Mr. Souza, what was the extent of the price shock, and how did Spain and Portugal respond?
Mateus Souza: In the lead-up to Russia’s war in Ukraine, energy prices increased as much as tenfold. The surge in gas prices pushed up electricity bills. In this situation, Spain and Portugal targeted the wholesale market to protect consumers. They capped the price of gas used in electricity generation, ensuring that higher gas prices were not passed on to the wholesale electricity market. Although a surcharge was necessary to finance this policy, our research shows that, on net, the “Iberian solution” substantially reduced energy bills for consumers, compared to a scenario without intervention.
In your research, you focused on the effects for the distribution of wealth between electricity generators, consumers and taxpayers. What are your findings?
Mateus Souza: The energy crisis shifted substantial wealth from consumers to generators. Spanish power plants that were not directly exposed to the fuel cost shocks increased their profits by almost 200 percent. This is due to the way in which electricity markets operate: Expensive gas prices determine the price of all electricity. Nuclear, hydro, and renewable power plants benefited and increased their profits by about 27 billion euros between 2021 and 2023. However, the Spanish policy intervention limited these gains by around 13 billion euros while also helping consumers.
Low-income households are usually hit particularly hard by rising electricity bills. The intervention mitigated the price increases for this vulnerable group. Our research shows that the “Iberian solution” benefited low-income households more than those with higher incomes. This outcome of the policy design is highly desirable, as it helps prevent energy poverty–that is, the lack of access to sufficient, affordable, and reliable energy.
How did other European countries respond to the crisis, and what effect did this have?
Mateus Souza: Most countries targeted the retail price, using subsidies, price caps, or direct transfers to households and firms. These solutions were adopted by policymakers in countries such as Germany and France. Retail price interventions helped to weather the crisis, but they entailed substantial fiscal costs which are ultimately borne by taxpayers. Importantly, these measures also left the profits of energy producers largely untouched.
What are your recommendations for managing future energy shocks?
Mateus Souza: Rather than focusing on a single type of intervention, policymakers should consider a range of options when responding to crises. Our research shows that both the “Iberian solution” and non-price energy-saving measures–such as limiting the usage of air conditioning in public and commercial buildings–helped ease the effects of the crisis. To conclude, we argue that distributional aspects should be incorporated from the outset to alleviate bill shocks from potential crises in the future.