Jul 3, 2008

World - Electricity in Spain

NEXT month Spaniards’ electricity bills will go up—but not by nearly as much as they should. Electricity tariffs are regulated in Spain, and the government has kept prices artificially low. Prices have in fact fallen by 2% in nominal terms in the past ten years, and have dropped by 30% in real terms, even though the cost of generating electricity has shot up. Meanwhile, demand for electricity has soared.
Over the years, this has created a huge imbalance. Power companies have been forced to sell electricity at regulated prices that do not cover costs. The cumulative difference between what it costs them to produce power and what they are allowed to charge for it—the “tariff deficit”—has now ballooned to €14 billion ($22 billion), according to the Spanish National Energy Commission (CNE).
The industry minister, Miguel Sebastian, recognises that there is a problem. He has branded the system, which dates back to the previous administration, as “unreasonable and unfair” and says he wants to get rid of it. But he seems not to have the stomach to do so. Just to stop the deficit from getting bigger would mean raising prices by 20%, according to Unesa, the Spanish power-industry association. To repay it will mean increasing prices still further. Paying it back over the next 15 years would require price rises of nearly 35%.

That would be politically tricky at the best of times. But raising prices when Spain’s economy is deteriorating and inflation is rising is even harder. Instead, the government has proposed an average increase of just 5.6%. Some families’ bills will go up by as much as 16%, but poorer households will qualify for a cheaper “social tariff”. Admittedly, some big industrial customers will start paying market prices from July 1st, and the rest will follow next January. But that will still leave roughly 40% of consumers paying artificially low prices.
In theory, the deficit should finally stop growing on January 1st 2011, the date set by the European Union for electricity-price liberalisation in Spain. But even then the government will still have some wiggle room. It can maintain a “tariff of last resort” for some households, though who exactly will qualify for it is unclear. “The risk is that the government could broaden the definition to include households that might not qualify,” says Vicente López-Ibor, a former CNE board member.
Financing the deficit is also becoming a problem. In the past Spanish utilities could easily securitise the deficit in the debt markets and receive the money up front. But the credit crunch, and the deficit’s size, is making this harder and more expensive. Investors are reluctant to lend against increases in future electricity bills, given the government’s reluctance to raise prices.
The CNE, which is now in charge of co-ordinating the securitisation, managed to raise only half of the €2.7 billion it needed in the most recent debt auction. This means the power firms will have to wait longer to get paid, and will have to plug the gap out of their own pockets until then.
What can be done? Millions of Spanish consumers have inadvertently racked up nearly €14 billion in debt, plus interest. To stop the problem from spiralling further, the government will have to stop interfering in the price of electricity. If it also stripped out hidden costs, such as electricity taxes and renewable-energy subsidies, it would leave €2 billion-3 billion a year to cover production costs, by some estimates.
“The system needs to be made much more transparent and less interventionist,” says Pedro Mielgo, an energy consultant at Lovells, a law firm. Doing so will not be easy, but it would encourage a more efficient use of electricity.

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