By: Sebastian Mariz, CEO of Influence Spain
March will probably be remembered by the Prime Minister and his Cabinet as the worst month of their legislature, surpassing even the toughest months of the Covid-19 pandemic. The month has been riddled with bad news on all fronts: the war in the Ukraine, soaring energy prices which have caused a nationwide truckers strike which almost brought the Government to its knees and left store shelves empty, protests in Parliament against the Prime Minister led by his junior partner, and labor unions threatening to strike over inflation rates, inches away from levels not seen since the 1940s. In the words of the Finance Minister, and 1st Deputy Prime Minister, Nadia Calviño, the economic uncertainty due to the war in the Ukraine is intense and the Government doesn’t know when this uncertainty will end.
National Emergency Plan
In response to the war, and the effects it has had in worsening an energy crisis that began brewing in the summer of 2021, the Prime Minister adopted a national Emergency Plan Decree-Law on the 29th of March, which now needs to be ratified in Parliament. The Plan, which is highly interventionist in nature, was negotiated beforehand, with Spain’s European partners in the European Council, and will be in force until the end of June. All of the PM’s parliamentary coalition partners have already publicly stated that they will ratify the Decree-Law.
The main focus of the Plan is the adoption of measures to help companies and households cope with historically high energy prices (gas, electricity and petrol) and the inflationary pressures these prices are causing. It includes, 16 billion euros in State backed loans to small and medium sized companies with liquidity problems due to the energy crisis, a 20 cents/litre discount on unleaded and diesel fuel prices for all consumers, including truckers, extending subsidized household electricity prices to an additional 600,000 vulnerable households, thus bringing the total to 1.9 million, and imposing a 2% freeze on any increases on housing rental prices, and salaries, under negotiation over the next three months. An additional 450 million euros in direct subsidies for truckers, taxi drivers, fishermen and heavy industry, are also included in the Plan.
The energy sector and utility companies are, unsurprisingly, the main focus of the PM’s Emergency Plan. After threatening to veto any decision taken in the European Council of the 23rd and 24th of March, the PM got approval from his European partners, to temporarily intervene in the Spanish gas and electricity markets. The measures included in the Decree-Law, will cap windfall profits for electricity utility companies, by fixing a maximum electricity price of 67 euros/MWh, in those bilateral contracts between utility companies and large electricity consumers up for revision in the next three months. Electricity prices on the spot market will not be capped. The Government will also extend the reduced electricity and VAT tax rates on electricity bills, in effect since last summer.
Gas and renewables sectors
Not included in the Decree-Law, but set for adoption in the upcoming weeks, and only after approval from the European Commission, are a number of other interventionist measures affecting the gas and renewables sectors. The Spanish Environment Minister wants to cap electricity prices on electricity generated in gas fired power plants, and sold to other electricity producers, to 50 euros MWh, compensating gas companies for any differential on real generation costs, through a special tariff, or tax, to be paid for amongst all consumers in future electricity bills, or by issuing new electricity tariff deficit (ETD) bonds. If approved by Brussels, and adopted, the measure is expected to bring electricity prices on the electricity spot market down to approximately 110 euros/MWh.
For renewable energy producers, basically solar PV and wind, the Government proposes to implement a system whereby the feed-in-tariffs paid to producers are liquidated in advance, rather than in the agreed on, three-year period of time. The intention being to avoid an excessive ROI over and above the 7.1% agreed on, in the three State auctions organized in 2020 and 2021. Under current spot market prices, renewable energy producers are benefitting from extraordinary margins due to the very high electricity prices being set by gas fired power stations. By liquidating now, the system avoids an accumulation of these high margins leading to ROIs well above the agreed on 7.1%. This measure is expected to save the system up to 1.8 billion euros, and would allow the Government to lower existing grid and operating tariffs by up to 55%, or 6 euros on each electricity bill.
In addition to the Emergency Plan, and in response to demands from Spain’s allies, including the US, the Government has also announced the adoption of a new Cibersecurity Law, changes to the roll out of the 5G network and historical changes to Spain’s relation with North Africa. The new Cibersecurity Law will increase the Government’s budget on cybersecurity measures, from 1 billion euros set aside in this year’s budget to 1.2 billion euros. Speeding up roll of the 5G network will also mean greater scrutiny on those telecom infrastructure companies bidding for construction work, and a veto on telecom companies of Chinese origin, including Huawei.
New relations with Morocco
In parallel to the Emergency Plan, the Prime Minister has also adopted earth-shattering changes to Spain’s foreign policy vis-à-vis its north African neighbors, ending 45 years of pro-independence support in the Western Sahara and granting Morocco sovereignty over this former, mineral rich, Spanish colony. The decision, taken in the form of a letter from the Prime Minister to the Moroccan king, has French, German and US support, and caused shock waves in Algeria and could put at risk Spain’s relationship with Algeria. In response, President Biden has promised to increase shipments of liquid gas to Europe and Spain, thus reducing the continent’s dependence on Russian and Algerian gas. China’s response has been more ambiguous, although China is expected to try to influence Algeria’s position and to soften Algerian-Moroccan relations, so as to not lose access to the mineral rich lands of the Western Sahara.
All of this has taken place within an already tense and unstable political situation, in which the PM has had to deal with continuous internal opposition from his junior partner. This opposition has only but been aggravated by his decision regarding the Western Sahara. A break in the coalition is highly unlikely, however, given that it would not favor the junior partner at this stage.
The PM is also waiting to see how things evolve for the new leader of the conservative popular party. The PM will most likely only call elections when he sees his opponent in his weakest position, both in terms of party leadership and popularity in the polls. He is also gambling on better economic data and lower inflation as of the summer, or at the latest by September, boosting his popularity amongst voters and cementing continued support for his government within a majority of the Parliament.