Olaf Scholz said Friday that the President of the Spanish Government, Pedro Sánchez, has “very successfully represented the interests” of Spain, together with Portugal, in order to get the European Union to recognize that both countries need “special treatment” with respect to the high energy prices.
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“Pedro Sánchez has very successfully represented the interests of his country. Together with his Portuguese colleague, they have ensured that there are options for the governments of Portugal and Spain to act,” Scholz said at a press conference at the end of the second day of the European summit in which European leaders discussed energy prices.
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Spain's Sanchez takes risk over energy! Spain's PM Sanchez says EU allows Spain, Portugal to implement measures to cut energy prices.
Spanish Prime Minister Pedro Sanchez said Spain and Portugal will be allowed to implement temporary measures to cut the price of energy as part of a deal agreed by EU leaders in Brussels.
He said the measure will not distort prices on the European market.
The talk in Brussels is that Spanish prime minister Pedro Sánchez needs to bring home a result from this week’s European Council – or his political future may be at stake.
Spain is at the sharp end of a surge in energy and fuel costs. Truck drivers say it costs so much to refuel that they lose money making deliveries, and have gone on strike, dismissing a government subsidy offer as inadequate. Supply chains are at risk. Supermarket shelves have emptied, as the effect of the strike combines with bulk-buying behaviour due to rising food prices and concerns about the war in Ukraine.
In addition, roughly one-third of households in Spain are on electricity contracts that link their bills directly to spot market rates. Those rose 400 per cent between April and October 2021 – before Russia’s invasion sent them even higher.
What makes the situation additionally painful is that almost half of Spain’s electricity was from renewable sources last year. Only 10-15 per cent was from gas. Despite flowing in for free from the sun and wind, electricity from renewables is priced at the same rate of gas, because of how the European Union’s energy pricing system works.
Electricity prices are set when distributors buy from producers on the wholesale market. The electricity is sold one day ahead on a trading platform, in 24 one-hour lots. Offers from buyers and sellers are matched by computer.
The cheaply produced renewable energy is offered for the lowest prices and is snapped up first. Then the more expensive fossil fuel electricity begins to find buyers. The most expensive electricity is usually left unsold. At the end of the lot, the highest level paid by any buyer is fixed as the price for all electricity sold for that hour.
Scorchingly expensive
In normal times, it’s viewed as an efficient system that guarantees the lowest electricity price each hour. Indirectly, it encourages investment in green energy, because selling at fossil fuel prices means renewable producers make almost pure profit after their initial investment.
But due to the specific role gas plays in the EU as an energy source, this pricing system has now become dysfunctional. Gas is a near-inescapable fuel in Europe: it was designed to be the backstop that kicks in when the sun doesn’t shine or the wind doesn’t blow. It used to be cheap and abundant. But now that it has become scorchingly expensive, that ubiquitous presence is setting a cost floor for all electricity, no matter how it’s produced.
EU countries widely acknowledge the system has broken. But they disagree on what to do about it.
Spain has led calls for the electricity pricing market to be changed to remove the role of gas. Belgium has called for gas prices to be capped. Italy, Greece, and Portugal back them up.
Ireland is among the countries cautious about interfering in the market for fear of unintended consequences. Critics object that the renewable energy producers who are currently raking it in will suffer if the market is interfered with. And if gas prices are capped, governments will need to make up the difference to suppliers, or they will simply sell their fuel elsewhere (this would result in a defacto EU “Gazprom fund”, one diplomat predicted).
Green transition
Denmark, Ireland, the Netherlands and others argue that it all makes the case to speed the transition to green energy. Bulgaria, Hungary and Poland disingenuously argue that climate measures caused the price rise, and therefore the green transition should be delayed.
Poland has also led calls for the EU to stop buying gas from Russia outright. German chancellor Olaf Scholz has ruled this out, saying the resulting shortages would plunge Europe into recession, risking “entire industries” and “hundreds of thousands of jobs”.
