Gas price cap should bring electricity prices down by up to 18%

  • Lusa
  • 12 May 2022

Cordeiro said that the Iberian mechanism, which will have to be validated by the European Commission, after approval by the Portuguese and Spanish governments.

Portugal’s environment minister has estimated that the Iberian mechanism to establish a cap on the price of gas for electricity production will allow for savings of up to 18% compared to the average price of the first four months of the year.

“When we compare it to the average electricity prices that we experienced in these first four months of the year, it is a reduction of around 18 per cent compared to the average price that occurred,” estimated the minister for the environment and climate action, Duarte Cordeiro, who was being heard in parliament as part of the discussion on the draft state budget for 2022 (OE2022) on Wednesday.

In response to Portuguese Communist Party (PCP) deputy Bruno Dias, Cordeiro said that the Iberian mechanism, which will have to be validated by the European Commission, after approval by the Portuguese and Spanish governments, already allows “some degree of security” and “predictability”, estimating savings of up to 18 percent compared to the amounts paid in the Iberian Electricity Market (Mibel), between January and April.

Questioned by Left Bloc (BE) deputy Pedro Filipe Soares about the windfall profits of energy companies, the environment minister said that applying a cap on gas prices is a way of capturing part of the companies’ unexpected gains and mutualising the unexpected gains in the system.

“Those who are selling electricity by fixing the price of gas at a figure much higher than they expected – and which are their production costs – have extraordinary and unexpected gains. With the mechanism they see these gains captured and applied and socialised in the electricity market to lower the price of electricity,” explained Duarte Cordeiro.

“We manage to do it within the electricity system at no cost to taxpayers. Obviously, it is borne by consumers who are exposed to the market,” added the minister, referring to consumers in the liberalised market.

The Spanish minister of ecological transition said that Lisbon and Madrid hope to approve “simultaneously” on Friday in their respective Cabinet meetings the mechanism to limit the price of gas for electricity production.

“We hope to be able to approve it simultaneously in Portugal and Spain this Friday and immediately transmit it to the European Commission, which must adopt a decision of the College of Commissioners for the mechanism to come into force,” Teresa Ribera explained on Wednesday in a plenary session of the Spanish parliament.

She welcomed the fact that the two countries had achieved “a change in European policies” at the end of April and that since then Lisbon and Madrid have been working on the “technical details” of the new mechanism, which “can sometimes be a little complex”.

Spanish government spokeswoman Isabel Rodriguez had already said on Tuesday that Madrid would approve the proposal to Brussels “next Friday in an extraordinary Cabinet meeting”.

Isabel Rodríguez referred at the time to the most important aspects of the new mechanism, considering it a “very important” agreement that will benefit not only Spanish consumers, by reducing their electricity bills “by up to 30%”, but also their “Portuguese neighbours”.

“It will be approved this week […]. We will do it next Friday in an extraordinary Cabinet meeting,” the Spanish government spokeswoman added.

At the end of April, the governments of Portugal and Spain reached a political agreement in Brussels with the European Commission to establish a temporary mechanism that will allow the average price of gas to be set at 50 euros per MWh.

This measure will temporarily decouple gas and electricity prices in the Iberian Peninsula, which will thus benefit from an exception, as agreed at the March European Council.

The measure is expected to last around 12 months and will set the average price of gas at around 50 euros per megawatt, against the current reference price in the market of 90 euros, with the price starting at 40 euros.

In the current European market configuration, gas determines the overall price of electricity when it is used, since all producers receive the same price for the same product – electricity – when it enters the grid.