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.
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