What are the benefits fallen from the sky (windfall profit) of the electric companies and why have they caused a short circuit in the stock market?

A large part of the electricity production of the companies in the sector comes from nuclear and hydraulic energy. Both sources are among the cheapest that end up supplying the electrical system. However, by setting prices with a marginalist auction, nuclear and hydraulic production is paid at the same price as thermal power plants if required by demand. The difference between the production price and the extra income is known as ‘windfall profit’. The budget agreement between the Government and Podemos threatens to end what they consider to be overcompensation for electricity companies. Electric stocks are reacting with resounding falls.

The last electricity reform that devastated the quarterly auctions of the wholesale electricity market did not go that far. But now, the agreement on budgetary matters that the Government has reached with Podemos includes a section in which it is contemplated to modify from top to bottom the current system, based on daily auctions at a marginal price, and that is, the price of electricity remains established by the last price that crosses the market to cover the demand.

The cheapest electricity production, such as hydraulics, enters the auction first, known as a pool, to cover demand. If it is not covered, other more expensive types of energy enter, until all the demand is covered. The last price that enters establishes the remuneration for the rest of the production.

The most benefited producers are those that generate electricity through nuclear and hydraulic energy, which have a lower cost. The aforementioned agreement between the Government and Podemos wants to limit this type of income or overcompensation.

“One possibility could be to establish a limit to what certain technologies can charge in the electricity market. The difference between the market price and that limit will be considered income from the electricity system and will be used directly to lower the electricity bill of all consumers”.

The two political forces argue that this form of redistribution was installed in a regulatory framework prior to liberalization and has more than recovered its investment costs. Compensation skyrockets for power companies when demand is high.

“This is negative news, although it seems very difficult for such a complex reform to go ahead,” says the Sabadell analysis department. The experts point to Endesa as the most affected, in case it goes ahead, followed by Iberdrola and Naturgy.

Endesa’s shares accumulate a fall of almost 9% in three days, while Iberdrola and Naturgy are close to 6%. Other companies linked to the sector such as Acciona are also suffering severe falls. In two days it has left 8%, despite today’s rebound.

The Entrecanales family company has charged for two parts. Due to its activity in wind energy and its weight in the construction business. Construction companies have been another of the sectors affected by the measures of the agreement. One of the star measures has been to start recording the benefits from abroad of Spanish companies. A large part of the national construction companies generate a good part of their business through subsidiaries abroad. BME with the proposal for a new 0.2% tax “on operations to purchase Spanish shares carried out by operators in the financial sector”.

Most of the experts put on the table that it will be very difficult to carry out the budgets. Budgets ultimately require a simple majority to pass. For it to happen, it would have to have the support of the nationalist forces, including the PNV. It will be difficult for the Basque nationalist party to vote against Iberdrola, as long as it is not in exchange for concessions, as happened with the Royal Decree for the energy transition and consumer protection, in which the PNV imposed a specific toll for its energy industry. 100 million euros.

The Government and Podemos agreement also includes reviewing capacity payments, so that they are limited to conditional, transitory measures, without distortions, of last resort and in accordance with compliance with the objectives of reducing the price of electricity.

Likewise, the Government and its partners intend to modify the contracted power of the electricity bill, so that the cost to be paid by consumers for the first Kw/h is lower than the following ones, encouraging energy efficiency.