Energy Crisis

Portugal, Spain cap gas prices for power producers to bring down wholesale prices

portugal spain gas pries capelectricity mechanism measure

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Published

June 14, 2022

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Published:

June 14, 2022

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Portugal and Spain have launched a mechanism to lower the prices of natural gas used by power utilities in order to bring down wholesale electricity prices on the Iberian electricity market (MIBEL). European countries have introduced various measures to help consumers cope with high power prices, but so far no one has opted for a move like this.

Electricity prices in Europe are mainly driven by the high natural gas prices, and the mechanism intends to solve this problem. Before the energy crisis, prices on MIBEL ranged from EUR 40 to EUR 60/MWh, but these days they are above EUR 200/MWh.

The measure is approved by the European Commission under EU State aid rules and envisages payments to electricity producers. It is estimated that Spain will have to pay EUR 6.3 billion and Portugal EUR 2.1 billion.

The measure will be in force from June 14, 2022 until May 31, 2023

The payments to power utilities will be calculated based on the price difference between the market price of natural gas and the gas price cap set at an average of EUR 48.8/MWh from June 14, 2022 until May 31, 2023.

During the first six months, the price will be capped at EUR 40/MWh, and then it will increase by EUR 5 every month. According to Spain’s Mibgas market, the price of gas today was EUR 78.75/MWh, and the monthly price was EUR 79.66/MWh.

Portugal and Spain will finance the measure from the income obtained by the Spanish transmission system operator from cross-border electricity trade between France and Spain, and from the charge introduced by the two countries on buyers benefiting from the mechanism.

European Commission: the mechanism will reduce wholesale electricity prices for consumers

The European Commission said the measure is in line with its Communication on security of supply and affordable energy prices and the European Council conclusions, both from March 2022, referring to emergency temporary measures reducing spot electricity market prices for companies and consumers.

The commission said that the limited interconnection capacity of the Iberian Peninsula, the high exposure of consumers to wholesale electricity prices, as well as the high influence of gas in price setting for electricity have led to a particularly serious disturbance to the Spanish and Portuguese economies.

Eurelectric warned that ill-designed emergency measures would create further market distortions

The mechanism will reduce wholesale electricity prices for consumers, without affecting trading conditions to an extent contrary to the common interest, said the commission, and added that the measure keeps competition distortions to a minimum and avoids possible negative impacts on the functioning of spot and forward electricity markets.

A month ago, Eurelectric warned that ill-designed emergency measures to limit the impact of high electricity prices would create further market distortions, and cripple investments in renewables and clean energy technologies.

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