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ENERGY

The shocking price of Spanish electricity

A decade of poor regulation has sent bills soaring and left growing numbers of families unable to pay

Since the government withdrew its 3.6-billion-euro contribution to reforming the electricity sector, the market has been out of control. REUTERS

F or most of this winter the electric radiator in Juan Presa's modest apartment in Madrid will remain off, and he and his wife and three children will stave off the freezing temperatures by putting more blankets on their beds and wearing more clothes. Presa, aged 62, lost his job two years ago, and none of his children are employed. The only money coming in is a government payment of 426 euros, out of which the family must pay up to 80 euros a month for electricity.

Around four million Spaniards face similar difficulties in covering the cost of electricity in their homes, and the Red Cross says that around 40 percent of families who come to it for help - many of them on an average wage until recently - cannot keep their homes warm in winter.

Last year, some 1.4 million homes had their electricity cut off for non-payment. Two weeks ago, the government blocked an initiative to prevent utility companies from leaving families without electricity in winter.

Spain's electricity bills are among the highest in Europe, having risen 60 percent between 2006 and 2012, with only the Irish and Cypriots paying more. Following two price rises in August and October, electricity companies announced just before Christmas that prices would go up a further 11 percent in January; in the face of the outcry that followed, the government intervened, preventing the increase.

Around four million Spaniards face difficulties paying their electricity bills

There is just one question that households like Juan Presa's want answered: why is Spain's electricity so expensive?

Electricity is produced in power plants, before being channeled into the national grid, from where it is distributed to homes, offices and factories. Each stage in the process increases the cost to the consumer, adding more in the way of taxes, debts, speculation, business interests, and premiums imposed on renewables or cleaner energy sources such as combined cycle plants.

The government says the main problem is the enormous electricity deficit - the difference between the sum paid by electricity companies to power generators and the amount they recoup from their customers. This has occurred as a consequence of subsidies to promote renewables, including high feed-in tariffs to power generators.

Another contributing factor to the deficit problem was a poorly designed policy that kept consumer rates low even as supply costs climbed, so the true costs were never passed on to customers. The electricity companies are now trying to recoup their debt, which makes up around eight percent of Spaniards' electricity bills.

When the current conservative Popular Party government came into office two years ago, it introduced a raft of changes aimed at reforming the electricity sector that included controversial measures such as taxing consumers on fixed costs, as well as encouraging them to be more careful. The reforms were dead in the water. Plans to wipe out the deficit by this year were scuppered when the Economy Ministry withdrew the 3.6 billion euros it had agreed to pay as its part of the debt.

The story of how Spain acquired its tariff deficit is less than edifying. In 2002, the then-economy minister, Rodrigo Rato, decided electricity costs should not rise by more than two percent a year, even though production costs were higher. The reasons for this approach were varied: to keep inflation low, electioneering, and the need to improve Spain's industrial competitiveness.

Spanish consumers have seen bills rise 60 percent between 2006 and 2012

The solution was meant to be a temporary one, but subsequent governments lacked the political will to explain to voters that they needed to pay more for their electricity. And so for a decade, Spanish consumers were living a lie. Industry and consumers were happy, and the electricity companies could scarcely keep up with demand.

The deficit was bearable until 2005 when production costs suddenly soared in the wake of the invasion of Iraq. Matters worsened in 2008 with new premiums on renewables. Various approaches are being tried to repay the debt. The latest has been to issue debt packages on the stock markets. The electricity companies have already been paid, and now it is up to Spaniards to pay the international investment banks who own the debt.

The price charged for electricity is the same, whatever the source

Critics of this solution say there was never a public audit. Jorge Fabra, an economist who was a member of the board of the National Energy Commission (CNE), argues that there is no accumulated tariff deficit, but a payment surplus. In other words, it's not that the electricity companies were charging less, but that consumers are overpaying. Not all kilowatts are the same, and production costs can vary greatly.

Some electricity is produced by wind, some from a dam that was built 70 years ago, and around a third by a power plant using imported gas whose price depends on a wide range of external factors.

But consumers pay the same price, whatever the source. This is a result of a unique sales system. Fabra explains that each morning producers offer the electricity they have created over a certain number of hours at the lowest cost they can on an electronic market known as OMIE. The first electricity to be sold comes from renewables, which have the lowest fixed costs, then hydroelectric and nuclear, and finally oil, coal, and gas, whose price can vary greatly.

To make the market attractive to all producers, in the end, they are all paid the same price: that corresponding to the most expensive electricity produced that day. The paradox of this system, which was created in 1997, when Spain's electricity market was liberalized, is that customers end up paying the same regardless of the real production cost of the electricity we consume.

EFE

"It's as if you went to the fish market and were expected to pay the same for cod as for sardines," says Fabra. "I know it sounds counter-intuitive to blame low-cost producers, but that's the way it is, because what the electricity companies save on production costs does not lead to lower prices, but simply bigger profits. Hydroelectric energy production brings profits of around 700 percent, and nuclear around 200 percent.

"If we paid them what energy costs, the system would balance itself out. The deficit is, in reality, the excessive profits they have made," he concludes.

So much for the theory. For a better understanding of how the electricity market works, it's necessary to see it in action. Axpo is the affiliate of a Swiss company operating in Spain with annual profits of around 600 million euros. A huge digital map of Spain showing all its power sources dominates its center of operations: wind farms in Galicia, solar plants in Murcia... Its technicians monitor Spain's REE national grid round the clock, ready to respond to the needs of the system. The timing has to be perfect, because if electricity does not enter and leave the grid at the same time, the REE's turbines could slow down, leading to blackouts.

Axpo's team of 50 employees regulates the production of a large number of clients, and then sells the electricity on. Traders work six screens at a time, along with computer technicians, sales staff... and all of them very young. "I'm the oldest here," says Axpo's president, Ignacio Soneira.

Selling on the OMIE is a complex process. Aside from the daily marketplace that attracts producers, intermediaries and the big consumers, there is also the quarterly Cesur auction, which sets the price that domestic clients will pay as a result of the government's TUR, or protected tariff. There are also intra-daily markets and complementary services carried out at lightning speed to meet demand.

The Cesur has been investigated by the CNE following allegations that it was deliberately hiking prices. Two weeks ago, the National Markets and Competition Commission (CNMC), which has swallowed the CNE, suspended the daily auction for the first time. The price of energy had risen 26.5 percent on October's auction, and the CNMC detected "the occurrence of atypical circumstances."

If we paid them what energy costs, the system would balance itself out"

Since the government withdrew its 3.6-billion-euro contribution to reforming the electricity sector, the market has been out of control. There may be 20 percent more water in the country's hydroelectric dams than this time last year, but the electricity companies have hardly put any hydro-produced power (among the cheapest) on the market. Two outages in nuclear plants sent prices rocketing.

Cesur is made up of the five big electricity companies, along with banks. Their job is to speculate on future electricity prices for the coming quarter, and in the process bring some stability to the system. If energy is being sold at 100, and in the international markets, it suddenly goes up to 110, or if a particularly cold day sends prices soaring, domestic customers keep the initial tariff. Any broker can buy and sell on the market in the hope that the wind or the price of coal brings a profit.

These brokers offer the utility companies a price for a packet of energy, and if their bid is successful, they buy energy hour by hour on the daily market.

To anybody unfamiliar with the system, this extra cost seems an aberration. Alberto Carbajo, a former director general of operations at REE, describes it as "oiling the wheels," saying: "We could be talking about profits to the tune of one billion euros, which in the scheme of things is nothing." He says the biggest problems besetting Spain's electricity sector are lack of planning and over-production.

"More earnings are needed in the sector to meet the cost of the investments that have been made," he says.

Spain has a capacity of 25,000 megawatts, of which 6,000 megawatts are surplus to requirements. Some combined cycle plants are only operational four hours a day. "We have a surplus of around 30 percent, with high production costs during an economic downturn," says Carbajo.

Spain has a capacity of 25,000 megawatts, of which 6,000 are surplus

"And this surplus, along with the penetration of generously subsidized renewables, has led to loss of competitiveness." When the economy was being driven by the construction boom, and energy demand was growing at three percent a year, the government and the electricity companies decided to set up an energy pool.

"They have shown a certain short-sightedness as regards the duration of the economic cycle, made worse by easy access to borrowing that has increased indebtedness. We have created huge amounts of expensive energy, through pushing ahead with renewables, which should have been gradually introduced as the technology improved over time. Simultaneously, the utilities have built too many combined cycle plants, creating greater competition, and these huge plants are underused," Carbajo explains.

In a scenario in which neither the electricity companies nor the state have shown any ability to plan for the future, it is hard to point the finger at any single culprit for the mess the sector is in. Furthermore, all parties accuse each other. The electricity companies blame renewable energy suppliers, which in turn reply that the premiums they are paid only account for 22 percent of the black hole, and that the electricity firms are simply trying to distract attention away from their excessive profits.

The highly complex legislation that regulates the sector is nigh impossible for the average consumer to understand, reflected in electricity bills that few people can decipher. However, sources at the big electricity companies, which are accused of hiding behind unnecessarily complicated rules, agree that the sticking plaster approach has only made matters worse: "Instead of an overall reform to the system, making it simpler, we now have 300 rules that nobody understands. This doesn't help us either."

The problem is perhaps best illustrated by the renewables sector. The Zapatero government created a series of premiums and subsidies to give solar, wind and biomass technologies a start. But even producers accept that this approach has hindered rather than helped. "I agree that things got out of control in the solar sector," says Jorge Morales, who owns a plant producing solar energy. "But that is just one line in a book filled with idiocies and scandals."

The amount was set by consulting bodies such as the CNE, but the legislation covering payment was vague, meaning that solar energy capacity quickly reached 2,900 megawatts, instead of the 400 initially proposed.

Instead of an overall reform, we now have 300 rules nobody understands"

Private, small-scale investors were encouraged to buy into solar energy parks, although speculators looking to move their money out of construction also moved in. The result was a surplus of very expensive energy. To make matters worse, the government slammed the brakes on a sector that had already cost the taxpayer billions of euros.

The recent history of Spain's electricity sector is filled with similar stories, such as the two billion euros paid to the coal industry or the compensation paid to the electricity companies under the liberalization program in the late 1990s.

Hopes that the country's politicians might take action to resolve the sector's problems are made less likely by the fact that dozens of former ministers, secretaries of state, and senior civil servants of all stripes sit on the boards of the big five electricity companies, while others exercise considerable influence over the renewables sector, for which they are paid handsomely - some would say rewarded - for their services while in office.

"The profits are in the multi-million range, and the pressure that the big players can exercise can be irresistible: we're effectively talking blackmail," says one former senior civil servant.

A few weeks ago, a delegation of Europe's 10 leading electricity companies visited the EC's energy commissioner, Günther Oettinger. His guests pointed out to him that Europe could face blackouts if their profits were to fall.

Meanwhile, the winter has barely started. Our electricity bills will continue to be unfathomable and, in the case of many families, unpayable.