Spain, Portugal propose capping gas prices far below current price

By Alyssa McMurtry

OVIEDO, Spain (AA) - Spain and Portugal presented a proposal to the European Commission that would allow them to cap the price of gas at €30 ($33) per megawatt-hour, Spain’s environment minister said Thursday.

The proposal will still need approval from the EU but it could dramatically reduce the price of electricity in both nations.

For March, the average electricity price in the wholesale market in Spain soared to €284 per megawatt-hour. According to electricity market operator OMIE, the price on the Iberian Peninsula was €50 at the same time last year.

According to the proposal, which was seen by Portuguese daily Publico, €30 is a “normal price for pre-crisis times.”

“This could have massive implications for inflation this year, especially in Spain,” wrote Angel Talavera, the head of European Economics at Oxford Economics.

For March, year-over-year inflation in Spain spiked to 9.8% while in Portugal it hit 5.3%.

The rising energy prices, pushed higher by the war in Ukraine, were behind much of the price increases.

After a European Commission meeting last Friday, where EU leaders discussed how to respond to the Ukraine crisis, Spain and Portugal convinced European partners that they should be treated as an “energy island.”

That means the two countries are allowed to temporarily break free of the EU’s marginalist energy pricing system and set price caps, as they did previously.

The nations’ new advantage derives from the fact that they have few energy connections with the rest of the EU and are leaders in renewable energy, which is relatively cheap.

Spanish Prime Minister Pedro Sanchez has called this system “problematic” because it means the final price of electricity is often set by the price of the most expensive energy source, which is currently natural gas.

On Thursday, he said the new proposal will allow Spain and Portugal to “significantly lower prices extremely quickly,” without distorting the market, disincentivizing renewable energy or subsidizing natural gas.

“I’m convinced that the European Commission will approve [the proposal] soon and the very next day the measures will take effect and be seen in the electricity bills of citizens,” he added.