Electricity prices: extension of the “Iberian exception” until the end of 2023

Spain and Portugal have decided to extend until the end of 2023 their exceptional electricity price cap agreement, which was put in place to protect their consumers from the European tariff system.

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The electricity price cap mechanism in Spain and Portugal has been extended until the end of 2023. This decision was announced by the Spanish government on March 28, 2023. The agreement was reached between Spain, Portugal and the European Commission and is called “Iberian exception”. This measure, originally scheduled to expire at the end of May, will be extended for an additional seven months until the end of December 2023.

The reasons that led to the implementation of this measure have not changed, according to the executive of Pedro Sanchez. Indeed, in June 2022, Madrid and Lisbon had obtained the approval of Brussels to leave the European tariff system because of their lack of interconnections with the rest of the European Union, which penalizes their consumers. The mechanism for capping the price of gas used in electricity generation has resulted in savings of almost 5 billion euros, according to the Spanish government.

The trigger level for this measure, which is currently 55 euros per MWh, will however be raised to 65 euros in December. The Spanish government does not rule out the possibility of extending this measure beyond December 2023. In January 2023, the government had expressed its desire for an extension until at least the end of 2024.

The price of electricity is set on the European markets by the “marginal cost” principle, which implies taking as a reference the price of the last production capacity used to balance the network, i.e. currently that of gas-fired power plants. This system is accused of driving up prices and several countries, such as Spain, France and Italy, want to reform it. Other countries, such as Austria and the Netherlands, prefer to rely on free competition or increased network interconnections on the continent to bring prices down.

Two weeks ago, the European Commission proposed ways to reform the European electricity market without fundamentally restructuring it, using long-term energy contracts for decarbonized energies to protect consumers from price volatility and encourage investment in renewables and nuclear power. This proposal is an alternative to the reforms proposed by some EU Member States.

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