Electricity will drop by 50% if the EU approves the cap on Ribera gas

The electricity price for the third quarter of this year will be 89 euros cheaper than in Germany. And it is that while electricity futures in the Iberian market mark 192 euros/MWh, in the German country this figure is close to 277 euros/MWh.

This differential responds to the expectations of an application of the cap of 30 euros/MWh for gas in the Iberian Peninsula, a preliminary proposal presented by Spain and Portugal to the European Commission with the objective of reducing the price of electricity to 100 eurostwice as much as before the energy crisis, but half the current price.

Before the European Council in Brussels – where the President of the Government, Pedro Sánchez, and the Prime Minister of Portugal, António Costa, obtained the so-called “Iberian exception” – the electricity futures markets of Spain and Germany were trading for the third quarter at very similar prices.

Since last March 25, the date on which this meeting was held, the price of electricity futures in Spain, for the period between July and September 2022, has not stopped falling, with the last price being at 190 euros/MWh.

Meanwhile, in the case of Germany, the opposite effect has occurred and the upward trend in the German market has placed the last price for this period at 279 euros/MWhmaking a difference of 89 euros/MWh, so buying electricity in Spain for the summer will be much cheaper than doing so in Germany.

If we compare the Spanish electricity market with the French one, the gap is much greater, specifically 110 euros/MWh, since its price is around 300 euros/MWh. In the last quarter of the year these differences could become much more notable, placing Spain as the country with the cheapest electricity price in the European Union, something that was impossible to imagine a year ago.

In this way, the market reflects a certain belief that Spain and Portugal could finally obtain this Iberian exception and establish a limit on the prices offered by gas combined cycles, although there are significant differences between the price of 30 euros proposed by Spain and Portugal and preferences of the European Commission. And it is that the EC does not want the difference between the Iberian wholesale price and the rest of the EU countries to be very largeto avoid exposing the current marginalist system or that there is an avalanche of countries that want to join it.

Expectations

analysts do not trust the approval by the European Union of the proposal to limit the price of gas to 30 euros per megawatt hour. From JP Morgan they declare that “the establishment of a maximum price means that customers who pay a price linked to the wholesale price should obtain a significant reduction in their bills, and the difference between the price of energy resulting from the maximum price and the real price to which the CCGTs offer would be paid by the rest of the consumers” and they hope that the cap “is closer to 50 euros/MWh, the average price of Iberian gas in 2021, than to 30 euros/MWh” since “with a cap of 50 euros/MWh in the price of gas, the implicit ceiling in electricity prices would be around 125 euros/MWh”.

For their part, the experts at JB Capital Markets are waiting for “the gas cap to finally be applied, but we will not be surprised to see a higher cap of shorter duration” and add that they are on the eve of “seeing how other European countries are reacting for competition reasons, although the first indications of an EU reaction against the proposed cap seem to support our opinion”.

Caixabank’s team of analysts has stated that “30 euros/MWh is compared to gas prices above 100 euros/MWh and would be equivalent to a pool price of about 85-90 euros/MWh” and insisted that “Such a low gas cap can induce pressure on pool prices that could ultimately penalize companies with a relevant position in the open market, for example Acciona Energia/Acciona.”

Iberian proposal

To calculate the value of the adjustment, Spain and Portugal propose setting a reference price based on the Mibgas, making producers with variable costs above 30 euros are compensated by the difference between that limit and the value set for the following day. According to the proposal, the value of the adjustment will be calculated every day before the start of the auction and “it will be published so that all market agents know what it is.” The creation of this cost adjustment mechanism “represents a payment obligation”, which will be distributed by OMIE among all the purchasing units that participate in the electricity market in proportion to the energy contracted.

Although the addition of this cost will fall “on the demand for electricity”, the countries defend that the final price will be lower than the marginal prices prior to the application of the mechanism.