France squeezes the Iberian exception of the cap on gas

Despite all the initial doubts, the so-called Iberian mechanism has achieved the objective of lowering the electricity bill of Spanish consumers.

Thomas Osborne
Thomas Osborne
30 September 2022 Friday 02:40
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France squeezes the Iberian exception of the cap on gas

Despite all the initial doubts, the so-called Iberian mechanism has achieved the objective of lowering the electricity bill of Spanish consumers. A study carried out by a group of economists from the EsadeEcPol Center for Economic Policy has concluded that since its launch on June 15, the total savings for Spanish consumers has been 690 million euros.

Despite this, the impact on the pockets of the Spanish could have been much greater if the European Commission had not vetoed the closure of borders and France had not been able to take advantage of that "implicit subsidy".

"The average price of electricity for consumers in the regulated market would have been 24.4% higher without the Iberian exception," says the EsadeEcPol report. This means that an average Spanish household that consumes 8 kWh a day will have saved around 69 euros since June.

Until the end of the study, those who had taken advantage of this exception had been consumers whose electricity bills were linked to the regulated market, the PVPC, around 10 million consumers. Therefore, the total savings of the mechanism until the end of August would be 690 million euros.

This is the conclusion reached by the economists at EsadeEcPol after analyzing the evolution of the price of gas and electricity in the Spanish market (Midgas) and in the reference market in Europe, the Dutch TTF, and the adjustment approved by the European Commission for that Spain top the price of gas, in exchange for compensating the producers for the difference. The amount of savings will continue to grow, explains the report, as consumers who are subject to contracts in the free market renew them and marketers update their offers based on lower market prices than those they would have offered in the absence of the mechanism.

But, despite being called the Iberian exception, Spanish and Portuguese consumers have not been the only ones to benefit from the measure. The study confirms that since June 15, electricity exports to France skyrocketed. For the first time, Spain has become an exporting country.

"The effect was almost immediate, although it is true that this increase in foreign demand by France has had various reasons such as drought or the stoppage of its nuclear power plants, so it cannot be accurately concluded that the increase in exports is due to only at a lower price than electricity in Spain”, explains Jorge Galindo, director of Political Economy at EsadeEcPol and one of the authors of the study.

The escalation of exports began just a few days after the mechanism came into force. If the same trend continued at the end of the year, exports would have doubled compared to the previous year. The reasons? "While quantifying the price is easy, knowing what is going on in political meetings is beyond our reach," says Galindo.

The study refers to the effects of the drought, the technical shutdown in some cases, forced in others of many of its nuclear reactors... But it leaves a shadow of doubt. "We cannot rule out that France's decisions on the production of its electricity market have not been equally strategic given the existence of an implicit subsidy: compensation to combined cycle plants is paid by Spanish consumers," the report slides.

There is no doubt that capping the price of gas has been a pernicious incentive for decarbonisation goals. "It is, perhaps, the most worrying," acknowledges the author.

In the face of a possible cap on gas at the European level, Galindo explains that calculations could be made of the cost of increasing exports with other bordering countries to the Union, borne by European consumers. “It would be much higher than in Spain because although the European Commission did not allow the borders with France to be closed to preserve the single market, it did limit them.

In any case, the mechanism has been shown to reduce bills. But what is more worrying is that the use of gas to generate electricity has skyrocketed and that would also occur at much higher levels if it is implemented at a European level, ”he says.

Indeed, since the entry of the Iberian exception, the use of gas for the generation of electricity has skyrocketed. The report notes reasons such as the drought that has not allowed the use of hydroelectric energy, lack of wind that has reduced the contribution of wind energy, or the almost paralysis of cogeneration plants were left out of compensation (this has already been rectified ) despite being much more efficient in the use of gas than the combined cycle.

In the first two weeks alone, gas-based electricity generation increased by 42%. In the period as a whole, it can be estimated that some 139 GWh per day were needed. “The challenge that Europe now faces is how to define a measure capable of achieving the short-term objective of containing consumer bills with the medium and long-term objective of reducing gas consumption and complying with the decarbonisation process. Galindo points out.

Among other things, that will be what the energy ministers meeting in Brussels will have to discuss this Friday.