Spain pushes to accelerate EU electricity market reform and close it this year

The Spanish government has proposed to the European Commission an almost total reform of the electricity market to lower prices in the long term and reduce its volatility. Brussels is preparing the process to introduce changes in the functioning of the electricity market, and Spain has gone ahead and has been the first member state tosubmit a comprehensive plan on how to tackle the reform, betting on fragmenting the current market by technologies and imposing long-term fixed contracts and prices for nuclear, hydroelectric and renewables.

Spain is trying to speed up the process for the European Union to reach an agreement on the structural reform of the electricity markets. The usual timeframe for undertaking a reform of this magnitude in the EU would be two years, but the Spanish government is pushing for a decision to be adopted soon and for a pact to be sealed between the EU-27 this year or very early in 2024.

From the Government it is now seen as a "perfectly feasible option" that during the Spanish Presidency of the European Council, in the second half of this year, an agreement could be reached for the structural reform of the electricity market in the EU, according to official sources. The Executive underlines the interest shown by Germany, France and Italy in studying the Spanish proposal.

Extending the 'Iberian exception

Spain and Portugal aspire to maintain the Iberian exception - the limit on the price of gas used to produce electricity to contain the price - while the EU activates a comprehensive reform of the rules of operation of the electricity market. The cap on gas is understood in Madrid and Lisbon as a strictly temporary measure that will no longer be necessary if the rules of the game of the Community markets are changed.

The Spanish and Portuguese intention was to extend the gas cap at least until the end of 2024 to protect themselves against large increases in the price of electricity while the energy crisis lasts or until there is an agreement to reform the market, but for the moment the European Commission is only considering approving an extension until the end of this year.

The European Commission has already informed Spain and Portugal that the extension of the Iberian exception, which expires next May 31, cannot go beyond 2023, because this is the period in which the temporary framework of aid for the war in Ukraine is in force. If the European Union does not extend this special framework of support measures, neither will the cap on Iberian gas be able to do so beyond the end of the year.

This was conveyed last Wednesday by the European Commissioner for Competition, Margrethe Vestager, to the Vice-President and Minister for Ecological Transition, Teresa Ribera, and her Portuguese counterpart, José Duarte Cordeiro, at the meeting they held last week, according to ministerial sources. After the meeting with Commissioner Vestager, the Spanish government now assumes as "a perfectly reasonable scenario" the extension of the mechanism for only seven months, until the end of the year, as opposed to the initial intention to extend it until 2025.

In any case, the Executive sees two possible scenarios from now on: that the EU extends the temporary framework of aid for the war, which would also allow an eventual extension of the Iberian solution beyond 2023; or, preferably, that an agreement is reached this year within the Union to reform the electricity markets. Shortening the deadlines and changing the rules of operation of the electricity market "constitutes the real problem and the central strategy for Spain", according to the Government.

The reform that Ribera wants

Brussels has opened a three-week public consultation period to receive proposals from member states and energy sector players on how to tackle a reform of the electricity market to reduce price volatility and better protect consumers in the event of price hikes. The European Commission, which aims to present its reform plan in March, has already received early proposals from Spain, France and Greece.

The Spanish government has proposed to Brussels to change the current rules of operation of the European electricity markets , which set prices through a marginalist system (which means that the last and most expensive technology needed to cover demand sets the price of all the others) and which has caused the soaring prices of natural gas to contaminate the price of electricity during the energy crisis.

Spain has proposed, in practice, to maintain in the current daily and intraday market the electricity produced by gas and coal plants, which would charge compensation (capacity payments) for being available at peak demand. Renewables, nuclear and hydro would have a fixed price for years through contracts with the electricity system. The price charged by renewables would be set by a system similar to the current government auctions, while that of nuclear and hydro would be a price set by the regulator.

Wholesale electricity markets in Europe operate with marginalist systems, whereby the last production offer to match demand is the one that sets the price for all the others. The last offer is in many cases the one made by gas plants, which during the energy crisis have suffered from soaring international prices, and which pushes up the price of all electricity, including that of renewables or nuclear plants that do not bear these extra costs due to the rise in gas prices.

Spain and Portugal apply a maximum price only to the bids that combined cycle power plants (those that burn gas to produce electricity) can submit in the electricity market. In this way, the electricity market as a whole contains its price by decoupling it from the price of gas. According to the Government's calculations, Spanish consumers have benefited from net savings of more than 4,500 million euros thanks to the lower price set by the market thanks to the gas cap.