“If they have explained the electrical system to you and you understand it, it is because they have explained it to you wrong”. This saying, beyond irony, hides a sacrosanct truth: everything that surrounds electricity is full of complex concepts, terms and mechanisms that complicate its understanding. And it is valid both for the market where wholesale prices are determined, something intangible and far from the citizens, as well as for the electricity bill, which we all pay out of pocket. It is not surprising that more than half of the users do not know what rate they have contracted, and that influential personalities have publicly stated how difficult it is to understand the system. This is the case of the former Energy Commissioner, Miguel Arias Cañete, who in 2015 stated that the electricity bill is “incomprehensible”, or of the phrase “no one understands the electricity bill” of the former president of the National Commission of Markets and Competition (CNMC), José María Marín Quemada.
All this complexity does not help in general, even less now that electricity prices have entered an upward spiral that has come to generate tensions between government partners and attacks by the opposition. But how does the electricity market work? What is the marginal price? Does the rise affect all consumers? Here is a small dictionary to try to understand some concepts of the electrical system.
‘Pool ‘. He pool It is the wholesale market where the price of electricity is set daily, and it is managed by an independent body, the Iberian Electricity Market Operator (OMIE). Each day marketers and generators launch their offers (of purchase and sale, respectively) for each hour of the following day. There is a daily session, in which the majority of the forecast energy is traded, and up to six intraday in which updates are made on said forecast.
Bid matching process. MarryAccording to the fifth meaning of the RAE, it means “to join, join or make something coincide with something else”. In the case of electricity, the process of matching bids is called the system through which the price is set for each hour of the day in the wholesale market. This is based on an algorithm, called Euphemia, designed at a European level, and through which OMIE orders the sales offers it receives from lowest to highest price. Nuclear and renewables are the cheapest. The first, because technically it is not profitable to reduce its power; the second, for using natural fuels with zero cost. On the other side are those technologies, such as the combined cycle or coal, that depend on the burning of fossil fuels such as gas. The meeting point between the sale and purchase offers determines the price of electricity.
Marginal price. This price is the result of matching and is the remuneration that the power plants receive for the electricity they produce. And it has a peculiarity: it is determined by the latest technology necessary to cover the energy needs of each hour and it is paid equally to all the plants that enter the market, regardless of their production costs. In other words, all the generators that offered cheaper will be paid at this marginal price. To give an example: if on a certain day at a certain hour the cheapest energies do not have enough generation capacity to cover the demand, then more polluting sources enter the market at a higher price, such as gas. The result? All the plants, even the cheapest, are paid for at the price of gas. In 2020, with demand sunk by lockdowns and record renewables production, prices were kept low. However, this beginning of the year, with an increase in demand due to the cold wave and the price of gas soaring, they have grown to levels never seen in more than a decade.
Overpayment. This marginalist price gives rise to an overpayment for certain energy sources, such as nuclear and hydroelectric. These plants in themselves have a very low production cost, but the marginal system means that they all charge the same price as a thermal one if it was the last to enter. This extra pay is also known as windfall profits, or benefits fallen from the sky. The coalition agreement signed between the PSOE and Unidas Podemos foresees making “regulatory changes” to “end the overpayment received in the wholesale market by certain technologies that were installed in a different regulatory framework, prior to liberalization and that have more than recovered their investment costs ”. The notice is aimed mainly at the hydroelectric plant, which works de facto under an oligopoly regime through concessions and which releases energy only when prices are already high to obtain a higher remuneration.
Emission rights. Emission rights are another element that causes the final price of electricity to fluctuate in the wholesale market. It is an instrument designed by the EU in 2005 to combat climate change and discourage the use of polluting energy. To simplify a lot, an emission right is an authorization to emit one ton of CO₂ equivalent (it is said equivalent because other greenhouse gases are included in addition to carbon dioxide) that companies can buy and sell on the market because they are limited. And, as the term says, they are the companies that generate energy dirty those that negotiate them. These rights, which in previous years have reached below five euros, have skyrocketed in 2021 to above 30 euros per ton, a threshold that Brussels considers sufficient to reduce the use of fossil fuels in electricity production , but that in the end is one more element that companies take into account when calculating their profitability.
Fixed and variable part of the receipt. The electricity bill is another great puzzle that directly affects the consumer, who in the vast majority of cases does not know what they are paying on the bill. And with good reason: the final price is not determined only by the energy it consumes; There are also other concepts that sometimes have little to do with electricity, since over the years the bill has become a mixed bag where the costs of current energy policies are hidden. The electricity consumed is the variable part of the bill because it depends on how much is consumed, and it only represents a little over a third of the final price. The fixed part is represented by what is known as contracted power, which is paid for the simple fact of having access to the system even if the light is never turned on. The more kilowatts (kW) of power contracted, the more capacity our installation will have – the possibility of having more electrical appliances on at the same time – but the more expensive the bill will be. To this must be added the rental of meters and taxes: the one levied on electricity and VAT, at the maximum rate of 21% – in other European countries a reduced VAT applies. The Minister of Finance, María Jesús Montero, has just ruled out a VAT reduction claiming that Spain is under the scrutiny of Brussels for having a lower collection of this tax than other neighbors.
Access tolls. Set by the Government, they are known as the tolls that are paid for the transport and distribution of electricity to homes. Tolls are assigned based on consumption capacity (contracted power) and also affect consumption itself (variable part of the bill).
Regulated rate or PVPC. This rate, known as the Voluntary Price for the Small Consumer (PVPC), is regulated by the State and was established in 2015 to replace the previous rate of last resort (TUR). In this case, the variable term, that is, consumption, is determined based on the price of the kilowatt-hour (kWh) in the wholesale market. The user can choose between the fixed rate and the hourly discrimination (where there are trough hours with cheaper prices during the night and peak hours, with more expensive prices during the day). Every day, the hourly prices for the following day are published on the website of Red Eléctrica de España (REE).
Free market. This is the other rate that consumers can contract. In fact, 60% of households have a rate in this market. In this case, the price of the kWh is the one agreed with the trading company with which they have contracted the supply. And in the long run it is usually more expensive than PVPC, according to market analysts.
Reference marketer. These are the only companies that can offer PVPC, and they replace the old last resort marketers (CUR). The problem is that These are companies, such as Naturgy or Endesa, which also operate in the free market through different affiliates, which can cause consumer confusion. For this reason, the CNMC forced the companies to clearly distinguish their trademarks in order to differentiate the reference marketers from those of the free market belonging to the same group.
Social bonus. This is a discount on the bill for vulnerable consumers who have contracted the PVPC. The discount ranges between 25% and 40%, depending on whether the user is considered vulnerable or severe vulnerability. It is granted, mainly, according to income criteria. The reference marketer with which the supply has been contracted is requested.