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Spain Is the Second Developed Country Where Electricity Prices Have Risen the Most

The electricity bill has reached its highest point since 2012. 


The energy crisis hitting the world is particularly affecting Spain, as reflected in the electricity bill. The situation is fuelling social unrest and unleashing a political storm as the price of electricity on the wholesale market reaches record highs since last June. 

The price of electricity is breaking all records. Spain has become the second developed country where the cost of this basic necessity has risen the most, according to the latest data from the Organisation for Economic Co-operation and Development (OECD). Only Norway is ahead, where the price of electricity has risen from 60.9% in August to 70.5% in September.

The rise in electricity prices has reached levels never seen before in Spain in 2021. October closed as the most expensive month in history and the bill so far this year is already 33% higher than in 2020. The Bank of Spain indicates that this increase is due to the rise in CO2 emission rights and the price of gas.

While awaiting the implementation of the shock plan launched by the government to cushion the impact of rising prices, the Consumer Price Index (CPI), the benchmark that measures how the cost of living evolves, published on Tuesday by the INE, puts a figure on the rise in electricity bills, almost 35% compared to a year ago.

 

How much has the price of electricity risen in Spain in the last year?

This upward trend in the prices of products and services, in general, and electricity, in particular, is reflected in the latest data from the National Statistics Institute (INE). The main results show that the annual rate of the Consumer Price Index (CPI) in October was 5.4%, almost one and a half points higher than in the previous month and the highest since September 1992. And not only that. Inflation in Spain is higher than the average for the euro area countries.

The organisation states that electricity in the country has risen by 62.8% compared to the previous year. Before 2021, the highest annual variation had been recorded in January 2017, with 26.2%. This is a far cry from the figures reported in recent months.

 

 

Why Are Electricity Prices Rising So Much in Spain?

The increase is driven by several factors, but it is mainly the international markets that have led to this constant increase over the summer. The case of Spain, in fact, is not unique since, as Andreu García, consultant in the Economic and Market Analysis area at AFI, explains, the rise in electricity prices is also affecting other European Union countries.

The factors that have caused the price of electricity to rise from almost 30 €/MWh to 140.38 euros per megawatt-hour in one year, according to data from the Iberian Energy Market Operator (OMIE), as García explains, are mainly two. The price of CO₂ emission rights in the European market and also the price of gas at an international level, which has also increased.

“Companies pay to be able to issue CO₂; currently allowances are at record highs and have been rising for the last six months and so it has caused a pass-through to the cost of electricity,” explains the AFI advisor.

 

 

tGarcía also explains that “we also have the effect of gas prices, which are also currently rising in international markets due to several factors such as a more powerful activity than expected, probably a lack of investment, which is preventing the gas supply from expanding and that is why we are having higher prices”.

It is these two factors, “gas and CO₂ rights, which have driven up electricity costs”, detailed Andreu García. In fact, the price of electricity in Spain will fall when renewable energies begin to produce energy.

 

The Government promises to improve the price of electricity bills in Spain by 2023

The government has approved a series of measures over the course of 2021 to prevent the price of electricity from continuing to rise. In June, it reduced VAT from 21% to 10% on electricity, which will apply until the end of the year, and decided to suspend the tax on electricity production. In addition, in September it announced a reduction in the excise tax on electricity from 5.1% to 0.5%.

The Minister for Ecological Transition, Teresa Ribera, has declared that this “shock plan” could lead to a reduction of up to 30% in electricity bills. The aim is for the cost of electricity in 2021 to reach the same level as in 2018. For his part, the President of the Spanish government, Pedro Sánchez, recently stated that he expects Spain to have one of the lowest electricity prices by 2023, thanks to the promotion of renewable energies.

 

How the Wholesale Market Works in Spain

The reason is that the wholesale market in Spain, known as the pool, the price is set according to a scheme shared by all the countries of the union. It stipulates the hourly purchase needs of all the electricity-producing companies. Then, when the sales offers are made, they are ordered according to the cost of producing the electricity, the cheapest being renewables and nuclear power.

If with these two there is not enough energy to cover all the hours, other technologies are added, such as combined cycle or coal, which are more expensive to produce, and are more penalised by CO2 emission rights. It is these technologies that set the final price for each hour, despite the fact that renewable and nuclear electricity is much cheaper.

 

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