The gas price cap mechanism seeks to control the bills of energy customers in a marginal market
In the context of the very serious energy crisis that Europe is experiencing, an adequate calculation of the economic results of the Iberian exception will make it possible to evaluate on a real basis the contributions of this experience in changing the European electricity market model.
In Spain, the measure to limit the gas price, which helps contain the escalation of energy prices, is based on Royal Decree-Law 10/2022. This Regulation establishes a temporary mechanism to adjust the production costs of marginal fossil technologies so that they reduce their supply to the electricity market by an amount defined as:
new supply = supply with the real price of gas – (real price of gas – ceiling price of gas) / 0.55
The maximum gas price is set at €40/MWh during the first six months of application of the mechanism to be increased in successive monthly steps (also of 6 months) from €5/MWh, to a value of €70/MWh in the last month . 0.55 is considered the standard performance of combined cycle gas-fired power plants.
This mechanism affects both supply and demand as it lowers the marginal market price. That is to say, the price at which all energy is sold (renewable, nuclear, gas, coal…) will always be the price of the most expensive energy, in the Spanish case gas.
With this mechanism, nuclear generation and renewable energy sources (the supply that remains below the marginal price) receive less revenue (the so-called windfall). On the other hand, the supply of fossil fuels (combined cycle generation and coal) is not affected by the ceiling, as what stops coming in due to the drop in marginal price is later received as compensation (paid by demand that benefits from the mechanism ). .
As for the question, there are two types:
1. Those with insured contracts, the price of which does not change.
2. Those who buy in the market, which with the cap mechanism now pays less for the decrease in the marginal price, but also pays more for the compensation for fossil fuel generation. Since the first effect is greater than the second, this demand benefits.
The gas price cap mechanism has been applied every hour since its introduction, on June 15, 2022, without any incident. In all cases, combined cycle plants were in operation and the gas price was above the maximum price every day, except for nine days at the end of October (from 20 to 27 and then 30 October).
The marginal price reduction of the Iberian Electricity Market (MIBEL) averages €180/MWh.
This drop in marginal price has reduced the income of inframarginal power plants not backed by a term contract instrument (36% of inframarginal energy). The reduction of extraordinary income from these plants can be estimated at 31 million euros per day.
Fossil plants have not seen their income fall because the mechanism establishes that the effect of reducing the marginal, estimated at 55 million euros per day, is offset by the same amount. This is achieved with contributions from demand (51 million euros per day) and the remainder with part of the congestion rent of the Spain-France interconnection.
Demand indexed to the market (which represents 58% of total purchases) has seen a decrease in energy costs thanks to the fact that the effect of reducing the marginal effect is greater than that of increasing the fee. On average, these values are respectively 77 and 51 million euros per day, so the result is a net reduction of 26 million euros per day.
With regard to the effect on consumers’ bills, the differentiating element lies in the type of contract. So:
-The main beneficiaries of the cap are PVPC regulated consumers and free consumers with a market indexed price, for whom the energy term of their bill has been reduced by 16% compared to the price that would have been given without the application of the mechanism.
-For consumers who have a free contract at a fixed price, the energy term of their bill is calculated with the contract price, without being affected by the ceiling.
-For those who had a fixed-price free contract and renewed it after the cap announcement (April 26, 2022), the bill may have different forms depending on the type of contract they signed.
Trading companies opt for companies that use two prices: a fixed price and, in addition, the compensation price (stated as an additional term on the invoice). The consumer must be aware that the effective price of the energy term on his bill is the sum of both.
This article was published in ‘The Conversation’.
Source: La Verdad
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
