Record Rise In The Price Of Electricity In Spain Will Affect Everyone

Record Rise In The Price Of Electricity In Spain Will Affect Everyone

The brutal increase in the wholesale price of electricity in Spain, with almost daily historical records above 115 euros per megawatt hour (and in the heat of the heat wave) has unleashed the controversial summer policy.

The president of the PP, Pablo Casado , has accused the head of the Government, the socialist Pedro Sánchez, of doing nothing, and promises a new law to pay only for the energy consumed if he presides over the Executive.

For her part, the Minister of Ecological Transition, Teresa Ribera, said earlier this Thursday that she did not have the tools to deal with the rise in the electricity bill and pointed to the European Union and the President of Russia, Vladimir Putin, as responsible for this increase.

However, Ribera has also raised for the first time the possibility of creating a public company to try to lower the price of electricity, a measure requested for months by United We Can.

For its part, United We Can, in the coalition government together with the PSOE, has assured that it will oppose “in the street, in the Government and in Parliament” what it considers a “looting” by the electricity companies.

The Third Vice President and Minister of Ecological Transition, Teresa Ribera.The Third Vice President and Minister of Ecological Transition, Teresa Ribera.EFE
The electricity companies, for their part, deny that they are profiting and point out, as does Minister Teresa Ribera, the gas sector as the great beneficiary.

But how does the electrical system really work in Spain? Is it true that the government can do nothing to mitigate the high? Will the price of electricity continue to rise in the next few months?

Who sets the price of electricity?
The price of electricity is negotiated in a wholesale market in which many factors influence, but the Government does have a certain margin to influence the receipt of electricity, as demonstrated with the VAT reduction from 21% to 10% approved in the Congress of Deputies at the end of June.

Is the Spanish electricity system liberalized?
Spain, with José María Aznar as president and with the support of CiU and the PNV, joined the European electricity system in 1997.

It was a fundamental change because in practice it meant moving from a system regulated by the Spanish government, in cooperation with a oligopoly of private and public companies, to another liberalized system. In practice, this liberalized system had to introduce new agents and more competition, as happened, in order to increase the overall efficiency of the electricity sector.

This system, although it has undergone legislative modifications, maintains the main operating skeleton. For its part, the price of electricity has been progressively rising with governments of different colors, but it had never reached the current historical highs.

How does the market work?
In this model, agreed by the different EU markets, buyers and sellers operating in Spain negotiate through OMIE (Operator of the Iberian Energy Market) and, for each hour of the following day, a price is set with the offer more expensive accepted, which will be the one charged by all.

That is to say, we start from the cheapest offer and, if it is not enough, the negotiation continues with other more expensive ones until the demand is completed, so that the last one will be the one that establishes the price.

As highlighted by Aura Energía , energy is obtained from various sources: wind, solar, hydro, coal, nuclear and thermal. The former (coal, wind, solar and hydro) are the cheapest, while the latter (nuclear and thermal) the most expensive.

As electricity is not stored, at the moment there is no adequate technology, as much energy is produced as it is consumed.

The energy produced is auctioned daily in the “electricity pool”, where the generating companies offer the electricity that the traders buy and distribute it to the customers. As in any auction, also in the “electricity pool”, the price per kWh varies according to supply and demand and, in this way, when less energy is generated there is an increase in the price of electricity and, when there is more, a decrease .

What does the price of electricity depend on?
Different factors such as weather influence, for example periods of drought or lack of sun or wind. An example: wind power plants generate more electricity on windier days, which causes a decrease in the price of energy.

Also they influence the consumption peaks that occur in the coldest days (heating used) or warmer (air conditioning).

And finally, it also affects the price of raw materials, especially gas, oil and coal.

Who are affected by these price increases in the wholesale market?
Price fluctuations in this market have an impact on that of consumers benefiting from the regulated rate or Voluntary Price for the Small Consumer (PVPC), which at the end of 2020 was 10.7 million consumers, according to the National Markets Commission and Competition (CNMC). Another 16.1 million consumers decided to contract their electricity on the free market.

What companies monopolize the market?
At the end of the second quarter of 2020 , three companies accounted for 83% of all clients: Endesa, with 34.7%; Iberdrola, with 34.1%; and Naturgy, with 14.2%. And although independent marketers are gaining ground, they only had 8.6% of subscribers.

Could Spain get out of the European system or nationalize companies?
United We can recognized in January 2021 that “the measures of the program agreed with the PSOE are not enough to prevent increases in electricity,” so it proposed “to nationalize a power company to have at least one large public energy company that can compete with the oligopoly that raises the light “.

In addition, they recalled that they already included that proposal in their electoral program and that the PSOE “flatly rejected” this proposal in the negotiation of the coalition program.

However, now the PSOE is open to the possibility of creating a public company , although it rules out nationalizing any of the existing ones, something that in the short term seems impossible.

How is the price of electricity calculated?
As explained from Aura Energía , the price of light is based mainly on two concepts: the power term and the energy term.

What is the power term?
The power term is a fixed amount on the bill, that is, it does not vary depending on your electricity consumption, but on the contracted power you have. That is, it refers to the maximum contracted electrical power, and determines the amount of electricity that you can use at the same time. If you use more than the contracted power, in the 2.0A, 2.0DHA, 2.1A and 2.1DHA access light rates, your differential will jump.

– If you consume less than 85% of the contracted electrical power, 85% is charged

– If you consume between 85% and 110% , 100% of the contracted power is charged

– If you consume above 110% there is a penalty, since you are using more power and are damaging the electricity grid (this penalty is regulated by BOE)

To conclude, the price of the power term that you find in the electricity bill is determined by the electricity marketer that you have chosen in the free market and if it is in the regulated market the Government, stipulating one for each tariff, that is why it varies depending on of which you have.

What is the term energy?
The term energy refers to the amount of light (electrical energy) consumed. Unlike the power term, the energy term is linked to consumption. Therefore, the higher this is, the more you will pay. Consumption is measured in kWh (kilowatts / hour). The amount you pay for each kWh depends on the price of the energy and the rate you have contracted with your marketer.

This is because the kW / hour price is established through the “electricity pool” in the regulated market, and by each company that sells electricity once it has been acquired in the free market.

The power term and the energy term mainly, added to the access tolls, the electricity tax, the VAT and the meter rent, are the components that determine the total electricity price of your bill.

What is the free market and the regulated market?
In the Spanish market, the consumer can choose various electricity rates.

On the one hand, the regulated market rate or PVPC . The price of kW / h fluctuates every day and hour depending on the prices set in the “electricity pool”. You can only hire it if you have less than 10 kW.

On the other hand, the free market rates are the different rates offered by the marketers and that allow you to choose one that is tailored to your needs, Aura Energía emphasizes.

Will the price of electricity continue to rise?
Different sources in the electricity sector consider that the price of electricity will continue to rise during 2021, a year that will close as the most expensive in history.

Ricardo Margalejo , energy expert and analyst, co-founder of Gana Energía, a 100% renewable energy trading company, has predicted that the price of electricity will continue to rise until February 2022, in an interview with Cope.

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