What is behind the first day without Iberian exception?

This Thursday will be the first day that the Iberian exception mechanism does not work since its launch on June 15.

Thomas Osborne
Thomas Osborne
19 October 2022 Wednesday 22:43
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What is behind the first day without Iberian exception?

This Thursday will be the first day that the Iberian exception mechanism does not work since its launch on June 15. The reason? The price of a megawatt of gas (MWh) in the Iberian Gas Market (Mibgas) is below 40 euros for the first time since that date.

The mechanism of the Iberian exception, approved by Brussels, allows Spain and Portugal to limit the price of gas for electricity generation, which establishes a ceiling of 40 euros per MWh during the first six months. Subsequently, an average of 48.8 euros is set for six more months.

This means that currently, below the limit of 40 euros, the aforementioned mechanism is not applicable and it is not necessary to make compensation for the difference to the combined cycle plants that produce electricity by burning gas, as is customary with this mechanism.

It will be deactivated this Thursday and, if nothing changes, also the next few days. Over the weekend, gas is listed on the Iberian market at 26.50 euros MWh. In the futures market, the rest of October gas is trading at 75 euros MWh and November is at 64.6 MWh, but the situation becomes more complicated again for next year with averages above 110 euros.

Yes, the rule that launched it already provided for this possibility, so the suspension is automatic, and its reactivation will also be automatic as soon as the MWh price on the Mibgas market exceeds the threshold of 40 euros again, without need of any intervention neither of the Government, nor of the regulating organisms of the market.

Behind this conjunctural 'exception of the exception' there are multiple reasons. On the one hand, the abnormally high temperatures this fall. This is delaying the need for heating in European homes, thus detracting from demand and increasing gas savings. In addition, the wind is also becoming stronger, favoring a greater production of wind energy.

On the other hand, the fear of a gas supply cut by Russia has prompted all European countries to do their homework in terms of increasing reserves to the point that most are above 90%. It is not about the gas, the problem is that there is a lack of storage capacity. On Monday, Reuters reported that at least 35 methane tankers (those that transport Liquefied Natural Gas, LNG) are sailing off the Spanish coast "unable to secure spaces to unload."

No. Reuters also pointed out that another 12 methane tankers would be in a similar situation on other European coasts. The price of natural gas in the Dutch market, TTF, a reference in Europe, has accumulated four days of declines to 119.5 euros per MWh that it marked on Wednesday, a level not seen since last June, after having marked maximums of 350 euros MWh last August.

Financial sources explain that investors are not only discounting Europe's storage problems, but are also taking into account that the forthcoming recessions announced in countries such as Germany will detract from consumption. That will mean less activity in factories and less demand.

So will, as they point out, the savings policies that are being approved in most of the countries of central and southern Europe. “In fact, part of the drop in prices in recent days also has a lot to do with doubts about what Europe can approve at Thursday's summit. If there is a joint purchase, it is clear that this will put downward pressure on the price, which is why many traders have left the market to avoid that risk,” they say.