Iberian gas-for-power price cap to start June 14 after EC approves measure for 12 months

A year-long cap on the price of gas used for power generation will come into force June 14 for application on the day-ahead market, Spain's government said June 9.

The measure, which applies to both the Spanish and Portuguese markets, was approved June 8 by the the European Commission to run until May 31, 2023.

From June 14 market operators will have to "internalize the unitary adjustment amount," the government said in the official gazette, BOE.

The support will take the form of a payment that operates as a direct grant to electricity producers to finance part of their fuel costs.

Daily payments will be calculated based on the price difference between the market price of natural gas and a gas price cap set at an average of Eur48.80/MWh during the duration of the measure.

During the first six months of the application of the measure, the actual price cap will be set at Eur40/MWh.

Spanish gas at the PVB hub for July delivery was assessed June 8 at Eur70.50/MWh, S&P Global Commodity Insights data show.

As of the seventh month, the price cap will increase by Eur5 per month, resulting in a price cap of Eur70/MWh in the 12th month.

The measure will be financed by so-called "congestion income" obtained by the Spanish power grid operator as result of cross-border electricity trade between France and Spain and a charge imposed by Spain and Portugal on buyers benefitting from the measure.

The impact on consumers' electricity bills is estimated in single digits, according to Fernando Garcia, director of European utilities equity research at RBC Capital, who said the measure could also boost Spanish gas exports to France by as much as 7 Bcm/year while also boosting CCGT load factors in Spain.

Flows reversing northbound

The European Commission, in approving the mechanism, said it recognized that the Spanish and Portuguese economies are "experiencing a serious disturbance" as a result of record-high gas and power prices.

Spanish and Portuguese day-ahead power settled at Eur182.67/MWh for June 9 delivery, up from Eur81.60/MWh on the same day last year.

While Spain's government estimates that the day-ahead price could be reduced by 38% once the measure comes into force, it estimates the savings for consumers at nearer to 15%.

"The temporary measure... will allow Spain and Portugal to lower electricity prices for consumers who have been hit hard by the rise in electricity prices due to Russia's invasion of Ukraine," said Margrethe Vestager, the EC's executive vice-president in charge of competition policy. "At the same time, the integrity of the Single Market will be preserved."

Spain and Portugal estimated a Eur8.4 billion impact from the measure (Eur6.3 billion for Spain and Eur2.1 billion for Portugal) to lower the input costs of fossil fuel-fired power stations with the aim of reducing their production costs and, ultimately, the price in the wholesale electricity market, according to their notification to the EC.

Spanish year-ahead power has become Europe's discount market with Cal 2023 settling June 8 at Eur154.50/MWh compared to Eur306.01/MWh for France, exchange data show.

In 2021, France net exported 6 TWh to Spain with flows on the 2.8 GW interconnector capacity already having reversed northbound most of the time since the plans emerged in March, while French power carries an extra premium due to record-low nuclear production this year and next.