The recent cold spell has resulted in an increase in demand for energy, causing the prices of gas and electricity to shoot up, with the price of electricity reaching a historic record high. This increase will be passed on to consumers’ bills, who have a wide range of offers and tariffs from suppliers available to them and perhaps they do not know whether they are paying more than necessary. However, what do we know about the price of energy? How are the tariffs set?
The wholesale market combines the supply of energy producers and the demand of the purchasers, in other words, the suppliers (there are also other agents, such as companies, administrators, etc.), to set the price of electricity. This price can be consulted on the website of OMIE and changes every day and hour depending on a series of factors:
– The balance between supply and demand. When there are peaks of consumption, demand rises, therefore the supply gets more expensive.
– The generation mix, in other words, the technologies available to produce electricity at each moment. The price will be different depending on the technology used (nuclear energy, renewable sources or gas power stations). The most expensive, for example, is natural gas.
– The contribution of renewable energies. In the event of a drought or lack of wind, for example, hydraulic and wind energy generation decreases. As a result, other energy sources have to be used, which can increase the price.
– Technical stoppages of the electricity generation plants.
– The weather.
In this sense, the price of the wholesale market will have an impact on the consumers’ final bill depending on the kind of tariff they have contracted, which currently may be:
– The regulated market or the voluntary price for the small consumer (PVPC in Spanish).
– The free market.
The voluntary price for the small consumer (PVPC in Spanish)
In the first situation, the PVPC corresponds to the tariff regulated by the Ministry for Industry, Commerce and Tourism for a contracted power less than or equal to 10 kW. This is a tariff only offered by reference resellers aauthorised by the Ministry. Consumers included in PVPC pay the price set by the wholesale market for their consumption. This price is determined on the basis of three concepts:
– The electrical energy production costs, which is set on the basis of the market hourly price.
– The fees for access to the network and the charges.
– The supply cost, which includes operating costs and a remuneration for the activity.
In this sense, the price will vary by hour, so that the temporary increase of the cost of electricity will directly affect consumers who have contracted this system, but a decrease in the price will also positively affect them. For example, the price of electricity is often more expensive in winter and cheaper in spring.
Consumers can consult the price of energy applied to them through the System Operator Information System of the Electricity Network of Spain.
The PVPC system has a series of advantages for the consumer:
– Economically it is a good price in the mid-term and does not incorporate any additional price guarantee cost.
– Billing terms and conditions are regulated.
– Consumers receive a simple bill in a format that has been established in a regulated and transparent manner.
– Consumers may contract any other kind of system with the right to return to the PVPC system.
– As an alternative to PVPC, consumers may contract a fixed price with another reference reseller for one year. This annual fixed price offer must set out details of the prices that correspond to the energy supply and the access fees, charges and other costs.
– This type of arrangement provides better protection before non-payments or disconnection notices.
– PVPC is the only system that offers the social discount, aid for people in a vulnerable situation. It is a discount that is applied to the electricity invoice and can be for 25% or 40%.
The free market
Under this type of contract, the price for electricity is not regulated, so it may or may not refer to the price of the electricity market. Therefore, prices may vary hourly or be fixed depending on the supplier. Consumers who have a contracted power greater than 10 kW are obliged to use this system. Advantages of the free market are:
– Clients tends to pay a closed price with a fixed price per kilowatt hour or a flat rate, so they avoid paying more when the price of electricity is very high.
– Contracts can be entered into with any supplier.
– It allows the guarantee of renewable origin to be requested, which certifies that the company supplies energy originating from renewable sources.
– It allows additional services to be contracted, such as equipment maintenance and revisions.
One must bear in mind, however, that this system can cause confusion and the tariff can sometimes end up being more expensive than that of the regulated market. Firstly, because the free market offers are also conditioned to the prices of the wholesale market, so if the price of electricity rises, the free market tariff also increases. Furthermore, one must also bear in mind that in the free market suppliers’ interests reign, and each company will set the kW price depending on their own commercial strategy. Secondly, because when there is a set price, the consumer cannot benefit from a decrease in the price of electricity. And thirdly, because this system often includes contract modifications or special clauses. Furthermore, the free market system has the inconvenience of being incompatible with the social discount.