Reforms in the horizon for the regulated electricity tariff in Spain

The electricity end-user price in Madrid increased by 8% in December after experiencing an 11% drop last month. Still, it remains below the European average and 30% lower than it was in December 2022. The price hike is mainly attributed to a notable rise in the Spanish regulated tariff (PVPC), which is established by the government, covers about 1/3 of all residential customers and is currently indexed to the price set every hour by the wholesale electricity market based on three consumption time bands (peak, valley and flat hours).

Starting on January 1st, a new method for calculating the price of PVPC will come into force, initially reducing the weight of the daily price from 100% to 75%, to also consider futures prices. Specifically, the monthly, quarterly and annual prices will be also part of the calculations, with their shares increasing progressively. Until 2026, the weight of the daily market will drop to 45%, resulting in less volatile retail prices which will protect consumers from wholesale fluctuation that may occur.

The reform, which was approved in June 2023 by the Council of Ministers and came as a requirement from the European Commission during the approval of the “Iberian Exception”, is expected to promote the domestic renewable generation in place of fossil fuels. Although this is perceived as a step in the right direction, it does not necessarily translate into cheaper retail prices since the new model will diminish the time discrimination of the regulated tariff by introducing the futures prices system. Thus, the impact of shifting consumption throughout the day to lower demand periods will be reduced.

Furthermore, prices are expected to rise substantially in 2024 as the measures introduced by the government during the energy crisis, to protect consumers from rising prices, are set to expire. The Spanish Organization of Consumers and Users (OCU) foresees that the removal of these measures will have a strong impact on the end-user price, anticipating a 20% hike in electricity bills.