Spanish Government Infuriates Energy Giants By Making Them Pay for Soaring Electricity Prices

In retaliation, the energy companies have even threatened to shut down nuclear plants, which would decimate Spain’s energy supplies. 

As winter approaches, a perfect storm of demand- and supply-side forces, financial speculation and geopolitical uncertainty is driving natural gas prices in Europe to worryingly high levels. European benchmark prices have almost tripled so far this year. That is putting added pressure on electricity prices across the continent, at a time when rising inflation is already taking a toll on consumers and businesses still reeling from the aftershocks of multiple lockdowns.

Things have got so bad in Spain that newspapers and broadcasters are now providing daily reports on the current price of electricity. To cope with the surging bills, customers have taken to washing laundry at midnight and other non-peak hours and rationing their overall use. In response to the crisis, Spain’s government has unveiled a battery of measures aimed at cutting electricity prices, including a plan to temporarily reduce energy utility companies’ “extraordinary profits” and redirect them to consumers.

Unsurprisingly, the companies in question are not exactly thrilled at the idea of sharing the burden of higher energy prices. In response, they have threatened to take legal action and perhaps even shut down the country’s nuclear plants. 

Desperate Times, Desperate Measures

For the past three decades Spanish governments have maintained extremely cosy ties with Spain’s energy oligopoly. An endless succession of outgoing ministers and prime ministers have seamlessly transitioned from political chambers to the boardrooms of the energy companies. But desperate times call for desperate measures.

European benchmark natural gas prices have soared 287% so far this year, driven by reduced supplies from Russia and a shortage of U.S. supply due to hurricanes disrupting refineries. The result? Natural gas in storage is well below the five-year average. And Europe’s winter, when demand is at its highest, is coming. There are also claims that hydro generation in Southern Europe is also down significantly on recent years. However, a recent scandal in Spain involving Iberdrola, Spain’s largest electric utility company which is already accused by Mexico’s government of corruption and price gouging, suggests this could be due to companies emptying reservoirs to maximize their profits during this period of high prices. 

At the same time, rising economic activity is fuelling a resurgence in global demand for energy. Carbon prices have also rocketed in recent months, partly due to rampant speculation on the EU’s carbon market, which also feeds through to electricity prices. In Spain wholesale power prices have more than doubled since mid-August, from €98 per megawatt hour, to €189. 

There are hopes that the recent completion of Nord Stream 2, a system of offshore natural gas pipelines that runs under the Baltic Sea from Russia to Germany, bypassing Ukraine, will alleviate the pressures. Europe is certainly hungry for the gas, which will sell at rates up to 40% cheaper than LNG spot prices. But Nord Stream 2 still faces some hurdles, including regulatory issues and ongoing opposition from the US, which is worried the pipeline will further increase Europe’s reliance on Russian energy supplies, as well as hurt its own liquefied natural gas (LNG) exports, a third of which went to the EU between January and November 2019.

Geopolitical tensions are also on the rise in Algeria, which provides the lion’s share of the natural gas consumed in Spain. After unilaterally deciding to sever diplomatic relations with its most populous neighbour, Morocco, Algeria announced at the end of August that it will stop supplying Spain with gas through the Maghreb-Europe gas pipeline, which runs overland through Morocco. Although this latest spat between Algiers and Rabat should not affect Spain’s gas supplies, it still underscores how vulnerable Europe’s gas supplies are to geopolitical tensions.

In the meantime, electricity prices continue to rise. And the Spanish government’s response has not gone down well with the companies targeted, which will have to return €2.6 billion to consumers between now and March 2022.

“The measures aimed at intervening in the markets go against market efficiency and European orthodoxy and they create a climate of legal insecurity,” moaned the industry association Aelec, which represents the energy companies Iberdrola, Endesa, Viesgo and EDP (Energias de Portugal). Company sources said they will analyse the government’s initiative to see whether to mount a legal challenge against this attempt to “expropriate” their profits, reports El Economista.

A Shot Across the Bow

The government’s proposed bill, which includes tax cuts and greater protection for vulnerable households that cannot afford their utility bills, was approved by Congress on Thursday. The day before the bill’s passage, the Nuclear Forum, a powerful lobby group that includes the main electricity companies, fired a shot across the bow by warning that “the continuity of Spain’s nuclear plants would become impossible” if the bill was passed.

If Spain’s energy companies were to follow through on this threat of extortion, by shutting down nuclear plants ahead of time, the result would be chaos. Spain’s seven nuclear plants have provided more than 20% of Spain’s energy needs over the past decade. But as El País reports, the statement is pure bluster:

Despite the Nuclear Forum’s warning about the risk of having to shut down plants ahead of time due to untenable costs, the owners of these facilities do not have the power to unilaterally decide on their date of closure, but must instead make a request to the relevant ministry. These plants typically operate on 10-year licenses and must honor the timeframes or face hefty sanctions.

Beyond the front pages of the business press, the energy sector’s protestations are unlikely to elicit much in the way of sympathy. As El Diario reports, Spain’s energy companies have been making bumper profits for years. According to Eurostat, in 2018 (the latest year of available data) their profits accounted for 18.2% of turnovers, well above the European average (10%). The only EU member states with higher profit margins were Sweden, Finland, Estonia and Poland. In Germany industry profits represented just 5.6% of turnover; in Italy, 10.1%; in the UK (which was still a member of the EU at the time), 15.3%; and in France, 15.8%.

Until now the Spanish government and energy utilities have been the closest of allies. Successive administrations have done everything they can to coddle and protect Spain’s energy plutocracy, which consists of six main companies: Gas Natural, Endesa (now owned by Italy’s Enel), Red Electrica de España, Repsol, Union Fenosa and Iberdrola. The former Rajoy government even introduced legislation in 2015 to make it economically unfeasible for residents to produce and store their own solar energy, largely to ensure the oligopoly maintains its dominance of energy supplies. In return, the companies have provided lucrative board positions to dozens of influential former politicians (see this slideshare from 2015), including two former prime ministers, Felipe Gonzalez (Gas Natural), and José María Aznar (Endesa); the former Minister of the Economy (and current ECB vice president) Luis de Guindos (Endesa) and the former Secretary of State for the Economy Guillermo de la Dehesa (Union Fenosa).

But relations are now souring as Spain’s minority socialist government tries to soften the impact of surging electricity prices on struggling households and businesses. Prior to this latest announcement, the government had already cut the value-added tax (IVA) on electricity bills from 21% to 10% for consumers with up to 10 kilowatts of contracted power, in cases where the average monthly cost of a MWh exceeded €45.

“A Systematic Variable”

Overall, the government’s case for raiding electricity companies’ “extraordinary profits” is a reasonably solid one. Electricity, it said in the bill’s accompanying text, “is a systemic variable of the economy that affects families, self-employed workers, companies, industry and the economy as a whole”. The emergency measures seek to “immediately halt the effect that rising electricity prices is having on the rest of the sectors of the economy.” This effect is already being seen in the consumer price index, which hit a nine-year high of 3.3% in August, “with the subsequent loss of purchasing power for consumers and competitiveness for industry and the service sector”.

The one thing the government doesn’t mention is the fact that it has also played a role in pushing energy prices — and with them overall inflation — higher. Europe’s carbon pricing policies are having a ratcheting effect on energy prices, as was originally intended: the higher carbon fuel prices rise, the more competitive renewable energies become. And cash-strapped governments are raising some much-needed revenues along the way. Even after this week’s tax cuts, Spain’s finance ministry is expected to pocket some €2.2 billion of additional funds this year from the auction of CO2 emissions rights and the collection of taxes such as VAT.

But high electricity prices are also hitting consumers and small businesses hard, as the EU’s climate czar Franz Timmermans acknowledged on Tuesday, adding that the 27-nation bloc should ensure that the most vulnerable people don’t pay the heaviest price of the green transition:

“The one thing we cannot afford is for the social side to be opposed to the climate side. I see this threat very clearly now that we have a discussion about the price hike in the energy sector… Only about one fifth of the price increase can be attributed to Co2 prices rising. The other is simply a consequence of shortage in the the market.”

For the moment, Brussels says it will study the steps taken by Spain’s government to reduce electricity prices for consumers. But there doesn’t appear to be much sense of urgency. That would seem to imply that Spain’s energy companies may have little choice but to suck it up. If Brussels doesn’t intervene, Spain’s new energy rules could end up serving as an interesting precedent,  and one which large energy companies in other parts of Europe will no doubt be watching closely.

Print Friendly, PDF & Email


  1. Louis Fyne

    The same rapid electricity inflation is happening in US wholesale markets as well as natural gas prices have gone crazy this year and wind production has not picked up the slack….combined with the continual shutdown of fission and coal plants.

    Most Americans are on fixed contracts….but once those terms lapse, expect your power provider to ask for higher rates from the regulators. And depending on your state (or power contract terms), those increases will be rubber-stamped or automatic. And as the inflationary factors are affecting ALL electricity generators, it likely will be very difficult to shop around and finding an alternative (barring going partially/fully off-grid).

    But my understanding (happy to be wrong) is that solar installations have been hit by big inflation too.

    1. Carla

      To my surprise, a few weeks ago I was able to get a fixed price natural gas contract that matched my low rate of last year. Just dumb luck I guess. My contract price for electricity went up, but not sharply.

  2. timbers

    Good thing Europe supported blocking “unreliable” Russian gas in favor of reliable American “freedom” gas.

      1. drumlin woodchuckles

        That was a Trumpist political commissar at Dept. of Energy who did that, to the best of my memory.

    1. drumlin woodchuckles

      Wait! I thought that the Nordstream II has been greenlighted and will be built. So EUrope will be able to buy all the reliability molecules it wants from its “reliability-capable” Russian supplier. So whatever the DC FedRegime might have wanted is moot. Or very soon will be.

        1. Andrey Subbotin

          Permitting hiccup is supposed to take ~4 months, so first gas will come no earlier than January. Also current EU law does not allow exclusive use of pipelines, so Gasprom will be allowed to use it only at 50% capacity. There is an ongoing legal struggle on whether NS2 should be grandfathered as investments were made before the law went in force

  3. PlutoniumKun

    A number of issues have come together here to create something of an energy crisis for Europe. A key one, as the article aludes to, is with gas. There was an extended cold snap in spring this year in Europe which is increased demand significantly at a time when usually cheaper prices allow stores to be built up. The very calm and hot summer also drove up demand and it seems that the resurgence in growth in Asia meant that LNG wasn’t available at any price. Interestingly, it seems suppliers were taken by surprise by the speed of economic recovery in Asia and Europe (or maybe they just didn’t bother doing the calculations).

    The situation with nuclear in Spain has been replicated elsewhere, including with an apparent coincidence of two CCGT (gas) plants unexpectedly closing down in Ireland for long term repairs. The stated reason is Covid related difficulties in getting spare parts, but if I were conspiracy minded, I would suggest that maybe some power providers are seeing an opportunity to leverage better contracts with the network companies (and governments).

    A further complication is that a lot of old generating capacity, dating from the 1960’s and 1970’s, has reached the end of the road. Its not always planned – sometimes semi-mothballed plants just end up with a technical problem and it will cost too much to get them back up, so they are just shut down permanently – this happened last year with a number of large coal plants, which are often kept ticking over as emergency backup. Sometimes something just breaks, and you find the manufacturer went bust 20 years ago, so there is little you can do without spending a fortune.

    I’m old enough to remember back in the 1990’s that many warned that exactly this could happen if as (at the time) where was what was called the ‘dash to gas’ as newly privatised utilities started building lots of CCGT plant – they are cheap and quick to build with relatively few regulatory issues compared to thermal or renewables. Gas power always looks a good idea, until you look at just how vulnerable and inflexible the overall supply chains are for gas delivery – they are in many ways the least resiliant systems to serious supply issues as you just can’t stack up gas for storage like you can with solid fuels and the pipelines are uniquely vulnerable. Texas found this out the hard way last winter, now Europe is learning the lesson too. One of the big drivers behind the EU’s proposals for new LNG terminals around Europe was exactly this – to increase supply options, but they forgot that there are other capacity constraints too, not least the number of LNG ships.

    This, as usual, is a problem with neoliberalising supply networks. Unless you have very strong regulation you will almost inevitably be left with capacity cut to an absolute minimum and you are very vulnerable to regulatory arbitrage or straight up blackmail. Its also the reason why ‘resiliance’ needs to be added to the conversation when discussing power supply networks, so far its been almost entirely ignored, except when the issue is geopolitical supplies. Climate change is going to severely mess with our power supplies, no matter what the source.

    1. XXYY

      if I were conspiracy minded, I would suggest that maybe some power providers are seeing an opportunity to leverage better contracts with the network companies (and governments).

      Recall this is exactly what happened during California’s ill-fated experiment in electricity markets. Utilities were found to be deliberately scheduling preventive maintenance and other outages during times of shortages to drive electricity prices higher.

      1. Kelly in Texas

        Enron. You remember them? The corporation that was W’s friend but he couldn’t remember ever hearing of them once it hit the fan.

        1. drumlin woodchuckles

          And Davis the Gray Democrat sniffily refused to use the Progressive Era law in California enabling him to seize every physical aspect and asset of the California electricity grid system and run it for California citizen benefit.

          Decisions like that may have contributed to him losing the recall-Davis vote.

    2. Ignacio

      The problem with fossil fuels such as Ntl Gas is that these tend to be volatile for vaious reasons including geopolitical and struggle for power. The article makes a very good summary of events though IMO omits a few things. The big problem here is the wholesale electricity markets that works with a last resort overall price every day that is applied to all suppliers. When this is expensive Ntl. Gas you have a problem and, as the article explains implies enormous profits for companies licensed to exploit the nuclear or the hydropower plants and there is were, with good reasons as the article explains, the Government is intervening. Factors that have contributed, apart from those mentioned in the article are that in late summer winds tend to be less intense in Spain and that the international connections do not allow for enough electricity exchange.

      Spain is very much the canary in the mine here because for a vast majority of households the price is settled monthly while in, for instance, Germany these are generally set early in the year so they have not noticed the spike. In France other schemes apply about contracts with EDF. What the article omits is that the Spanish government had little manoeuvre room because the EU impose constraints (free markets are kings, no?). The government first reduced VAT from 21% to 10% temporarily to cope with the crisis. This hasn’t resulted in diminishing revenues for the Kingdom, so much have risen energy prices (on the contrary, i believe). Now, they have removed a special electricity tax, a fixed 5% that was applied before VAT I hope this time forever. This was not enough and here is when they adopted the decision on some suppliers returning part of their excessive income. The government had to do a good reasoning effort here in order not to wake up the ultraliberal fre-market sensitivities so prevalent in the EU.
      The article also omits that the measures taken before by the government were not their own but the result of EU directives. When these were passed there was some fear in the EC that some yellow vest movement could arise, so they well knew in advance what their effects were.
      The article also omits that in all this affair the conservative opposition has been strikingly silent, instead of trying to use this as a political reason. Ask them why!

    3. JTMcPhee

      Burn gas, you get CO2. It’s methane, which is much more potent as a deleterious greenhouse gas than CO2. Lots of methane ‘escapes’ in the production and transport parts of the supply chain. For some reason, the Antarctic ozone hole is bigger than the continent now.

      Yet we all are supposed to moan over the disruptions to life as usual, and what? cheer the corrupt Spanish government for “standing up to the energy profiteers? “ 18 percent of turnovers pays for a lot of revolving door executive perks.

      And how many of us humans are making any kind of effort fore government policies and corporate behavior to get to a sustainable level of human presence here, or to even dial back our “Carbon bootprints?” Hey, that’s no fun! Wheee! Party on, Garth!

  4. Bob

    The problem with natural gas and most if not all fossil fuels is two fold –

    The fossil fuel sources run out.
    The fuel cost to the consumer can be easy manipulated.

  5. The Rev Kev

    The bluff by the nuclear power plants to shut down was, I guess, always a bluff. I do not know if it is true but I read onetime that all nuclear power plants require government subsidies to survive. But maybe what the Spanish government could have done was to announce that they will refuse to back the insurance policies of those nuclear power plants. I think that after a nominal amount, it is the governments around the world that are on the hook in case of a nuclear disaster. If the Spanish government announced this, those nuclear plants would be worth zip as who would want to buy them without government-back insurance. And those companies would lose all that capital leading to much recriminations at the next shareholders meeting – provided that they are still in business that is.

      1. The Rev Kev

        Nothing so crass as a threat to those companies. Just a quiet coffee together with the government asking those companies mildly how their insurance policies are going as a reminder of governmental powers – as seen during the present pandemic.

  6. Oh

    Coming soon to your city or town! Higher natural gas and electricity prices orchestrated by our energy companies.

    Fortunately, these prices increases will not be inflationary /s

    1. Louis Fyne

      like most disasters there won’t be just one cause,( in no order) blame all of the following….

      bipartisan politicians/regulators,

      environmental activists with unrealistic expectations on what wind/solar can do in the near and intermediate term,

      energy companies,

      govt regulations,

      pandemic stimulus efforts focused on consumption rather than ‘boring’, more productive things like new windows, insulation,

      relentless demand from China for stuff, so that they can keep meeting US-EU demand for widgets

      even at 4am, the power, HVAC needs of the median first world city is incredibly, mind-boggling large and will stay that way, barring Star Trek-type advances in tech.

      1. Synoia

        even at 4am, the power, HVAC needs of the median first world city is incredibly, mind-boggling large and will stay that way, barring Star Trek-type advances in tech.

        Umm…Windows which open does not strike me as very high tech.

        Opening North facing windows in summer in the Northern Hemisphere is also not so high tech,

        Having opening widows in a high rise is not high teach, and one of my customers, and insurance company, had a high rise with opening windows, treated their employees well, and had no jumpers.that I can recall.

        1. Grumpy Engineer

          Open windows that face north is of little value at 4AM in the middle of January. If you want people to be able to reliably heat their homes in the middle of a windless winter night while maintaining a low-carbon footprint… That’s a tougher challenge.

        2. Daniel LaRusso

          open windows are a magnet for criminlas in bugalows and ground floor flats. I remember attending burglaries and the amount of premises ‘violated’ like that in the summer was extraordinary. It’s a known tactic when criminals are out grafting to look for owners in the summer who forgot to close any windows.

          Our crime prevention advice to anyone who slept with a downstairs bedroom open … get a fan.

  7. James Simpson

    I was wondering why my electricity price keeps rising in the UK, despite my supplier (E.On) claiming that it is 100% renewably sourced, and the media telling me that renewables are falling in cost to well below that of fossil fuels. Somebody is not telling the truth. Or is it (heresy!) that renewables are not as reliable as their proponents claim?

    1. PlutoniumKun

      The electricity cost rise across Europe is almost entirely driven by the rise in wholesale gas prices, its nothing to do with renewables.

  8. WhatdoIknow

    This is the next step in the road to perdition.
    Print infinite amounts of money, create demand and shortages , ignore inflation and mandates and then blame businesses for the price increases.
    Next step seems to be government mandated price controls, which is what basically Spain is doing.
    It will backfire big time.
    Why we never learn?

    1. Nick Corbishley Post author


      Thanks for bringing this story to my attention. Even by Iberdrola’s usual standards, it’s pretty shocking behaviour. Have updated the paragraph to reflect this new information.

      1. Ignacio

        Come on. Hydro is not only about energy generation but water management. In August and september dams are at ninimum levels, not good idea wasting a precious resorurce this time off the year.

        1. Nick Corbishley Post author

          You’re right, Ignacio. It is insane. Hence the scandal. It seems that Iberdrola has been using much more hydro energy than usual, which has a much lower cost of production than most other forms of energy, to take advantage of the surging prices. That’s according to the company’s financial statement from late July:

          The gross margin “in Spain has grown to €1.016 billion million thanks to higher production, mainly driven by hydroelectric generation (+ 39.9%), but also wind power (+ 12.1%), together with the increase in installed capacity. solar (+829 MW) and a higher sale price to the commercial business as a result of the increase in the pool price.”

          The company says it increased its energy production during the first half of the year by 13.6%, while production from its hydro sources increased by three times that amount (40%). Whether or not the company has continued this practice into August and September, when water levels are at their lowest, is not clear. According to government data, Spanish reservoirs were at 45.5% of their capacity in mid-August — 23% lower than the 10-year average for that time of the year. Whether that is due to lower rainfall or Iberdrola’s short-term profiteering, it’s impossible to say just yet. Perhaps more will come out from the multiple investigations being conducted.

  9. yan

    There are some factors that are not mentioned in the otherwise good post regarding how the electricity price in Spain is settled. It´s a marginal price auction system where all power producers bid in a reverse auction (the producers offer the price) for the amount of energy sought for that time slot. So, for example, nuclear producers are normally the fist to bid at a given price (they need to offload the electricity, hard to stop a nuclear plant on an hourly or daily basis), then normally comes wind + solar, then hydro, then gas (easiest to start and stop). The final price *for all the energy* is set by the highest price bid. So even if, let´s say, the nuclear producers (most of the nuclear plants in spain are over 30 years old or more) offer USD 30/MWh in the auction, the hydro producers (also amortized to a large extent) offer USD 40/MWh, etc…if any of the producers (indistinctly from the source) offer USD 170/MWh, *all* the energy is paid at the marginal production “cost”. Now gas is supposed to be the most expensive source out of all of them theoretically…but in the last months hydro has set the highest price on about 40% of all time slots. To the point that some reservoirs have been depleted (this is a veeery long conversation that goes back to Franco times and how the hydroelectricity producers also manage the reservoirs) to make some good money. This “market efficiency” was sought by the European Union, by the way. Prior to that the State set the price of electricity. Regarding the nuclear kerfuffle: the nuclear lobby is hissyfitting because the government wants to make nuclear plants also pay for carbon emission taxes.

Comments are closed.