In 2022, gas prices reached unprecedented highs, largely due to Russia’s shrinking gas supply and international tensions following Russia’s aggression in Ukraine. The effect of this increase on electricity prices has been, and still is, the subject of European study and debate. This is due to the fact that, in Europe, the spot price of electricity is determined by the marginal generation technology price (Marginal Clearing Price) for each market zone (bidding zone).

All generators participating in the spot market in a given bidding zone receive the same price-the marginal price-for energy fed into the grid. Likewise, those who participate in the market in a given bidding zone by purchasing electricity all pay the same marginal price. In Europe, marginal generation technology is often based on Combined Cycle Gas Turbine (CCGT).

As a result, very high gas prices have inevitably been reflected in electricity prices. In this context, producers with lower generation costs than marginal technology (such as from photovoltaic, wind, hydro, etc.) have benefited from very high infra-marginal rents (i.e., the difference between the marginal price and their generation costs), to the detriment of end users. To counter this phenomenon, European governments are studying possible regulatory policies to be applied, even temporarily, to energy markets.

In mid-2022, Spain and Portugal, in an attempt to reduce the rents of infra-marginal generators, introduced a temporary energy policy, known as the “Iberian model,” aimed at containing electricity prices in the wholesale market.
The idea of these containment policies is to separate wholesale electricity prices from very high gas prices:in the “Iberian model”, this is done through a subsidy or compensation to producers with gas-fired generation plants that covers the difference between the actual gas price observed on the Iberian spot market (MIBGAS – Mercado Ibérico del Gas) and a predefined maximum gas price for electricity generation.

This report preliminarily analyzed the possible impacts of applying policies similar to the “Iberian model” at the pan-European level in a medium-term scenario characterized by different gas price cap measures.
The activity described in this deliverable was carried out at the request of ARERA’s Special Office for European Regulation (REU), to which RSE provided support to study the possible implications of this issue in both the national and European contexts.

The study was developed by exploiting an electricity zonal market simulator capable of determining hourly market clearing over an annual time horizon and calculating zonal prices considering fuel costs, emission costs, operating costs, and possible bidding strategies (mark-ups over production costs).

In the preliminary context of the medium-term scenario developed for the pan-European zonal system, results on zonal electricity prices, transitions between zones, and changes in the thermoelectric generation mix resulting from the application of each of the containment measures were analyzed and highlighted.
The results show that cap policies at the gas price are clearly reflected in the final electricity price, reducing it. The generation profile of thermal power plants also tends to follow the dynamics of gas prices: output from CCGT plants is increased as a result of the application of curtailment policies. Finally, the transitions between the various bidding zones are congruent with the results obtained with respect to electricity prices.

In particular, the zones that benefit most from these policies are those in Italy and especially the Central-Northern zone: as a result of the application of the “tope” policy (inspired by the “Iberian model”) the price of electricity is reduced by more than 55 percent compared to the “base” policy (in which no policy is applied to contain the prices of gas used for thermoelectric generation). Finally, countries outside the European Community perimeter are also found to benefit indirectly from the application of such policies on the European continent: in fact, an increase in imports leads to a reduction of more than 44% in the price of electricity in Switzerland and 33% in Great Britain.