JUAN CARLOS HIDALGO / EFE
The price escalation in the wholesale electricity market, which sets the amount that companies that supply electricity to homes pay for electricity, has set five consecutive historical highs this week and ends up having an impact on domestic consumption. This Thursday, the Minister for the Ecological Transition, Teresa Ribera, admitted the limited capacity of the Government to do something in the short term. External factors influence the rises and predict that there are days, weeks and months left in which electricity will have a lot to talk about. Here are 11 questions and answers to try to understand the rise in the price of electricity and how it affects your pocket.
1. Why does the light go up?
The record prices these days are those of the wholesale market. This marks the amount paid by the retailers – the companies that supply electricity to households and to whom the bill is paid, which are about 300 in Spain although Endesa, Iberdrola and Naturgy are the majority – to the companies that generate electricity. , which is formally a different activity although it is covered by the same names. The price is set by a daily auction that is blind. The marketers make their bid specifying what they want to buy and the amount they are willing to pay; the producers say the amount of energy they sell and at what price. The Omie (Operator of the Iberian Energy Market) marries both and the resulting amount is an amount that is set in time slots for 24 hours the next day. The closing price is the one that is paid to all producing companies, even if they can generate cheaper electricity.
The resultant of the energy that is generated is called mix electric. From renewable sources and nuclear power plants to coal-fired thermal power plants or combined cycle plants enter there. The latter use fossil fuels and, when they are necessary to produce the electricity that is demanded at a certain time, they increase the price.
2. Why is producing energy with fossil fuels more expensive?
The international gas markets are setting sky-high prices. The reason is that last winter was colder than usual and many countries, among which China stands out, ran out of supplies. To prepare for next winter, they must refill their reserves and thus the price has climbed from around 16 euros per megawatt-hour (MWh) that marked last winter to more than 46 euros today. Added to this are the carbon dioxide (CO₂) emission rights, a kind of environmental tax that polluting companies must pay in Europe, the cost of which has also risen this year due to Brussels’ decision to withdraw rights from the market to favor the emission cuts.
3. How long will it be at maximums?
Futures markets – where operations are traded based on what the light is believed to be worth over time and which are used to predict trends – indicate that electricity will remain expensive for a long time. If we take the price of gas as an indicator, experts believe that the current situation will remain at least until the first quarter of 2022. Another thing is to talk about maximum prices, such as those that this week have been beaten for five consecutive days. The heat wave has contributed to this, because it triggers the demand for the use of air conditioning and, at the same time, the lower wind causes less wind energy to be generated. The result is that in the end it is necessary to produce electricity by burning gas. The current upward streak is easy to cut this Saturday, because on weekends the decline in industrial demand favors cheaper prices. But if the heat continues, nobody can rule out that on Monday the market will go back to its old ways and hit highs again.
4. How is the wholesale auction price transferred to the household bill?
In Spain, domestic consumers can take advantage of the regulated tariff (the Voluntary Price for the Small Consumer or PVPC) or contract electricity on the free market. The former are, according to the latest data from the National Markets and Competition Commission, 10.6 million households and the latter are 16.2 million households.
The regulated tariff is indexed to the wholesale market and therefore, in the consumption part (one of the concepts that is paid when contracting the electricity supply) the price of each kilowatt oscillates according to this market. The wholesale market price also has an impact on other concepts that depend on consumption, for example VAT: it is not the same to pay 10% of something that costs one euro than 10% of something that costs three euros (although the percentage is the same, in the first case 10 cents of income would be paid and in the second, 30 cents). The usual thing was that the part of the bill that depends on consumption did not exceed a third of the total, but in circumstances such as the current one, when the price of the kilowatt increases and other concepts remain stable – or even fall, such as VAT -, the cost consumption is approaching half of the total bill.
5. What happens if I do not have the regulated rate contracted?
Bad news: it may be affecting you, too, and will almost certainly affect you in the long run. It depends on the type of rate that you have agreed with the marketer. Some work in a similar way to PVPC and fluctuate with market prices. Others have hourly discrimination but at fixed prices and, according to the CNMC, at the end of 2020 less than 7% of consumers had contracted flat rates. By the way, one in three did not know how to answer what type of fee they were paying. But even with rates that use a price agreed in advance between the marketer and the client, the escalation of the wholesale market ends up having an influence. “Faced with significant long-term increases, companies are ultimately forced to raise the price,” warns energy analyst Ricardo Margalejo, co-founder of the marketer Gana Energía. The contracts allow, always giving advance notice and giving the option for the client to terminate it without penalty, to modify the conditions.
6. What other costs does the invoice have?
In addition to consumption, another series of regulated costs are paid in the electricity bill, the so-called tolls and charges. The tolls are paid to the transmission and distribution networks (the electrical installations and lines that carry light from the places where it is produced to the homes, which depend in part on the multinational with state capital Red Eléctrica de España and in part on the companies electrical). The costs are used to promote renewable energies, to cover tariff deficits or to distribute the higher cost that non-peninsular systems have. They are concepts that depend on government decision. A part of the bill also depends on the power that each home has contracted, the meter rent and taxes.
6. Why did the light get more expensive with the cold of Filomena and now you do it because of the heat wave?
Neither extreme cold nor extreme heat episodes are favorable for the Spanish electricity market, since they greatly limit wind power generation. Without wind, the mills hardly move and during storms they have to stop because excess wind can damage them. “Each country has had its own policy and decides what it has enhanced the most: in Spain we want to remove coal and nuclear, but we do not have enough renewable energy and we depend a lot on gas,” summarizes energy analyst Ricardo Margalejo.
8. What has the government done and what is the opposition demanding?
The current situation of rising prices began last spring and that is why in June the Government approved a temporary VAT reduction on the electricity bill. This was 21% and now it is paid at 10%. This meant that, despite the fact that electricity was more expensive in July than in June, the average bill was somewhat cheaper, according to consumer associations. The other measure was the suspension, also temporary, of the tax on electricity generation, a 7% tax paid by companies. They are relief measures, but they do not intervene on the factors that determine the price escalation. The electricity tax, which is also paid on the bill and is 5.11%, has not been touched.
The PP has asked the Government to permanently abolish the tax on electricity generation (which companies pay, although it also ends up being transferred to prices) and has proposed “transferring non-energy costs” from the bill to the Budgets. This would mean financing through budgetary items some of the concepts that are now charged in the electricity bill as charges.
9. What is happening in the rest of Europe?
The blind auction system for setting prices in the wholesale market is set by Brussels and is similar in all countries. All those with a Mediterranean coast, except France, have daily average prices above 100 euros per MWh. Above the 117.29 euros that Spain and Portugal mark this Friday, only Italy is found, but others such as Greece or Croatia are not very far.
What changes in each country is the mix, that is, the combination of sources that produce electricity. France, for example, stands out for having an important component of nuclear energy, with a more stable and cheaper price. But still the amounts are above 90 euros, the same as in Germany, Belgium or the Netherlands. The final configuration of the invoice and how the regulated invoice is calculated is also different in each country, aspects in which, according to the European Commission, Spain has room to act. The Executive changed the regulated rate with a system of hourly discrimination that came into effect on June 1, a movement that in theory would bring savings to households and that has nothing to do with the current situation, although this makes it difficult to assess the real impact of this change on domestic economies.
10. Would a public electricity company help lower the price?
Unidos Podemos has requested the creation of a public energy company, a possibility to which Minister Teresa Ribera has been receptive this Thursday, who has opened the possibility of studying its creation by incorporating hydroelectric plants whose concession term expires. Hydroelectric plants are some of the companies that benefit from the so-called benefits fallen from the sky. These are produced because there are generators that, despite producing cheap electricity, obtain great profit when the closing prices of the auction are high (because the closing price is paid to everyone). Ecological Transition has already registered a project to try to limit those benefits, something that the PP also proposed in its day.
In the European context, a public electricity company is no surprise. EDF (Électricité de France), without going any further, is majority owned by the French State. A different question is whether that company would help moderate prices in the wholesale market. Following the same example, France has not been spared from price tensions this summer. Margalejo, for example, believes that a public electricity generation company in Spain “would be one more victim of the perfect storm”, as defined by the current situation of high demand and insufficient generation capacity using cheap technologies.
11. How can the invoice be made cheaper?
“Actions can always be taken, but reality shows us that the consumer’s possibilities are limited”, responds Miguel Ángel Serrano, vice president of Facua. These actions include not leaving electrical appliances in stand by (the red dot that you see on TV), use power strips with a switch that allow the power to be completely disconnected, do not leave chargers plugged in or move some activities such as ironing or setting the washing machine to off-peak times in those cases where the rate has discrimination hourly. But in Facua they insist: “The solution is not for the consumer to adapt their habits because their margin is little; it happens that the institutions, particularly the Government, carry out forceful measures to benefit the consumer ”.