The mechanism devised by Spain and Portugal agreement with the European Union to put a limit on the price of natural gas used to generate electricity seeks in the first instance lower the price of the electricity bill of consumers. But also reduce inflation, which closed May at 8.9%, and has become a big monster in the room after the start of the Ukraine war. This cap will allow inflation to be lowered by 0.5 percentage points this year, according to the Bank of Spain; while from the Government they point to between “eight tenths or one point”, according to the vice president and minister for the Ecological Transition, Theresa Rivera, this week in statements to Onda Cero.
In the macroeconomic projections, the Bank of Spain starts from a precio of the gas between June 2022 and May 2023 between 70 and 80 euros per megawatt-hour (MWh), a generation level with gas (combined cycles and coal) “same” as the previous year, a generation volume affected by demand (that is, from consumers) is 46% and increases by 4.9 percentage points each month and a price difference with France equal to the unit amount of the mechanism (which allows the collection of 300 million euros). So calculate that the Iberian mechanism will reduce the wholesale price of electricity by 30% and the price of the regulated bill (PVPC) by 17%. Considering that electricity weighs about a 4% in the basket of the Harmonized Index of Consumer Prices (HICP), the mechanism would subtract approximately 0.5 percentage points from the average inflation rate of 2022.
While, regarding the impact on inflation in 2023, Its effect is expected to be “slightly positive“, of around 0.1 percentage points because “the impact of the measure will be less and less during the first half of 2023” —as of December, the limit price of 40 euros MWh is increased monthly by 5 euros MWh until May— and because “in the second half of 2023 electricity prices will compare, thanks to the implemented measure, with lower price levels in the same period of 2022″.
Although the bank adds other possibilities evolution of prices, generation with gas, volume affected by the limit and sales to France that could change the influence of the Iberian mechanism on the average inflation. Thus, if gas prices are higher (in line with the reference market for Europe, the Dutch TTF), the impact would reach -0.7 percentage points in 2022. If the price differential between Spain and France were higher than expected, revenues could amount to 2,000 million euros, which would reduce the burden on consumers [el total que debe asumir España por la compensación del mecanismo es 6.300 millones, de los cuales 5.500 millones corresponderían a los clientes de luz y 800 millones a los ingresos por las ventas a Francia] and the impact on average inflation in 2022 would be around –0.6 percentage points.
Lastly, if the generation affected by the measure were 20% higher than that assumed in the base scenario —for example, due to a less renewable generation— the estimated impact would be around –0.4 percentage points in 2022; while if the percentage of the peninsular demand would have to pay the costs of the mechanism as of June were 35% (instead of the 46% considered in the baseline scenario), the impact on average inflation would also mean –0.4 percentage points.
In the case of government calculationsthe vice president did not spell out what variables they started from, but in the document with which the European Comission authorizes the mechanism, despite the fact that estimates of inflation are not included, calculations do appear on how much the bill will be reduced, which point to 15% in the case of domestic customers and between 18% and 20% in the case of the industrialists. To reach these figures, the Executive starts from an electricity price of 96 euros MWh and sales to France of around 800 million euros, while maintaining the same cases of generation level (the same as in the previous moving year) and volume of generation affected by demand (an initial 46% that rises to 100% at the end of the period) than the Bank of Spain in its base scenario.