Member Article

Decree-Law no. 33/2022, of 14 May (“DL 33/2022”), which establishes the exceptional and temporary mechanism for adjusting the costs of electricity production within the scope of the Iberian Electricity Market (“MIBEL”) was recently published.

The diploma was published simultaneously with the publication, in Spain, of Real Decreto-Ley 10/2022, of 13 de May, with a similar scope and content, expressing a unique response to an Iberian common problem: the high and rising prices of electricity.

The Spanish diploma is much more detailed than the Portuguese one, namely because this measure requires a review of the rules of the MIBEL daily and intraday market, operated by OMIE, which is governed by Spanish law (“OMIE”).

Background:

DL 33/2022 comes in the context of a sustained and unprecedented spike in electricity prices, motivated by the fast recovery of the economy after the Covid-19 pandemic scenario and the invasion of Ukraine by Russia.

From an average price of €47.67 / MWh in 2019, the OMIE market price reached, in 2021, a value of €111.90 / MWh and, in the first four months of 2022, an average value of €219.19 / MWh.

This led Spain and Portugal to claim before the European Union for the approval of a temporary mechanism for temporarily limiting electricity prices (“Mechanism”). Spain led this process, as it is especially affected by the exponential increase in electricity prices, since, unlike in Portugal, in Spain the variation in prices in the OMIE directly affects all consumers, including the especially vulnerable.

On April 26, 2022, a political agreement was reached between the Iberian countries and the European Commission to create the Mechanism, taking into account the fact that the Iberian Peninsula still functions, due to its deficient interconnection capacity with France, as an energy island. The Mechanism is adopted in a simultaneous and coordinated manner in the Iberian Peninsula.

Purpose:

The objective of the Mechanism is to “decouple” the wholesale price of electricity from the price of natural gas, with a view to mitigating the current instability in prices.

The Mechanism:

1. What is it

The Mechanism consists of setting a threshold on the price of natural gas that the natural gas plants covered must consider when making offers to sell energy on the market. This threshold is set at €40/MWh of natural gas for the first six months of application of the Mechanism, then increasing by €5/MWh per month until reaching €70/MWh in the last month. In the mechanics created in the diploma, this threshold is created by the imposition of gas plants to internalize the part in which the cost of acquisition of natural gas exceeds the reference price referred to in the previous paragraph.

As OMIE is a marginal market, it is the technology with higher marginal costs of production needed to supply demand at a certain time that determines the price that all production units receive at that time – and that, in the end, consumers will bear.

Due to the peak in the price of natural gas, gas-fired power plants have more frequently acted as a marginal technology, thus raising the price received by the other technologies they sell on the market, at the head of which, in Portugal, the large hydroelectric plant (since most wind farms still sell at a fixed tariff and there is still little installed solar capacity).

Thus, the Mechanism’s purpose is to limit the gains that other electricity producers receive through the high price of natural gas.

A price of €40/MWh of natural gas will form, at current CO2 prices, a final wholesale electricity price of between €120 and €130/MWh, well below the average market price of OMIE in the first four months of the year.

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