Why is electricity so expensive in Spain?

Why Spain has the most expensive electricity bill in Europe.

I am afraid my love for Spanish electricity companies remains at its lowest level. After the new laws on solar cell panels and after increases on our electricity bill of nearly 80% from 2004 to 2014 it is more of a hate relationship.

I decided to do an in-depth research to find out why we have the most expensive electricity bill in Europe so that perhaps I can recuperate my lost affections for Spanish electricity companies. It could well be that to produce one Spanish Kw of electricity is more costly here than anywhere in Europe.

Armed with patience and after a few days of research on the web, I found a few articles written by the journalist David Page Polo which led me to the book called: “The Frankenstein Report” written by Inaki de las Heras, a real bombshell. In fact these coming articles are based basically on the work written by those two extraordinary journalists.

Spain has One of The highest bills on electricity in Europe.

They actually explain why in Spain consumers support one of the highest bills on electricity of Europe (only behind Cyprus and Ireland), after suffering a dramatic rise in the bill of 72.5% between 2004 and 2014. And yet, we consumers have to absorb a debt that borders the 30,000 million Euros because we do not pay enough to cover all costs. No the actual costs (what it costs to produce electricity and to take it to households), but the costs that regulation has created. And between those costs that are not really costs, but the law says that they are, which cannot be justified, and others which are tremendously over-inflated.

On how the famous debt of 30,000 million Euros was created.

The book exposes three decades of excesses of all the players in the Spanish electricity sector. And it does so by exposing this charade without dogmatism but with a brutal honesty.

It is a system which now has a surplus of about half of the power generation capacity because large investments were made in new facilities with a predicted consumption of unbridled optimism. A system that made Spain for years one of the first world power in renewable energy for instance and now, the government is desperate to prevent a continues grow (in some cases without control), which has led Spain to overtake Venezuela as the country with most demands of international arbitration.

A unique system in the world.

In recent years it has become a habitual public talk subject (and published) the desire to battle among each other to find the culprit of such enormous 30,000 million Euros debt. And each of the protagonists (and their related pressure groups) accused, of course, the other parts.

The traditional electricity companies accuse the renewable of taking millions of Euros in bonuses for years. The main electric companies exploiting wind farms however point out that only the solar energy as the guilty party. Renewable Companies denounce the bonuses received by the traditional nuclear and hydro power generators, as a bastion of waste. An all look at the politicians as responsible and accountable to allow this squandering of public money.

And among so many skewed versions drive by personal interests, this report now pinpoints all the causes of an endemic native electrical system. And it does untethered, but without false equidistance, stoking all without apportioning false blames as do those who do not want to blame anyone.

The journalist Iñaki de las Heras published the “Frankenstein Report. Why when you click the electric switch the electrical system goes crash”.

It draws our attention on how thirty years of regulatory excesses have created a horrific creature.

And few scary stories end well.

The case of the electric deficit is an example of how the confusion of public and private interests and an apprehensive double set of regulations, misguided planning and a failed market can produce some disastrous results. Companies benefited at the expense of widespread over remunerations that has had the effect that now consumers have to pay extremely expensive electricity which not so long ago had a reasonable price.

A failure of the Spanish politicians and their obligations not only to pursue the general interest but also to discern which particular interests are hidden behind apparent general interests, and that has been the main theme for decades.

The five causes of why electricity is so expensive in Spain

This fantastic report (harsh report, in addition to a good book, in addition to a great story) identifies five general causes that made possible the creation of the “Spanish electric deficit” as it is known. It is this debt between income and recognized costs. Five causes are intertwined for decades

1 the decision to open the door to pay electricity in instalments, accumulating debt rather than pay the recognized price at one time;

2 the enormous costs that were added to the bill, were real, were gratuities or were mere aid under the counter for the electricity companies;

3 the decision of politicians, either by electioneering either by social sensitivity (you decide), to postpone increases prices in electricity and not to address the real causes of increased costs;

4 the collapse of consumption as a result of the economic crisis, plunged the revenue system and made it impossible to cover the recognized costs;

5 and all seasoned with regulatory mistakes that short-circuited the management of the regulated part of the bill and gave birth to a malfunction market.

The result:

Almost 30,000 million of Euros of debt that users of electricity have to ultimately pay to the industry. Though the debt has been used by the companies that money is now owed to banks and investment funds. With interest of course.

On the first part of this article we saw that we pay one of the highest bill on electricity in Europe.

We also analysed how the famous debt of the 30,000 million Euros in favour of the electricity companies was created and why we have a unique system for the electricity industry in the world.

We also discovered that the electric deficit is an example of how the confusion of public and private interests and an apprehensive double set of regulations misguided planning and a failed market can produce some disastrous results. Companies benefited at the expense of widespread over remunerations that has had the effect that now, consumers have to pay extremely expensive electricity which not so long ago had a reasonable price.

This article will centre on the history of why we are where we are…paying the most expensive electricity in Europe.

A brilliant idea!!

It all started when the Prime Minister Aznar in the year 2000 decided that the Spanish electricity user should not pay the electric companies the cost of electric production and accumulated a recognized debt, the difference between the amount invoiced and the real costs of electricity production.

At the time we Spaniards had to meet the Maastricht criteria for joining the Euro, and Spain could not allowed inflation to rise more than the allowed rate. So all started as a mere accounting exercise adding the difference between what the electricity that consumers used and the amount that they paid. The difference was awed to the electric companies, that amount would gradually be charged to the public in the future. The invention worked: between 1997 and 2004 the electricity bill dropped 12%. In return, in 2002 there was more than 1,500 million Euros debt to the electrical system account.

Now you see it now you don’t…

Until 1997, the electricity price was set by the government and was set out with a differentiated cost for each type of electric power generated. But the Electricity Act which was adopted at the dawn of the first Aznar government created a wholesale market (“The pool”) which set the price of electricity for for all types of electric production. But other types of electricity generation technology joined the pool with rising costs so it was decided that the price of all electricity will be that marked by the latest type of technology i.e. the most expensive!!

That is, the cheaper production of some plants could charge much more expensive electricity and be compensated well above their actual costs.

And this is exactly what happens to nuclear power plants and hydroelectric plants, which have already paid their facilities and whose production costs had been amortized but their owners receive millions of Euros above their costs.

Is what is called “profits from heaven”, which according to different sources would be between 1,400 million and 4,000 million euros a year.

The monster they created.

Nevertheless this is just one of the extra costs as result of regulatory failures that assume the Spanish electricity system there is also at least 3,600 million euros more that the large companies received for the costs of “transition to the competition market”. Adding to that there is the 4,400 million that the users have paid since the eighties until last year. The so-called nuclear moratorium, the inflationary effect on the money owed, and there is the quarterly price auction now in use.

The big deficit (or monster) grew and grew as electricity costs increased as it did… too much too quickly, and I am talking about “recognized costs” by the government, which does not mean they are necessarily the actual costs!

The electrical industry has been characterized by the rapid development of new infrastructure or the compulsory inclusion of all kinds of items to the accepted rates.

And here is a funny one…

The electricity bill is composed of a component of energy production, which includes the costs of generating electricity at a price set on the wholesale market; and a second component which is the fees paid to have access to the grid system. Adding to that there is an aid for burning domestic coal rather than importing cheaper coal from abroad (about 600 million of Euros per year), the costs of subsidising electricity to all the Spanish islands (about 1,800 million), The “Interruption fee”. And here is a funny one… an aid of about 750 million per year to the large industries in case they have to stop production in a peak of electricity demand, something that has never happened; the financial costs of the debt itself (about 2.700 million) …

And there’s even more…

Someone has to subsidise the electrical industry on the orgy of investment (about 70,000 million Euros) which served to double the installed capacity in Spain with the construction of dozens of new combined cycle plants which use natural gas and renewable energy in just a decade.

Today Spain has an installed capacity close to 100,000 MW, quite an excess considering that the peak demand stands at about 48,000 MW. But this crazy investment charade encouraged by the governments of José Luis Rodriguez Zapatero must also be paid. And that is what we do my friend, (you and I) every time we pay our electricity bill.