Dissecting the ‘Iberian exception’
Is the Spanish gas price cap a success or failure?
The Spanish press is outraged. The government’s vaunted gas price cap — known as the ‘Iberian exception’ — has failed to lower energy bills. In fact, Spanish and Portuguese consumers seem to be paying more than they were before the mechanism was introduced. But there are mitigating circumstances: namely, a heatwave-induced power demand spike, and soaring EU gas prices. The upshot is an inconclusive outcome of the excepción ibérica, leaving the merits of intervention open to interpretation. So where does this leave hopes for meaningful reform of broken EU energy markets?
For a refresher on how the cap is supposed to work and why intervention was deemed necessary, see ‘The rain in Spain’ (parts one and two)
For a background briefing on marginal pricing in EU electricity markets, see ‘Clear as mud’ from May
If you’re curious about the wider EU discussion around electricity market reform, this hot-take is a good starting place
Today’s article dissects the impact of the gas price cap mechanism on the Spanish power pool, the Iberian gas market and Spain-France energy trade. This is supported by the usual peppering of original charts using data from Spanish grid operator OMIE. It then examines the assumptions upon which the mechanism is deemed by some to have failed, and ends with a discussion about the political ramifications for EU energy market reform in the context of the brewing winter gas crisis.
Que pasó en el <pool>?
Let’s start with what happened last week when the cap was introduced. The mechanism came into force in the Iberian power pool day-ahead auction held on Tuesday 14th June, with results affecting market outturn the following day. The cap of €40/MWh on thermal generators (gas, coal and combined heat and power plants) duly lowered clearing prices, albeit by less than hoped.
The average wholesale price on 15th June was €165.59/MWh, a reduction of €48.46/MWh (-23%) on the previous day. However, this price does not include the cost of subsidising thermal plants. The so-called ‘adjustment cost’, which covers the difference between the cap and the market price of fuel (i.e. natural gas), comes on top.
The cap was supposed to deliver a net saving to consumers by lowering wholesale prices significantly more than the additional cost of subsidising thermal plants. As the chart above shows, this did not happen. Prices still rise and fall in tandem with the amount of power sector gas burn.
The adjustment cost of nearly €60/MWh erased the wholesale savings, resulting in a ~5% net increase in the total system price to €225/MWh. The same happened on the following two days: the adjustment cost drove up the system cost by +17% and +1% on 16th and 17th June.
Prices fell over the weekend of 18-19th June, but were higher than the previous Saturday and Sunday. As demand returned on Monday 20th June, gas-fired power generators ramped up output and both wholesale and adjustment costs shot up again.
Que decepción
Ministers promised the cap would save consumers a much-needed 15-20% on their bills. Spanish newspapers are keeping a close eye on pool prices because around one-third of households in Spain are on a tariff that moves with wholesale gyrations. Consumers on this so-called ‘PVPC’ tariff (see part 2) were primed to expect a reduction but saw the opposite happen. Cue widespread apoplexy.
The feelings of dismay and anger are understandable, but they do not tell the whole story. The situation is far more complex than it first appears.