The Iberian Exception: An overview of its effects over its first 100 days

Author:

David Robinson, Angel Arcos-Vargas, Micheael Tennican, Fernando Núñez

Keyword:

Economics, General Economics, General Economics (econ.GN), Systems and Control (eess.SY)

journal:

date:

2023-09-04 16:00:00

Abstract

This paper offers an independent assessment of certain key economic effects of the Iberian Exception (IE). Their stated aim was to reduce the major component of electricity prices for most Iberian consumers, a component which was indexed to Iberian wholesale power market spot prices power market prices that were rising alarmingly due to extremely tight international markets for natural gas. The Spanish Government estimates that, during its first 100 days, the IE provided substantial benefits for consumers affected by the IE, which included over 10 million small consumers as well as many large ones, but the authors of this study question that estimate. The authors of this paper argue that the estimated effect of the IE on retail prices depends critically on the assumptions about what would have occurred in the absence of the IE, i.e., in a counterfactual scenario. Although counterfactuals are always difficult to construct, the government s counterfactual ignores demand elasticity, and this inflates their estimate of immediate consumer benefits. Using hourly data on the wholesale electricity market for the first 100 days of the IE, this paper s analysis of alternative counterfactuals that reflect the effects of demand elasticity shows substantially lower benefits of the IE for consumers than the Spanish government estimates. Indeed, this paper s analysis suggests that affected consumers would have paid somewhat less for electricity in the first 100 days of the IE had it not been introduced. The authors identify several other potential short and longterm effects of the IE that deserve further study. These include increased margins for fossil fired generators, reduced margins for some decarbonized inframarginal plant, heightened investor perceptions of regulatory risk, weakened incentives for efficient consumption, and higher carbon emissions and gas prices.

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