Record power prices driving Spanish inflation: Banco de España

The direct pass-through of gas and CO2 prices into wholesale power prices has started to have a notable impact on inflation during the first half of 2021, according to a report published Aug. 10 by Spain's central bank, Banco de Espana.

Estimates indicate that the increase in the Spanish electricity price has been responsible for one third of the increase in the consumer price index during the first half, BdE said. This would mean around a 0.8% direct impact on inflation from an overall 2.9% increase in consumer prices, according to the report.

Rising gas and CO2 costs were seen as responsible for 50% and 20% respectively of this year's power price increase, it said.

The overall inflationary effect of record high power prices could be even higher due to the pass-through of the higher energy costs in the production of energy intensive industries such as cement, iron and steel, ceramics, refining and air transport, the bank said.

Spanish gas prices increased from an average Eur18.20/MWh ($21.30/MWh) in December 2020 to Eur28.70/MWh in June, adding Eur20.90/MWh to the electricity price in the first half, BdE said.

This compared to a direct impact of about Eur8.10/MWh for CO2 in the same period, while most of the remaining increase could be attributed to the pass-through of the subsequent increase in the 7% generating tax, it said.

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Wholesale electricity prices had almost doubled in Spain between December 2020 and June 2021, BdE said, and while developments in wholesale electricity prices in other European markets have been similar to those in Spain, the direct pass-through to retail prices through the existing mechanism means a far greater impact on consumer prices.

The impact on consumers has been around a 22.3% increase on their bills, the dank estimated.

In response, the government has rushed through legislation lowering value added tax on electricity from 21% to 10% to the end of the year and suspending a 7% levy on generation for the third quarter.

It has also submitted proposals to tax older non-emitting hydro and wind plants to recoup some "windfall" income form the high wholesale prices.

With a heat wave declared for Aug. 11 through to Aug. 16 by state weather agency Aemet, Spanish wholesale prices have reached three consecutive record highs this week, hitting Eur106.74/MWh on Aug. 9, Eur111.88/MWh for Aug. 10 and then Eur113.99/MWh for Aug. 11, having already broken the record in July, which had previously stood since 2002.

The most expensive year to buy power on the Spanish wholesale market (OMIE) was 2008, when the day-ahead price averaged Eur64.43/MWh, while a COVID-19 impacted 2020 saw an average price of Eur33.96/MWh.

For 2021, prices have spiked since February, reaching an average Eur92.42/MWh in July.