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ENERGY

Spain and Portugal present their ‘energy island’ plan for cutting electricity costs

Spain and Portugal on Thursday sent Brussels their joint proposal for lowering electricity prices in the Iberian peninsula to a maximum of €30 ($33) per megawatt hour, Spain’s ecology minister said.

Spain and Portugal present their 'energy island' plan for cutting electricity costs
Spain's Prime Minister Pedro Sanchez (L) and Portugal's Prime Minister Antonio Costa speak ahead of a meeting as part of a European Union (EU) summit at EU Headquarters in Brussels on March 25th, 2022. (Photo by JOHN THYS / AFP)

The move came a week after the European Union agreed that Spain and Portugal could deviate from the bloc’s rules on energy pricing to ease the impact of energy prices on consumers.

Spain and Portugal are in a strategically advantageous position in that they’re not as dependent on Russian natural gas as many of their European neighbours, importing most of it from Algeria and other countries.

Spain is also the country with the largest gas storage and regasification capacity in Europe and together with Portugal is a renewable energy leader in terms of solar, hydraulic and wind power. Their energy markets are more self-sufficient and extremely well connected between both nations.

This has led the two countries that form the Iberian peninsula (as well as tiny Andorra) to be referred to as an “energy island” by Spanish Prime Minister Pedro Sánchez and his Portuguese counterpart António Costa, as a simplified way of describing why their countries should be temporarily released from the EU’s common market rules.

The decision to grant Spain and Portugal “special treatment” came after their efforts to convince Brussels to decouple electricity prices from the gas market fell on deaf ears.

“We have a joint proposal… and we’re working with the European Commission” to push it through, Teresa Ribera told reporters.

The proposal involves capping the price of gas used for the generation of electricity to the equivalent of “€30 ($33)” per megawatt hour, she said.

Such a cap, which would significantly reduce the price of electricity on the wholesale market in both countries, “is one of the technical elements of the proposal we need to discuss with Brussels”, she said.

Prices are particularly high in the Iberian peninsula, with both Spain and Portugal heavily dependent on gas to produce electricity.

Prices have risen sharply in both countries in recent months due to the rules governing Europe’s electricity market which obliges producers to sell electricity on the wholesale markets at a price determined by the most expensive production costs — that of gas-fired power plants.

READ ALSO: Is Spain ready to be the EU’s main natural gas supplier?

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MONEY

Spain’s electricity price hikes in 2024: What you need to know

Electricity bills for many people in Spain will go up again this March, with previously capped VAT rates due to rise further. Here's how much more you can expect to pay.

Spain's electricity price hikes in 2024: What you need to know

In January the Spanish government recalibrated some of its anti-crisis measures.

Though it maintained 0 percent VAT rates on essential foodstuffs, it cut some aid on energy bills. Prime Minister Pedro Sánchez at the time announced that VAT on gas and electricity would go from the reduced rate of 5 percent to the (increased but still reduced) rate of 10 percent.

The measures had originally been brought in to give Spanish consumers a little respite during the energy crisis sparked by war in Ukraine.

However, due to unexpected falls in electricity prices (below €45/MWh) in February ,VAT on electricity bills will now rise again to the standard 21 percent, as in keeping with the legislation.

Why is it going up?

Essentially because electricity prices have fallen faster than the government anticipated. According to the anti-crisis law, if the price of electricity falls below €45/MWh, VAT would return to 21 percent. The government argues this is positive for customers, because prices are falling.

However, this was not expected to happen until late-2024 if not early-2025, so the rise has come rather unexpectedly and ahead of schedule.

If the average price breaks the €45/MWh threshold again, the government has said it will reintroduce the 10 percent VAT cap.

READ ALSO: How to change the title holder of utility bills in Spain

When does it go up?

This increase in the tax will be applied from Friday 1st March, coinciding with billing cycles.

What does it mean for my bills?

Basically, that your next electricity bill will include an 11 percent increase in VAT.

This rise applies to all consumers with electricity contracts with power of less than 10kW, both in the free and regulated market.

How much will my next bill be?

To get an estimate of how this will add to your bill, take a look at your last one.

Assuming that your consumption is stable and doesn’t fluctuate massively (if you went away on holiday, for example), the itemised electricity usage cost (terminology for this varies by company) should be stated, plus equipment, and the separate electricity tax, known as IEE in Spain.

Say all that adds up to €100. With the previous 10 percent VAT cap you would’ve paid €110, and with 21 percent the amount will now be €121.

Reporting from Europa Press estimates that the average annual bill is expected to increase the average annual bill of a “typical customer” by 15 percent, “from €467 to €539 per year”.

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