Spain Presses EU on Lower Gas Price Cap to Ease Power Crunch

(Bloomberg) -- Spain warned Brussels that if a cap on natural-gas costs to generate power is set too high it won’t help ease the highest inflation in 40 years, which has shut down factories and sparked street protests. 

Negotiations with the European Commission on the exact level is underway and are expected to be concluded next week, according to a senior official familiar with the discussions. A proposed cap of 30 euros ($32.55) per megawatt-hour is seen as too low by the commission, while Spain argues that over 50 euros will be ineffective in tackling prices, said the official, who asked not to be identified because the talks are confidential. 

Spain and Portugal rely mostly on cheaper renewable energy, but power prices are determined by the most expensive generation technology -- which is currently gas. By capping the price that gas-fired power producers can charge the overall system, Spain would lower the cost of electricity for all users. The government has said that it would look to find savings from within the system to compensate those producers forced to sell at a loss.   

The measures could potentially serve as a test for other European countries, such as France or Belgium, and for reforming the overall pricing system on the continent. 

Spanish Prime Minister Pedro Sanchez and his Portuguese counterpart Antonio Costa convinced European leaders in March to allow them to set the level to help slash record power prices. But the regulator wants to avoid giving too much competitive advantage to Spanish and Portuguese industries as all nations are struggling with soaring costs, the official said. 

Spain argues that a cap above 50 euros will not be effective in arresting inflation hovering at about 10%. The original 30-euro level would have slashed price growth by as much as 4 percentage points by the end of the year, the official said. 

Price Jump

Soaring living costs triggered a three-week protest by small truck owners and drivers in March that nearly paralyzed the euro area’s fourth-largest economy. Electricity prices have jumped in recent weeks, stoked by Russia’s invasion of Ukraine, forcing number of energy intensive users to temporarily suspend some operations. 

Spain’s central bank has doubled its inflation forecasts for this year and next based on the jump in energy costs, warning they could dent an economy still not fully recovered from the Covid-19 crisis. 

The rare agreement to authorize both countries to intervene in their markets was based on a European Union rule that allows such exceptional measures on the condition that they won’t affect the common market. 

Spain’s Environmental Transition Ministry, which oversees energy policy, declined to comment. The commission did not comment directly on the details of the negotiation, but said by email that it is assessing whether the measures proposed by both countries are in line with EU state aid rules and internal energy market rules.  

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