Spain acts as soaring energy prices pile pressure on EU governments

Newsletter: Europe Express

Europe’s soaring electricity and gas prices are putting the heat on EU governments, with Spain announcing temporary tax cuts to cushion the blow to consumers as other countries also seek to minimise the political damage from the rise.

In a television interview on Monday night, Pedro Sánchez, Spain’s prime minister, said taxes on electricity would be cut by €1.4bn until the end of this year while €650m taken from energy companies’ “extraordinary profits” would be “redirected to consumers”.

“We have made a firm commitment that all citizens will pay the same electricity bill [this year] as in 2018,” the prime minister said, describing energy companies’ current level of profits as “not acceptable”. 

The steady rise in Spain’s electricity prices, which have hit record levels on the wholesale market throughout the summer, has become the country’s most burning political issue, putting pressure on Sánchez’s leftwing minority government, which is behind in the polls.

The government has already announced a temporary cut in VAT on energy, a move whose effects have been diluted by the continued rise in prices. 

Some commentators expressed scepticism over whether Sánchez would attain his high-stakes goal. “At this point he needs to be very lucky to get average prices down to the 2018 level,” said Toni Roldán, a former liberal MP and director of the centre for economic policy at Esade business school in Madrid. 

“We will have to start assuming that with climate change the cost of energy will become more costly for a while,” Roldán added, noting that increased demand for natural gas also explained roughly 50 per cent of the price rise in Spain.

Because many consumers pay variable rather than fixed tariffs, Spain’s retail electricity prices are particularly closely linked to the country’s wholesale electricity market, which depends on foreign sources — notably liquefied natural gas — for almost three-quarters of its energy mix. 

But the continued rise in prices is affecting Europe as a whole, driven by factors such as LNG demand by China as an alternative to coal, higher carbon prices and reduced supply from Russia.

“In Spain people are feeling the pinch in their personal finances but this is not a Spanish problem; it is a European if not a world problem,” said Angel Talavera, head of European economics at Oxford Economics. “The issue is that, because of the different way the Spanish market works, much of the world has not noticed it yet, but sooner or later a similar trend will happen in other countries.”

Indeed, over the past few days the French government has suggested it would consider extending the number of people who qualify for direct subsidies for fuel payments, while Greece has announced a €150m energy transition fund to compensate for recent electricity price rises.

Last week, benchmark wholesale electricity prices in Germany for delivery next year reached more than €90 per megawatt hour, or roughly double the level at which they started the year, surpassing the previous record hit in summer 2008 when oil prices were approaching $150 a barrel.

Julien Hoarau, the head of EnergyScan, the analytics unit of French utility Engie, warned that without more clarity on the level of Russian gas supply to Europe over the winter the market would remain tight and prices elevated: “We are only in September so it is quite worrying for the coming months where we will have higher gas demand for heating.”

The rising energy prices have also put political pressure on the European Commission, which in July proposed a big package of green policies, including a carbon price on car fuel and heating for buildings. 

The proposal has sparked a backlash from countries including Spain and France, which argue it will hit the poor, who cannot easily afford to switch to greener and lower-emissions fuels. 

MEPs will debate the reforms, which require approval from a majority of member states and the European Parliament, in Strasbourg on Tuesday morning. To stave off criticism, the commission has proposed a social fund worth billions of euros to help households most affected by the new carbon pricing regime.

Additional reporting by Eleni Varvitsioti

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