The Bank of Spain estimates that 70% of the rise in electricity is due to the cost of CO ₂ and gas

The Bank of Spain calculates that half of the increase in the price of electricity registered in the first half of 2021 was due to the increase in the cost of gas, and a fifth to the increase in the price of carbon dioxide emission rights (CO₂), so both factors would be responsible for 70% of the rise in light.

According to a report published on Tuesday by the agency, the increase in the price of gas accounted for up to 50.3% of the rise in electricity registered in recent months, while the cost of emission rights was responsible for 19.6% of this increase.

The Bank of Spain thus identifies these two factors as the main triggers that caused the “pronounced” increase in the price of electricity in the first months of 2021. Specifically, the average cost of electricity increased from 42 euros per megawatt hour registered in December, to 83.3 euros per megawatt hour last June. That is, the price of electricity increased by 98.5% in just six months.

On the one hand, the Bank of Spain pointed out that the increase in the price of gas led to an increase in the matching price of electricity, which is responsible for half of the rise in electricity. Specifically, the price of natural gas went from averaging 18.2 euros per megawatt hour in December 2020, to 28.7 euros per megawatt hour in June.

In this sense, the agency recalled that, as in the rest of the countries of the European Union (EU), the Spanish wholesale electricity market operates under a regime in which the daily demand for energy is satisfied first with the supply of technologies with the lowest prices, which are usually nuclear energy and renewables.

If this supply is insufficient to meet the total demand, the unmet portion is covered by the next cheapest technologies, until it is absorbed in its entirety. In this scenario, the price of electricity is set at the cost of the most expensive offer accepted by electricity marketers.

“That ultimate price is related, to a large extent, to the production costs of the most expensive technology that enters the market supply. Therefore, in this pricing system all technologies are remunerated at the married price, which causes benefits of considerable magnitude for those technologies that generate electricity at a lower cost, “they concluded from the agency.

Historically, electricity tends to become cheaper in the spring months thanks to the higher production of hydroelectric power plants and the decrease in demand for seasonal reasons. However, the Bank of Spain pointed out that the “atypical increase in electricity prices” experienced in the second half of the year is due to the “upward pressure” that combined cycle technology -gas- exerts on daily matching prices.

At this juncture, the Bank of Spain said that a “high proportion” of the offers made by gas production plants are conditioned to a minimum volume of income throughout the day. That is, if the producers do not reach the minimum remuneration that they set, they do not accept the offer, so it is not valid for the matching of the price.

In this context, the agency observed that, between December 2020 and mid-April 2021, the maximum married price was below the minimum income -which registered an “intense” increase-, which caused the generation of these plants to decrease “significantly” and their participation in electricity generation was “relatively reduced”.

This situation has been maintained until the end of June, since the Bank of Spain appreciates a stabilization in the percentage of electricity generated by combined cycle plants, “which would be indicative that the minimum variable income required would have remained, in that period, higher than the maximum matching price, as a reflection of the maintenance of high levels of costs in the production of this technology”.

“The result was an increase in the participation of other technologies, such as adjustable hydraulics, to cover the part of the demand not satisfied by either renewables or combined cycle plants,” continues the bank of Spain report, which explained the impact of natural gas.
in the rise of the light.

CO2 emission _rights

On the other hand, the prices of emission rights grew from 30.9 euros per ton of CO₂ in December to 52.8 euros in June; an increase that has a direct impact on the final cost of electricity, since, according to the Bank of Spain, the generating companies
of electricity that emit greenhouse gases tend to shift the entire variation in emission allowance prices to their supply prices.

_CO2 emission rights are incentives that the European Union introduced to promote investment in clean energy in the medium and long term. In this sense, it should be remembered that, since all bidders receive the market matching price, the increase in this price related to the increase in the cost of _CO2 emission rights generates extraordinary income for those sources of less polluting generation, such as renewables.

“As long as these benefits endure over time, incentives to invest in non-greenhouse gas-emitting electricity generation technologies will remain. Therefore, this element plays in favour of the objective of ensuring that the generation of
electric energy will be, in the future, free of polluting emissions”, explained from the Bank of Spain, which figures the reduction of greenhouse gas emissions between 2017 and 2019 at 35%.

However, _CO2 emission allowances have now become more expensive following the European Council’s decision to raise the greenhouse gas emission reduction target to 55% by 2030.

Finally, the Bank of Spain calculates that up to 6.9% of the rise in electricity is due to the tax on the value of the production of electricity, a tax figure that energy companies usually include in the offers they present in the wholesale market. By raising the tax base -the price of energy-, the expenditure on this tax also increases, which results in an increase in the final price.

8 tenths of the CPI

Likewise, the increase in the price of electricity registered in the first half of the year raised the representation of electricity within the total expenditure of households on goods and services to 3.5%.

In parallel, the Bank of Spain calculates that the increase in prices in the wholesale electricity market has contributed to the rebound in the Consumer Price Index (CPI), which stands at 3%, up to eight tenths.

Source: Five Days