What good has the application of the cap on the price of gas in the Spanish market?

In the context of the very serious energy crisis that Europe is going through, adequately calculating the economic results of the Iberian exceptionality It will make it possible to evaluate the contributions of this experience in modifying the European electricity market model on a real basis.

In Spain, the measure to cap the price of gas, which helps contain the escalation of energy prices, is based on Royal Decree-Law 10/2022. This regulation establishes a temporary mechanism for adjusting the cost of production of marginal fossil technologies, so that they reduce their offers in the electricity market by an amount defined as:

new offer = offer with the real price of gas – (real price of gas – ceiling price of gas) / 0.55

The maximum gas price has been established at €40/MWh during the first six months of application of the mechanism to be increased in successive monthly steps (also of 6 months) of €5/MWh, until reaching a value of €70/MWh in the last month. 0.55 is considered the standard performance of gas-fired combined cycle plants.

This mechanism affects both supply and demand because it reduces the marginal market price. That is, the price at which all energy will be sold (renewable, nuclear, gas, coal…) will always be the price of the most expensive energy, which, in the Spanish case, is gas.

On the supply side

With this mechanism, nuclear generation and renewables (the offer that remains below the marginal price) receive less income (the so-called benefits fallen from heaven). On the other hand, the fossil fuel supply (combined cycle generation and coal) is not affected by the ceiling, since what it stops entering due to the drop in the marginal price is later received as compensation (paid by the demand that benefits from the mechanism). .

On the demand side

As for the demand, there are two types:

  1. The one with insured contracts, whose price does not change.

  2. The one that buys in the market that, with the cap mechanism, now pays less for the drop in the marginal price but also pays more for the compensation for fossil generation. Since the first effect is greater than the second, this demand benefits.

The gas price cap mechanism has been applied every hour since its implementation, on June 15, 2022, without any incident. Combined cycle plants have been operating in all of them and the gas price has been above the maximum price every day, except for nine days at the end of October (from the 20th to the 27th and then on the 30th).

The reduction in the marginal price of the Iberian Electricity Market (MIBEL) has been, on average, €180/MWh.

The results for the bidders

This drop in the marginal price has reduced the income of inframarginal power plants that are not covered by any term contracting instrument (36% of inframarginal energy). The reduction in extraordinary profits from these plants can be estimated at 31 million euros per day.

Fossil plants have not seen their income reduced because the mechanism establishes that the effect of lowering the marginal, estimated at 55 million euros per day, be compensated by the same amount. This is achieved with contributions from demand (51 million euros per day) and the remainder with a part of the congestion rent from the Spain-France interconnection.

Demand indexed to the market (which represents 58% of the total purchase), has seen a drop in the cost of energy thanks to the fact that the effect of reducing the marginal exceeds that of increasing the payment of compensation. On average, these values ​​are 77 and 51 million euros per day respectively, so the result has been a net reduction of 26 million euros per day.

The results for consumers

Regarding the effect on consumer bills, the differentiating element lies in the type of contract. So:

  • The main beneficiaries of the cap are PVPC regulated consumers and free consumers with the price indexed to the market, for which the energy term of their bill has been reduced by 16% in relation to the price that would have been given without the application of the mechanism.

  • For consumers who have a free contract at a fixed price in force, the energy term of their bill is calculated with the contractual price, without being affected by the cap.

  • For those who have a free contract with a fixed price and have renewed it after the announcement of the cap (April 26, 2022), the invoice may have different forms, depending on the type of contract they have signed.

Trading companies are opting for those that establish two prices: a fixed price and, in addition, the compensation price (presented on the invoice as an additional term). The consumer has to be aware that the effective price of the energy term on his bill is the sum of both.

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