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.