E
very time electricity prices surge in Europe, governments rush to cut taxes, distribute transfers, cap retail tariffs and search for budgetary fixes to what is, in fact, an electricity market-design problem.
But taxes are not the root cause of rising electricity bills. The problem begins upstream, in the wholesale electricity market, where gas prices still too often spill over into power prices across the system. As long as gas-fired plants remain price-setting during many hours, any geopolitical shock immediately translates into higher electricity prices, higher inflation, and weaker competitiveness.
Europe paid dearly for this mechanism during the 2022 energy crisis, and it should not accept having to do so again. That is why the Iberian solution deserves to be revisited – not as a local anomaly of the last crisis, but as a model for common European action.
What Spain and Portugal did was simple, in principle. Instead of trying to compensate households and firms after wholesale prices had risen, they intervened directly in the formation of those prices. By capping the gas cost used by fossil-fuel generators in the market, they lowered the bids of the plants that were setting the price and therefore reduced the electricity price paid across the system. In doing so, they also limited the windfall gains accruing to other generators – nuclear, hydro, renewables – that do not consume gas but benefit when gas determines the market-clearing price.
