Wednesday, May 25

Brussels forces Spain to change the regulated electricity rate as a condition for approving the gas cap

Brussels has forced Spain to reform the semi-regulated electricity rate to decouple it from the hourly price of the wholesale electricity market. As confirmed by government sources, this is a requirement of the European Commission to give the green light to the Iberian cap on gas that Spain and Portugal have approved this Friday.

Ribera opens a public consultation on the reform of the electricity rate

Know more

The mechanism to intervene in the electricity market has already been approved by both governments and now needs the definitive approval of Brussels, which may take up to “two weeks,” according to Vice President Teresa Ribera.

But it requires, as a counterpart, to change the methodology for calculating the regulated rate, which will have to be implemented “at the beginning of 2023”, as explained in one of the drafts of the Royal Decree-Law that will be published this Saturday in the BOE. “One of the conditions for the approval of the mechanism by the European Commission is the reform of the current voluntary price for small consumers (PVPC)”, indicates the text.

As confirmed by government sources, it is “one of the issues that the European Commission has established for us in the pre-notification process” of the Iberian cap mechanism. These sources assure that the change in the calculation method of the PVPC allows “a convergence in a reasonable way” with other European countries, protecting consumers for the coming winter and against “what may happen” with the gas markets, alluding to a possible Russian supply cut. It also makes it possible to give “more liquidity” to futures markets.

The draft to which has had access indicates that “the rise in prices on the daily and intraday market and its high volatility have particularly harmed small domestic consumers with contracted power less than or equal to 10 kW, who are covered by the voluntary price for the small consumer, among whom are vulnerable consumers entitled to the application of the social bonus”, recalls the text.

“This direct translation of the volatility and the high price of the daily and intraday market to the PVPC is due to the fact that the methodology to establish the cost of energy uses exclusively the price of the daily and intraday market in each hour,” explains the draft.

The PVPC is the rate of “fools”, in the unfortunate expression of the president of Iberdrola, Ignacio Sánchez Galán, who a week ago had to apologize for those words after the government’s reprimand. Ribera said this Friday that those statements by Galán caused him “a deep embarrassment” and he recalled that in order to benefit from the discounts of the social bonus for the most vulnerable consumers “necessarily” you have to have the PVPC.

The PVPC has traditionally been cheaper than the free market, in which offers prevail at a stable price for a period of time (normally one year) that are not linked to the hourly price of the wholesale electricity market. But since the so-called pool has skyrocketed in recent months, regulated rate consumers have been the first to suffer these increases, since in the PVPC the cost of energy is directly indexed to the so-called pool, which changes every hour.

In December 2021 (the latest data available, which has just been published), just under 10 million households and SMEs had benefited from the PVPC. Specifically, and according to the data published this Thursday by the National Commission for Markets and Competition (CNMC), there are 9,999,491 supplies covered by the PVPC, which represent 36% of low-voltage contracts (up to 15 kilowatts contracted ).

The PVPC system was introduced by the PP government in 2014, after the elimination of quarterly auctions that determined the regulated rate and that were eliminated after it was shown that strong speculation prevailed in them. After the launch of the PVPC, this link to the daily market has received strong criticism from the electricity companies, who have been asking for its elimination for years.

Being directly indexed to the wholesale market, the PVPC carries strong volatility, although many experts believe that it fully transfers the price signal to the consumer. But the exponential rise in the wholesale electricity market as of last summer already led the Ministry for the Ecological Transition to open a public consultation last October, with the aim of gathering proposals for the reform of this rate.

Thus, to “reduce the volatility” of the PVPC, the Government must “introduce a reference to the prices of the futures markets, incorporating a price component based on a basket of products from the futures markets -annual, quarterly and monthly- and a price component of the daily and intraday market in such a way that the new formula for setting the cost of energy of the PVPC can begin to be applied at the beginning of 2023”. The system would be more similar to the system for fixing the regulated tariff in Portugal.

And before October 1, the Government must introduce a reference to forward market prices, incorporating in the formula for calculating the voluntary price for small consumers “a price component based on a basket of forward products and of the daily and intraday market”, says the draft.

“The basket of products will include futures market products, among them, annual futures, quarterly futures and monthly futures may be used, and will include a price component of the daily and intraday market that guarantees a certain exposure of these consumers to the price signal in the short term and encourage energy efficiency, storage and demand management”, states the text.

“Regulations will establish the weighting coefficients of each of the products in the basket that will be considered in the calculation of the voluntary price for the small consumer,” he concludes.

Leave a Reply

Your email address will not be published.