After the round of contacts with the executives of the large electricity companies (Iberdrola, Endesa, Naturgy, EDP and Acciona) and the main industrial associations, the Ministry for the Ecological Transition already has outlined the changes that it is going to introduce in the controversial Royal Decree Law (RDL) of September 14 that includes a significant cut in the income of technologies that do not emit CO₂ (nuclear, hydroelectric and renewables that go to market) and have internalized the marginal price of gas (profits fallen from the sky or windfall profit) at pool electric.
As the head of the ministry summarized last Thursday, Teresa Ribera, in the debate for the validation of the RDL in Congress, electricity companies that offer a “reasonable” price to the industry will be softened by the cut. More specifically, according to sources familiar with the process, past bilateral contracts (prior to September 14) and future (from that date) signed by generators will be freed from the reduction. with any type of client (not only industrial) at a price that does not reflect the escalation of the wholesale market. Specifically, direct contracts with industry and, in general, with trading companies that supply consumers, both industrial and domestic, in the free market. Modifications to the standard will be included in a future royal decree law that will serve as “development” of the one that is now in force.
Most likely, according to the same sources, this “reasonable” price will be around 60 euros MWh, taking into account that the inframarginal of the nuclear is 57 euros MWh, that is, the one that includes its fixed and variable costs and provides it with a certain profitability.
The final consequence of this change is that the Government will no longer achieve the 2.6 billion euros That, for this concept, it planned to collect until April, destined to alleviate the invoice of consumers with a reduction in the charges of tolls, which they enjoy from September 14. The deficit would be covered with public funds. After all, the only shock measure recommended by Brussels to alleviate the energy crisis is to help consumers and companies via Budgets.
In its article 6 (only three lines to modify) the RDL in force indicates that the reduction will affect the aforementioned technologies, “regardless of the contracting method used”, which covers all electricity sold through long-term bilateral contracts , at a closed price regardless of pool and with coverage.
Although the ministry rectified and exempted the contracts between the generator and the end customer from being cut, it kept them for those signed between the generators and marketers of the same group business, which will now also be spared. Iberdrola and Endesa denounced that this affected all their hydroelectric, nuclear and part of the renewable, since they sell all of them on time and at a fixed price to their marketers.
Negative incentive
This fact, coupled with a reduction formula linked to the price of gas, which doubled the cut for those affected when it shot up, made the ministry reconcile, which saw how the shock wave reached the industry and dynamited their bilateral contracts. In Spain these are for short terms: between one and two years. The utilities were quick to warn their industrial clients of the impossibility of maintaining current prices, appealing to confiscatory regulatory changes (at certain times, the tax, as they call the reduction in the sector, is higher than income). For their part, steel companies, such as Sidenor or ArcelorMittal, have announced stops in their production due to the impossibility of assuming the energy bill.
The ministry has given in by also exempting intra-group bilaterals from the cut, but has not wanted to repeal the RDL of September 14, which includes other important measures, and has used it as a negotiation weapon. With the changes in the making, if it does not manage to collect what is foreseen to compensate the tolls, Ribera will have achieved the “reasonable” prices that it intended for users. The utilities have the “negative incentive” to avoid the undesirable reduction if they renounce the windall profit of gas.
The new RDL would be approved before November 15, the date of the first liquidation of REE to the companies after the new regulation (this gives two months to the system operator for the reduced liquidation).
That short-term Spanish industrial culture
The energy crisis has uncovered the scarce contract for electricity contracts by the Spanish industry. Furthermore, after the collapse of prices in the first year of the pandemic (2020 closed at an average of 33 euros / MWh), in which the demand for goods also plunged. According to AEGE, an association made up of electro-intensive consumers, barely 10% of the energy consumed by the industry responds to closed contracts, while the remaining 90% is acquired in the wholesale market, which in recent weeks is exceeding 200 euros / MWh. On the other hand, according to sources in the electricity sector, of the few term contracts that are signed, 95% are for one or two years. These sources indicate that the reduction of charges of the invoice approved by the Government has a reduced impact for the industry, unlike the domestic ones.
Among the reasons for this short-term culture, there are those who allude to the fact that historically the price of the pool has beaten the hedges offered by electricity futures, although there is already a certain shift towards greater risk management. In addition, the Spanish market does not have a large volume of negotiation, so for large quantities, companies have to structure their purchases so as not to impact the price. As an example, the volume of electricity futures (financial and physical) traded in Spain in 2020 (186 TWh) accounted for 75% of national consumption, while Germany traded that year 10 times more than it consumed (5,370 TWh). Another reason for not setting an energy purchase price is the risk of the price of industrial products, with a visibility of only months. By contrast, sectors with less uncertainty (telecos, food …) took advantage of the low prices of futures in the year of the pandemic to contract.
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