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Keys | How can the price of electricity be separated from the cost of gas? | Economy

An osca woman light bulbs from a lamp to reduce consumption in her home Madrid Photo: Víctor Sainz energy expenditure light electricity bill electricity price
An osca woman light bulbs from a lamp to reduce consumption in her home Madrid Photo: Víctor Sainz energy expenditure light electricity bill electricity priceVictor Sainz

Brussels and the European governments are negotiating these days an emergency solution to prevent the abrupt increase in the price of natural gas from being transferred, as it has been until now, to the bill that households pay for electricity. This relationship is especially direct in the Spanish case, in which one in three households and companies have a regulated rate (also known as PVPC), historically cheaper, but now much more expensive: any increase in gas is transferred directly to his pocket. Hence the special commitment of the Executive of Pedro Sánchez to achieve a European umbrella that sponsors these changes.

In the current marginal system, the final price of electricity is set by the cost of the most expensive generation source, which is usually natural gas. For this reason, untying both variables is an absolute priority in the short term, especially after gas has multiplied its price in recent months. A trend that has accelerated after the Russian invasion of Ukraine. It remains to be seen how the issue will be settled: the next 10 days, until the summit of heads of state and government in Brussels at the end of next week, in which the green light for the mechanism must be given, are crucial. These are the main short-term alternatives, and the advantages and disadvantages of each of them:

Capping the wholesale market

It is the measure that the Government of Pedro Sánchez has defended in recent weeks. Brussels, however —and despite having changed her initial iron stance—, he does not finish seeing her with good eyes. And Germany flatly refuses. It would consist of imposing a cap on the price of electricity, so that all regulated contracts would automatically pay less than now. But it would force the Executive to establish some type of compensation for combined cycle plants (those that burn gas to obtain electricity): their generation would continue to be necessary during many times of the day, but with a limited price below their production cost, it would not they would have no incentive to bid. There is not much clarity about the origin of these resources.

The second drawback of this system would be, according to several consulted specialists, the risk of creating distortions in the market —even if it were a punctual, short-term measure— and what to do with international exchanges, since each country could set its own limit, different from the rest of European neighbours.

Set a ceiling on the retail market

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The wholesale market —which is spoken of when it is said that electricity prices have risen or fallen, despite the fact that it only affects households and companies with regulated rates— would continue to fluctuate freely and set stratospheric thresholds as long as gas continues to be priced at current levels. However, consumers with regulated tariffs would have their bill capped.

Brussels does not see it with such bad eyes as the cap on the wholesaler: in fact, it included this measure in its latest proposal to the Member States. And, in addition, the distortions derived from a ceiling in the wholesale market would be avoided. But the great unknown is how it could be done to finance that price gap between the two: someone will have to pay it. The already large tariff deficit could be increased —the closest thing to a kick forward: future consumers will pay for it—, charged to the General State Budgets —with the consequent impact on the fiscal deficit— or —and this is where the next alternative comes in—using a tax on profits that fell from the sky.

Tax (really) the benefits that fell from the sky

The rate would go on the extraordinary profits obtained by owners of technologies such as nuclear or hydraulics due to an increase in costs to which they are not subject. And it would be shared among consumers, who would see their bill cut with a specific reduction on their bill. It is the proposal that the European Commission sees with the best eyes, given that it would alleviate the blow to households and companies without intervening in the market. The Organization for Economic Cooperation and Development (OECD) has also thrown a cape in this regard, although without specifying: “Given the benefits of energy companies, there is capacity to increase the level of taxes they are paying and redirect part of that money to measures that cushion the impact”, defended its general secretary, Mathias Cormann, on Monday in Madrid.

However, taking it to the ground of the facts is not easy. Last fall, Spain already applied a reduction —not a tax— of these benefits with dubious success: the electricity companies justify that the vast majority of the electricity they sell is in bilateral contracts —between generators and customers—, and not in the wholesaler. And there, by definition, there are no benefits from heaven, since the price is born from an agreement between the parties. “The problem here would be how to design it in a way that you don’t get knocked down in court in the future. It is a very complex calculation. And there are so many negative sentences that consumers have ended up paying, such as the hydraulic canon or the social bond, that I fear the same thing will happen. It is a very high risk”, points out Pedro Linares, professor at the Universidad Pontificia de Comillas.

Subsidize natural gas without touching the market

Another option that has circulated in recent days and that, according to Five days, the Government is studying the application of defraying with public money part of the historically high costs that combined cycle plants are having to suffer in order to reduce the price at which they offer in the wholesale market. In this way, their appeal prices would drop substantially and —given the marginalist design itself— so would the average price per hour. Furthermore, it would not force the operation of the electricity market to be altered. “If it is necessary to touch, let it be touched without modifying the market rules”, demands Juan Antonio Martínez, from Grupo Ase, one of the largest energy aggregators in Spain.

There are, however, many unknowns that float around the measure: where would the money for that subsidy come from? What would be the price threshold from which the aid would start? “An objective criterion would have to be set, such as the long-term average of gas prices. And most likely it came out of the Budgets. I don’t know to what extent there is margin. With a tax on profits that fell from the sky, on the other hand, the State would not have to subsidize anything,” he acknowledges. Natalia Colladoexpert in regulated markets at the Center for Economic Policies EsadeEcPol.

Rates only linked to long-term contracts

The most creative option, but which is not yet on the Commission’s menu of options nor, as far as is known, of the most belligerent Governments with electricity prices, would be that the reference price for all consumers, including that have a regulated rate or PVPC—is set by long-term contracts between the system operator (OMIE) and the electricity companies, and not by the always volatile wholesale market. This is what Linares and Collado defend, among others.

“The effect would be the same as a wholesale price cap, which would remain the same but would only be used for adjustments. It would not only help residential, but would allow the industry —where there are many customers without coverage and suffering from wholesaler prices— to automatically go to a long-term fixed price scheme and eliminate volatility”, points out the Comillas professor . “It could be designed in the short term and I would be very surprised if the power companies were not willing: if they did not accept it, they would be exposed to enormous reputational risk.” Covering these long-term contracts with electricity companies would be, concludes the Esade researcher, “the best of the five possible options.”

This option is also defended by Miguel Lasheras, an expert economist in energy markets. In his case, however, not so much as a temporary measure but as a permanent one, which would imply de facto ending the regulated rate. “The best thing would be to leave a small wholesale market, of adjustment and balance, that does not affect so many consumers, and that these are governed by long-term contracts with more stable prices” he explains by telephone: “If we continue as before, we are in the hands of Russia.

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