The (default) price is not right

The (default) price is not right

Analysing the Spanish default energy tariff

In 2014, the Spanish Government replaced the default electricity supply tariff—previously determined by competitive supply auctions—for an hourly passthrough of the spot wholesale price of energy. The tariff was meant to pose no risk for default suppliers, to not interfere with the retail electricity market, and to provide a competitive long-term tariff for those customers not engaged with the retail market. Currently, nearly half of all households in Spain, 40%, pay this price.

In January 2021, following a very cold spell, wholesale electricity prices—and the default supply tariff—increased sharply. The government managed to resist the pressure from opposition parties to interfere with the default tariff. In 2021, the story changed.

Record electricity prices in the autumn and winter of 2021 prompted a myriad of measures aimed at reducing electricity prices for default customers. Faced with a default tariff that passed all these rises onto customers, the Government launched a consultation in the Autumn. The consultation concluded recently and rather surprisingly, indicated that there was no need for change.

Giving default customers, the most unengaged electricity customers, the most volatile retail tariff leads to welfare losses. These customers are the least capable of managing the energy price risk in a market where there are suppliers better equipped to take on that risk. This volatility will not go away in the foreseeable future; with the coal phase-out, the wholesale price resulting from matching demand and the fact that supply will vary greatly.

In terms of risk, there are allocation losses, but high spot electricity prices also prompt policy interventions. In this article we explain that gas will continue to play an important role in electricity prices in the future, and although there are reasons to believe that current high prices could be transitory, there is the strong possibility that the gas market tightens again in the medium term.

Read the full version of our article in Spanish here.

Los defectos del precio por defecto