Portugal: Short notes on the ‘Iberian exception’ – a gas price cap to lower wholesale electricity prices
Miranda & Associados, Lisbon
nuno.antunes@mirandalawfirm.com
The disruption caused globally by the Russo-Ukrainian conflict, which started on 24 February 2022, was acutely felt on various economic fronts. One of the most visible impacts – the humanitarian crisis aside – concerned the energy markets. States scrambled to find answers to energy problems that had not been planned for and for which no straightforward solutions existed. Further, collective approaches were often unviable because of existing ‘splits’ in energy markets.
Even within the European Union, where an ‘energy union’ supposedly exists, answers to such energy challenges were often tailor-made according to the circumstances of the ‘energy region’.[2] The steep and prolonged natural gas price increase resulted in higher electricity prices across the EU, stemming directly from the ‘pay-as-clear’ market structure (ie, the marginal price sets the same electricity price for all producers).[3]
The ‘Iberian exception’, as it came to be known, emerged as a response to increasing wholesale electricity prices for an area that, first, works (essentially) as homogeneous markets for electricity (Iberian Market for Electricity (Mercado Ibérico de Electricidade or ‘MIBEL’)) and natural gas (Iberian Market for Natural Gas (Mercado Ibérico del Gas or ‘MIBGAS’)) and, second, is in a way disconnected from the remainder of the EU (in particular, in respect of electricity, there is a significantly low level of integration with France and, consequently, beyond to central Europe).
Efforts from Portugal and Spain, which underlie the ‘Iberian exception’, effectively echoed the European Council’s concerns about the negative implications for EU businesses and citizens alike of ‘unaffordable’ energy prices.[4] Security of supply, it should perhaps be stressed, was less of an issue for the Iberian region in the aftermath of the conflict outbreak given the various liquefied natural gas (LNG) import points and the diversification of routes.[5]
The European Commission ultimately acknowledged that certain supporting measures by Member States would not breach State Aid rules. The proviso was that such measures would be temporary and tailor-made for regions with limited interconnection capacity, high influence of natural gas in price setting and consumers particularly exposed to wholesale electricity prices. In the words of Executive Vice-President Vestager, Commissioner for Competition, the ‘Iberian exception’ was a temporary measure that was approved to ‘allow Spain and Portugal to lower electricity prices for consumers who have been hit hard by the rise in electricity prices due to Russia’s invasion of Ukraine’. Simply put, this mechanism was intended to decouple gas and electricity prices.
Announced by Portugal and Spain at the end of April 2022, and formally approved by the European Commission in June 2022,[6] the ‘Iberian exception’ was expected to remain in place until May 2023.[7] Portugal and Spain have recently notified the European Commission of their intention to keep this supporting mechanism in place until, while amending it to gradually phase it out in a smooth manner by, the end of 2023.[8] The extension and adjustment were approved in April 2023. The gas price cap, which was initially set at €40/MWh for the first six months, with a planned €5 per month increase thereafter, was eventually adjusted to increase continuously from around €56/MWh in April 2023 to somewhere in the region of €65/MWh in December 2023, when it is expected to come into line with market prices.[9]
The ‘Iberian exception’ was passed as law in Portugal by means of Decree-Law No 33/2022, of 14 May 2022 (‘DL 33/2022’),[10] which, after the aforementioned extension and adjustment, was amended through Decree-Law No21-B/2023, of 30 March 2023 (‘DL 21-B/2023’). Various other regulatory instruments were put in place to render this mechanism operational, including: (1) Secretary of State for Energy, Order No 9799-B/2022, of 2 August 2022 (‘Order 9799-B/2022’); and (2) various directives issued by the Energy Services Regulatory Authority (Entidade Reguladora dos Serviços Energéticos or ERSE).[11]
From a practical standpoint, the value of the adjustment under the ‘Iberian exception’ is borne by suppliers, market agents, and wholesale electricity consumers operating in the wholesale electricity market,[12] which are viewed as the sectoral entities that benefit the most from the reduction in the electricity offer price (due to the marginal price decrease). In Portugal, DL 33/2022 stipulates that combined-cycle power plants and cogeneration facilities in the market regime are to internalise the relevant adjustment upon making their offers,[13] with the adjustment to be passed onto players within the electricity wholesale market, except for electricity production under bilateral physical contracts. An exemption from the settlement of the adjustment amount has moreover been granted to consumption for pumping at hydroelectric power plants, auxiliary services at other power plants and storage systems (namely, batteries).[14]
As a final note on the assessment of the mechanism, one could say that the ‘Iberian exception’ appears hitherto to have performed as planned, having decoupled natural gas and electricity prices, and curbed wholesale electricity prices in the MIBEL region, without major issues having apparently arisen.[15] The coordination between Portugal and Spain was a critical factor in its set-up, implementation and recent modification. The most relevant contribution of the ‘Iberian exception’ is, perhaps, in this author’s view, the somewhat overlooked issue of energy poverty, which should verily lie at the heart of any energy transition roadmap.
Notes
[1] Partner and Co-Head of the Energy and Natural Resources practice. The author wishes to acknowledge and express his gratitude for the assistance and contribution of João Martins, trainee at Miranda & Associados, who carried out much of the research for, and prepared an early rough draft of, this article.
[2] This ‘regionality’ aspect notwithstanding, within the EU, significant steps have been taken to address constraints at an EU level. The AggregateEU mechanism, set up in the wake of Council Regulation (EU) 2022/2576 (‘Solidarity Regulation’), which brought in joint gas demand aggregation and purchasing, is an example of such steps.
[3] Lessons have been learned and, without surprise, EU electricity market reform is currently underway.
[4] While Portugal and Spain are the EU Member States involved, these short notes reflect mainly a Portuguese perspective.
[5] For Portugal, in 2022, LNG imports amounted to some 91.5 per cent of natural gas imported, with less than five percent originating in Russia.
[6] This supporting mechanism was found to be compliant with State Aid rules, notably under Art 107.3(b) of the Treaty on the Functioning of the EU, pursuant to which a Member State may grant aid to a specific sector to remedy a serious disturbance in its economy.
[7] The financing of the gas price cap, estimated at €8,400m (€2,100m for Portugal and €6,300m for Spain) for the initially planned period, has been covered through, on the one hand, a charge imposed by Portugal and Spain on buyers benefitting from its implementation and, on the other hand, the so-called ‘congestion mechanism’, which is income obtained by the Spanish transmission system operator (TSO) from cross-border electricity trade with France.
[8] This notification followed the adoption by the European Commission, on 9 March 2023, of a new Temporary Crisis and Transition Framework for support measures in sectors key to the transition to a net-zero economy, in the context of the Green Deal Industrial Plan.
[9] In Portugal, the day with the greatest discrepancy between the values with and without the adjustment mechanism was 18 August 2022, prices having been €208.96/MWh and €348.22/MWh, respectively.
[10] In Spain, the ‘Iberian Exception’ was implemented by means of Royal Decree-Law No 10/2022, of 13 May 2022.
[11] Directive No 11/2022, of 14 May 2022, on reporting obligations of fixed-price contractual instruments (under Art 7 of DL 33/2022), followed by Directive No 10/2023, of 30 March 2023, enacted because of the entry into force of DL 21-B/2023. In addition, Directive No 22/2022, of 28 September 2022, approved a set of rules operationalising Order 9799-B/2022. Other directives concerning the ‘Manual on Procedures for Global Management of the Electric Sector System’ were also passed.
[12] DL 33/2022, Art 5.
[13] DL 33/2022, Arts 2 and 3.
[14] DL 33/2022, Art 7.
[15] The electricity revenue cap of €180/MWh adopted by the EU in the autumn of 2022 for inframarginal producers of electricity (eg, wind, solar and nuclear) is a somewhat different mechanism, which seems to have had neither the same consistency of application, nor the same social acceptance and support, as the ‘Iberian Exception’.