Hot Air: Electricity prices and government policy

The cost of electricity is to rise again. From 1 January it will increase by 9.8%, the largest single hike for 28 years. Since 2006, while cost of living has risen by 12%, the cost of electricity, including the January increase, will have gone up by over 40%.

The increase is due to a raising of the tariff set by central government. It will apply to the majority of consumers who are on the so-called "tarifa de último recurso". The increase has not surprisingly been condemned by consumer organisations and opposition politicians alike. The Partido Popular reckons that the hike will make the price of electricity in Spain one of the highest in Europe. It would be more accurate to say that the price is beginning to reach parity with that in other countries; it will still be cheaper than in the UK, Italy, France or Germany.

The reason for the increase lies primarily with a rise in the cost of electricity futures. These were determined a couple of weeks ago, but the news about the passing on of charges to consumers was largely ignored. A cynical view that has been expressed is that the Spanish Government's declaration of a "state of alert" to do with further possible action by air-traffic controllers was a way of burying the bad news.

The increase is, though, hard to reconcile for different reasons. One is that the government wishes to cut consumers' power bills by 2013 by attacking the tariff deficit between what energy companies charge and the revenue they receive from government. Among other things, this will lead to a reduction in revenue by photovoltaic plants (solar energy) by around 30% over the next three years. This is a blow to the renewables energy industry and is a further issue that is hard to reconcile, as it goes against the government's own policies of clean energy and energy efficiency.

The latter, energy efficiency, is something else that is hard to reconcile, particularly in Mallorca. Consumption of electricity, for heating, is disproportionately high, owing to the inadequacy of much housing stock. Governmental talk of energy efficiency has not been matched by a drive to assist with measures that could significantly reduce consumption.

There is then the effect on the wider economy, and this is something else that is hard to reconcile. The increase can be viewed as being pretty much equivalent to a tax increase. Coming on top of the rise in IVA and the austerity measures, the electricity price rise is likely to make still-born the possibility of economic growth. While the hope is that tourism will steer the Balearics into more benign economic waters in 2011, it will, in all likelihood, disguise the situation in the domestic market as a whole.

The fragility of confidence is reflected in the figures for spending in the Balearics over the Christmas period - down by around 14% per person and 25% per family. This is a substantially greater decline than had been anticipated. The level of Christmas spending may be a special case, but if it is taken as a barometer of activity, then the economic outlook is far gloomier than had been feared. Put 10% on electricity bills, and that outlook just got gloomier still. There has to be a fear that Mallorca and Spain are heading backwards into further recession.

The announcement of the price rise comes at the same time as it has also been announced that a pipeline to bring natural gas to Alcúdia is being planned to come on-stream in 2012. Good news perhaps for the hard-pressed consumer, except that gas is also rising in price, while what the pipeline will mean in the short-term isn't clear, other than possibly supplying the power station, assuming it can be converted from its reliance on coal.

As part of a wider strategy for energy, the arrival of natural gas can only be a positive, but it is a rare positive amidst an energy policy that the Partido Popular is probably right in criticising for its errors. The hot air (and hot air that is about to cool off in many a household) that comes from government regarding energy has been exposed as being this alone. One wonders if the idea of keeping bar and restaurant doors closed in order to seal in set temperatures will be revisited. Heaven help the poor bar-owner if, on top of the smoking ban and, yes, his own increased energy costs, he is forced to install automatic doors that will maintain a summertime temperature of air-conditioned 26 degrees.

This setting of optimum temperatures is, however, an example of a failure to educate as to how different settings can increase or reduce consumption. The whole notion of energy efficiency is not being well handled, and while it isn't necessarily a political maker or breaker, price increases could well be. Zapatero's fate, if it hadn't already been, may well have been settled by the economics of energy.


Any comments to andrew@thealcudiaguide.com please.