Spain rules out extending the Iberian Mechanism to limit gas prices in electricity production

Spanish government vice-president and Minister of Ecological Transition Teresa Ribera on Tuesday ruled out a possible extension of the Iberian Mechanism to cap gas prices in electricity production, recalling that it has not been activated since February.

“The extension of the Iberian Mechanism, which in principle ends on December 31, will require an approval procedure from the European Commission’s Directorate-General for Competition, which has already made it clear that [essa eventual extensão] after December 31 this year it was not possible,” said Teresa Ribera.

Speaking on behalf of the Spanish Presidency of the Council of the EU, at a press conference in Brussels after a meeting of European energy ministers, the official noted that “prices have already stabilized well below” the ceiling set by this Iberian mechanism.

This “to a large extent explains why this mechanism has not been activated since February,” Teresa Ribera said on the day that the guardianship authorities approved the extension until January 2025 of the European ceiling on the price of imported gas (180 euros per megawatt-hour), a deadline which expires in February due to the risk of conflict in the Middle East.

Last April, the European Commission approved the extension until the end of 2023 of the Iberian Mechanism, operating in Portugal and Spain, to limit the price of gas in electricity production, but already providing for a “smooth and predictable” lifting.

This is a temporary Iberian mechanism, applied from mid-2022 to set limits on the average price of gas for electricity production, which in the case of Portugal and Spain is around 60 euros per megawatt hour (MWh).

The instrument was requested from Brussels by Portugal and Spain due to an energy crisis worsened by the war in Ukraine, which has put further pressure on the Iberian Peninsula’s energy market with limited interconnectivity with the rest of the EU.

Data from Brussels shows that between June and December 2022 the maximum limit was set at 40 euros per MWh, increasing to five euros per month after the first half of the year.

Spanish and Portuguese authorities told the European Commission that total net savings, including adjustment costs, amounted to around five billion euros between June 2022 and January 2023 for Spanish and Portuguese consumers as a whole.

Since mid-2022 and initially scheduled until 31 May 2023, a temporary mechanism to limit the price of gas for electricity production in the Iberian Peninsula has been in place, with a budget of 8.4 billion euros, of which 2.1 billion relates to Portugal.

Under this measure, electricity producers receive a payment that acts as a direct subsidy to finance a portion of their fuel costs, with the payment calculated daily based on the difference between the market price of natural gas and the marginal gas price.