Commission OK's Spain & Portugal plan to cut power costs during crisis

The European Commission has approved, under State aid rules, the prolongation and amendments of a Spanish and Portuguese measure aimed at reducing the wholesale electricity prices in the Iberian market ('MIBEL') by lowering the input costs of fossil fuel-fired power stations.

The amended measure, which will be in place until 31 December 2023, was approved under Article 107(3)(b) of the Treaty on the Functioning of the European Union ('TFEU'), recognising that the Spanish and Portuguese economies are still experiencing a serious disturbance.

The Spanish and Portuguese measure

In June 2022, the Commission approved a measure to lower the input costs of fossil fuel-fired power stations in Spain and Portugal with the aim of reducing their production costs and, ultimately, the price in the wholesale electricity market, to the benefit of consumers. The measure was set to expire on 31 May 2023.

Under that measure, electricity producers receive a payment that operates as a direct grant to finance part of their fuel cost. The payment is calculated daily based on the price difference between the market price of natural gas and a gas price cap. Between June and December 2022, the price cap was set at €40/MWh. After the first six months, the price cap was set to increase by €5 per month.

The measure is financed by: (i) part of the so-called 'congestion income' (i.e. the income obtained by the Spanish Transmission System Operator as result of cross-border electricity trade between France and Spain), and (ii) a charge ('adjustment cost') imposed by Spain and Portugal on buyers benefitting from the measure.

The Spanish and Portuguese authorities submit that the total net savings (after taking account of adjustment cost) for Spanish and Portuguese consumers combined amounted to around €5 billion between June 2022 and January 2023.

In April 2023, Spain and Portugal notified to the Commission their intention to prolong the original measure until 31 December 2023 with the following modifications:

• The price cap trajectory will be amended to provide a smooth and predictable phase-out, converging with expected gas market prices by the end of 2023:

• Buyers in the wholesale electricity market are exempted from paying the adjustment cost between 1 June and 31 December 2023, for those volumes of their electricity purchases for which they have entered into contracts for electricity supply at a fixed price prior to 7 March 2023.
• Final consumers, who are not registered as wholesale electricity market buyers, are exempted from paying the adjustment cost from 1 May to 31 December 2023, for those volumes of their electricity purchases for which they have concluded contracts for financial hedging of their electricity price risks prior to 7 March 2023.

The budget of the modified measure will ultimately depend on whether the mechanism is activated until the end of 2023, that is on whether the price cap will be below the gas market prices.

The Commission's assessment

The Commission assessed the amended measure under EU State aid rules, in particular Article 107(3)(b) TFEU, which allows Member States to grant aid to specific companies or sectors to remedy a serious disturbance in a Member State's economy, and the general principles set out in the State aid Temporary Crisis and Transition Framework, which the Commission has applied by analogy.

The Commission concluded that the prolongation and the amendments are in line with EU State aid rules. In particular, the Commission found that:

• The measure will be in place until 31 December 2023, in line with the applicability of the provisions of the Temporary Crisis and Transition Framework relating to aid to compensate for high energy prices.
• The measure continues to be different from other forms of price interventions due to the particular circumstances of the Iberian wholesale electricity market. In particular, the limited interconnection capacity of the Iberian Peninsula, the high exposure of consumers to wholesale electricity prices, as well as the high influence of gas in price setting for electricity have led to a particularly serious disturbance to the Spanish and Portuguese economies.
• The modification is appropriate, necessary and proportionate. The measure remains temporary and is limited to the minimum necessary to address the serious disturbance of the economy which Spain and Portugal are facing, by providing a safeguard against sudden spikes in electricity prices in the Iberian electricity market, in the context of a current volatile geopolitical situation.
• While the market dynamic has evolved since the measure first came into force, the amended measure will continue to serve as a backstop in case of gas price spikes, serving to protect vulnerable consumers and increase market stability.
• The adjusted price cap trajectory provides for a predictable and smooth phase-out of the measure, ending at a price level which is close to the currently expected prices on the gas wholesale market for the end of 2023.
• The amended measure continues to keep competition distortions to a minimum and to avoid possible negative impacts on the functioning of spot and forward electricity markets. Moreover, in line with internal energy market rules, the amended measure does not lead to any cross-border restrictions to electricity trade or to discrimination between Iberian and non-Iberian consumers.

On this basis, the Commission approved the prolongation and the amendments to the Spanish and Portuguese measure under EU State aid rules.

Background

On 24 and 25 March 2022, the European Council, following the Commission's Communication on security of supply and affordable energy prices of 23 March 2022, acknowledged that sustained high energy prices had an increasingly negative impact on citizens and businesses in the EU. It called on the Commission to urgently assess emergency temporary measures notified by Member States in the electricity market to mitigate the impact of fossil fuel prices in electricity production as regards their compatibility with the provisions of the Treaties and the Electricity Market Regulation 2019/943. Furthermore, it noted that due account should be given to the temporary nature of the measures, as well as to the level of electricity interconnectivity between the intervention area concerned and the single market for electricity.

EU State Aid rules allow Member States to grant aid to remedy a serious disturbance in the economy of a Member State. Additionally, the Commission Communication of 18 May 2022 on Short-Term Energy Market Interventions and Long Term Improvements to the Electricity Market Design recognises justified temporary national measures to subsidise the cost of gas used for power generation with a view to lowering prices on the electricity market, provided it is tailored for regions with very limited interconnection capacity, high influence of gas in price setting and consumers particularly exposed to wholesale electricity prices.

On 9 March 2023, the Commission adopted a new Temporary Crisis and Transition Framework to foster support measures in sectors which are key for the transition to a net-zero economy, in line with the Green Deal Industrial Plan. The new Framework amends and prolongs in part the Temporary Crisis Framework, adopted on 23 March 2022, to enable Member States to use the flexibility foreseen under State aid rules to support the economy in the context of Russia's war against Ukraine. The Temporary Crisis Framework has been amended on 20 July 2022, to complement the Safe gas for a Safe Winter Package and in line with the REPowerEU Plan objectives. The Temporary Crisis Framework has been further amended on 28 October 2022 in line with the Regulation on an emergency intervention to address high energy prices and the Regulation enhancing solidarity through better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders.

In the EU's wholesale electricity market, in case the demand cannot be covered otherwise, the market price for electricity is determined by a fossil fuel power production (for example, a coal-fired or gas-fired power plant). As a consequence, the sustained increase in gas prices following Russia's invasion on Ukraine has led to higher electricity prices across the EU. Therefore, measures mitigating the impact of the fossil fuel price in electricity production can contribute to the reduction of the excessive electricity prices.

The non-confidential version of the decision will be made available under the case numbers SA.106095 and SA.106096 in the State aid register on the Commission's competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the Competition Weekly e-News.