What is the compensation for the gas cap on the electricity bill and who pays it

The governments of Spain and of Portugal approved in May the so-called Iberian exceptiona limitation on the price of gas which is used for electricity a €40/MWh. They did it for the purpose of relieve bills of consumers with indexed rates to the wholesale market of the electricity either ‘pool‘, those most affected by the crisis and the rising prices of the Energy. This measure, however, has a compensation cost for remunerate at floors that generate electricity with gas the difference between the fixed cap and the real cost, if this exceeds the limit. But, What does this compensation consist of and who pays it?

Before knowing what the compensation is for the gas cap on the electricity bill, it is worth remembering what the Iberian exception is, which came into force after its publication in the Official State Gazette (BOE) on May 13 and is valid for 12 months.

Measure, exceptionally approved by the Governments of Portugal and SpainIt allows temporarily decouple gas and electricity prices in the Iberian Peninsula, in such a way that a gas reference price of 40 euros/MWh is established for six months. From then on, it is increased by 5 euros/MWh per month, ending at 70 euros/MWh so that there is a convergence to normality, compared to the current reference price in the market of more than 100 euros/MWh -as in the case of the Dutch TTF, a reference in Europe.

Is limitation about him MWh affects because, as explains the OCU in a statement, “the price system of the wholesale electricity market means that the price of the last kWh necessary to match supply and demand decides the price of 100% of the energy. In this way, when it is necessary to resort to a high-cost technology such as gas, the impact is transferred to all the energy negotiated for that hour”.

For this reason, after its approval, the Third Vice President of the Government and Minister for the Ecological Transition, Teresa Ribera, pointed out that this Iberian exception would be “an umbrella” to protect domestic consumers and large industry in the current context of tension in the energy prices, aggravated especially by Russia’s invasion of Ukraine.

“For the first time they will not pay the same,” he stressed, pointing out that the purpose was “to reduce the extraordinary benefits of electricity companies so that there are benefits for all.”

Of course, he pointed out that the gas thermal plants, the combined cycles, would continue to charge what is necessary to guarantee the electricity supply. This cost would only be passed on to consumers benefiting from the measure at any given time and would always be less than the final savings provided by it.

And it is that, as indicated by the OCU plants that generate electricity with gas they receive a compensation by difference between actual cost and capped cost that they use to make their offers”.

“Each hour that electricity is generated with gas, if its real cost is greater than 40 euros/MWh, the producers are remunerated for that difference. The more expensive the gas and the more it is used to produce, the higher the compensation. Logic says that it is cheaper to compensate only that part of the generation that uses gas as a raw material, than to pay 100% of the electricity generation at the gas price. The result is an amount that varies from hour to hour, like the wholesale price of electricity, which must be distributed among electricity consumers. For this, Red Eléctrica provides a price per kWh for each hour of the day”, they explain.

East cost of compensation at electrical “Distribute among all electricity market users, except in contracts with a fixed price that are prior to April 26, 2022, since having a fixed price, they would not benefit from the power drop in prices that this measure should produce in the wholesale market. In other words, if you have an indexed rate (such as the PVPC) or a fixed price contract that was renewed after April 26, the price you pay already includes the cost of this compensation. For this reason, many customers have already seen the cost of compensation on their invoices.

In the case of having a contract indexed with the PVPC regulated rate, “the final price offered by Red Eléctrica for a kWh already includes this cost since June 15, when the measure came into force. Therefore, the cost of the gas ceiling is not appreciated in the invoices since it is integrated into the concept ‘Cost of Energy’”.

On the other hand, in fixed price contractsthe companies incorporate it separately: “They offer and advertise their rates as usual and then indicate, in small print and in areas that are not always visible, that the cost of capping the price of gas is added to these prices.”

While the measure lasts, warns the OCU, “fixed prices cease to exist” since “they will have a variable indexed component, whose price will change depending on the time at which we consume, how much gas has been used to generate electricity and its price”. Thus, “all contracts with a free marketer signed or renewed from April 26 will incorporate this new concept in their invoices.”