Why Did Spain's Electricity Prices Suddenly Increase?

The second week in January 2021 marked a significant wave of cold weather, as well as an historic all-time high for energy prices in Spain. Predictably, many consumers were outraged at the sudden 27% price spike, especially when countless people have been out of work or with reduced income due to the global pandemic. Consumer protection bureaus were flooded with complaints.

How big a jump did energy costs make? On the night of January 2, the price went as high as €114.02 euros per megawatt-hour (MWh). On Christmas Day the previous year, the price was only €16.04 per MWh. Even the political party Podemos filed a formal complaint with the government as a result of the higher rates.

How Are Energy Prices Determined?

Electricity prices are split into fixed and variable costs: the fixed costs include meter rental, power capacity (your contracted rate) and optional maintenance costs. The variable costs are determined by consumption and by the tax rate, which is applied both to your variable electricity consumption and to your fixed contracted rate.

Approximately half of the Spanish energy market is controlled by three companies: Endesa, Iberdrola and Natural Gas Fenosa. The market was deregulated in 1998, opening it up to more competition, but several of the larger companies—including the aforementioned “big three”—remain regulated. The hourly price of electricity for their customers is established through an agreed-upon wholesale market rate.

Apart from this pool of regulated companies, there are a number of open market providers, such as Lucera, Holaluz, Mariposa Energía, Evergreen Eléctrica and EnergyNordic. Their prices are not regulated by the wholesale rate, meaning they can charge whatever they like. Though by law they aren’t able to offer the same discounts as the large entities, being unregulated means these companies can sometimes offer better prices than their regulated competitors. Each of their websites portray them as more consumer-friendly, more environmentally-focused and less expensive than the giants of the regulated market. Also, they often don’t require a fixed term for consumer contracts. 

Why Did the Prices Go Up?

A customer service representative from Lucera stated: “The price of energy has risen this month for all companies due to several factors. Because of the recent heavy storms and snowfall, there is less energy production from cheaper and renewable sources like wind and solar power. There is less supply. If you add that to the increased demand due to the colder temperatures, it causes the prices to increase.” (They were also careful to point out that they recently lowered their prices on natural gas.) 

So, no, energy companies didn’t simply decide to charge customers more because it was getting colder. It boiled down to a very basic principle of economics: supply versus demand. The storm brought not only unusually cold weather leading to an increase in demand, but it also caused the supply to decrease. Renewable energy sources are cheaper than burning fossil fuels, but they are dependent on fair weather. Storm fronts bring with them cloudy skies rendering solar panels temporarly useless and high winds that force wind turbines to shut down, cutting off the renewable energy supply. This is significant because Spain currently counts on renewable energy sources for nearly 50% of its supply.

Another factor is the value added tax (VAT) on utilities. After the prices rose so sharply, a coalition of Spanish political parties officially requested a cut in the VAT on electricity in order to bring energy Spain’s tariffs more in line with those of other EU countries. (Spain is tied with Portugal for being the fifth most expensive country in Europe in terms of its energy costs.) However, the Spanish Minister of Finance and Government, María Jesús Montero, stated that “21% VAT is the rate set by the European Union,” and the government can’t go against that.

What Can Consumers Do to Save Money?

You can apply for a discount on your bill if you can prove that you are in economic need. This isn’t a new thing—the bono social has been around for years, aimed at vulnerable families and those who experience sudden financial hardship such as severe illness or job loss—but it has drawn increased attention since the start of the pandemic. 

In order to be eligible, you have to be able to prove financial hardship, exceptional vulnerability, or that you or your family is at risk of social exclusion. You also have to have contracted the PVPC rate—the “voluntary price for the low consumer rate,” a variable rate—with one of the specific companies that make up the regulated energy market, a low voltage installation and a digital meter. The reduction in rate can range from 25% to as much as 50%.

If you aren’t eligible for these reduced rates or prefer to look for another option, you may also consider the option of contracting a fixed rate in order to avoid unexpected surprises in your monthly bill. Holaluz is an example of a company that offers a fixed payment plan based on your energy bills from the past 12 months. This rate can be updated if you make significant changes to your home, such as installing air conditioning units or adding more members to the household. If you choose a fixed payment plan, you may be required to commit to a minimum contract period, depending on the company. 

You should already have a smart meter installed (every household in Spain should have had its old meter replaced with the new smart meters by the end of 2018). But if you don’t, you should contact your provider and request that a smart meter be installed. Installation is free, but the monthly rental fee is slightly more than that of the older meters. The new smart meters allow you to monitor your consumption by the hour. This can help you accurately regulate your consumption and reduce how much you spend. 

You can check the kilowatt-hour rate you’re paying on your monthly bill, and make sure that it corresponds to your household’s needs. Small or medium sized homes with electrical appliances and gas heating need only approximately 3-3.45 kWh, whereas larger homes and/or if you make regular use of air conditioning units (splits) need 5.5-5.75 kWh. Larger homes with increased electrical consumption, such as heat and air conditioning, need closer to 9.9-10.35 kWh.

If you want to reduce your energy consumption you can bundle up at home, or try alternative heating methods such as log fires, portable space heaters, gas heaters or paraffin heaters. Just be sure to remember to disconnect these appliances when they’re not in use.

Finally, you can shop around—a list of all the energy providers for Barcelona is here.

On its website, Lucera also offers a list of nine suggestions on how to save energy during the winter, including tips such as making sure that beds and sofas aren’t blocking radiators; using lids on pots and pans while cooking in order to economize the amount of energy needed to prepare food; requesting a “day and night tariff” and making sure to use high-consumption appliances such as dishwashers and washing machines only during non-peak hours, between 22:00 and noon the next day.