Spain set to overhaul consumer power price mechanism to reduce volatility

Spain's government has proposed an overhaul of its retail power tariff mechanism to dilute the link to volatile day-ahead prices, the Ecological Transition Ministry said Oct. 5.

The proposal would include three additional reference prices (monthly, quarterly and annual, based on MIBEL exchange prices) in the calculation of a Voluntary Small Consumer Price (PVPC).

The change in methodology would avoid future "price oscillations without losing prompt reference prices which help energy saving and efficient consumption," the ministry said.

It would also address an underlying need to better reflect the growing influx of renewable offers, it said.

Under the new proposal, in consultation until Nov. 7, the curve prices would be weighted 10% for the monthly, 36% for the quarterly and 36% for the annual product.

The curve pegs would represent 25% of the PVPC calculation in 2023, leaving 75% still pegged to the day-ahead price, but this would rise to a 40% weighting in 2024 and 55% in 2025.

The year-ahead reference window would be an average of the year-ahead closes in the three months prior to liquidation, according to the draft decree.

The reference window for the quarterly product would be the fifteen days prior to liquidation, while the month-ahead window would be the average of the five days prior to liquidation.

The new mechanism would be expected to reduce the price fork by around one third, the ministry said, from a 27% spread between minimum and maximum in daily settlements to 17%, and from 23% to 16% on a monthly average.

The PVPC tariff is used by nine million consumers, or 35% of the country's end users, although free market contracts are also usually linked to the same benchmark day-ahead contract.

The average PVPC price for Oct. 4 was Eur263.10/MWh compared to a day-ahead price of Eur190.53/MWh on the OMIE exchange plus a Eur98.28/MWh adjustment for the gas price cap.