/MWh). Specifically, one hour on the 16th; three hours on the 17th; four hours on the 18th and all hours today.

      Spain at a disadvantage

      Critics of this Spanish public aid to the price of gas have been denouncing that it is a discrimination for the Spanish consumer with respect to the French consumer (who benefits from the mechanism without financing it) and for the Portuguese consumer because he does not pay it in an equitable way.

      An advantage in the case of Portugal is that, until this January, Portuguese consumers have not had to pay the Iberian exception across the board. According to the agreement reached by the two Iberian countries with the European Commission, the compensation would be borne by consumers with a regulated tariff (PVPC), as they are the beneficiaries of the drop in pool prices, to which this price is linked. From then on, it would also be assumed by all new free market contracts and those that were extended or renewed. And, ultimately, all those contracts that are renewed after one year are considered to be extended: by incorporating more payers, the lower the cost for all.

      However, in Portugal, in addition to having a very small regulated market, liberalized contracts are all reviewed in January, according to industry sources. The incorporation of Portuguese users to the financing comes at a good time, when the winter situation brings down the price of the pool due to the high production of renewables and when the price of natural gas continues to fall, following the stockpiling of this fuel by European countries.

      In any case, Spain and Portugal want the mechanism, which expires in June, to be extended until the end of 2024. France also wants to join the Iberian system, according to reports in the national media in recent days.

      Ribera and Cordeiro ask for the extension of the exception

      The Vice-President for Ecological Transition, Teresa Ribera, and the Portuguese Minister for the Environment and Climate Action, Duarte Cordeiro, met yesterday in Brussels with the Commissioner for Competition, Margrethe Vestager, to discuss the extension of the Iberian derogation that both countries are demanding.

      The Spanish government already announced last week its intention to ask the European Commission for an extension of the mechanism so that it can be applied beyond May and for the duration of the energy crisis, even until the end of 2024. Ribera explained then that Spain wants this cap on gas for electricity generation to be "as low as possible", between 45 and 50 euros/MWh. With the current design it is increasing from the 40 euros with which it started to 70 euros in June.

      The meeting was "positive" and served to evaluate how the mechanism has worked so far, diplomatic sources explained. The Government sees the Commission as "receptive" to its request for an extension, but "no specific deadline or date has been set for the technical teams to complete their analysis", they added.

      The Portuguese delegation also described the three-way meeting as "positive" and, along these lines, all the parties involved decided that their teams will work on the details of the extension before a new meeting between the representatives of Spain and the Commission.


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