The Iberian Exception: What was the Cost of Distorting Electricity Markets During the 2021-23 European Energy Crisis?

European wholesale power prices increased to an unprecedented level during the energy crisis in 2022. To tackle the adverse impact on consumers, Spain and Portugal implemented the Iberian Exception (IE) in June 2022, intending to decouple power prices from the rest of Europe to reduce consumer energy bills. The IE posed challenges and questions, including the impact of foreign demand for Spanish electricity, whether the policy would subsidise French power prices, and whether it would reduce energy bills for consumers. Given that this was a policy implemented in the middle of a continental gas supply crisis, we focus on the direct impact of the policy on gas demand in Spain and in Europe. This is interesting because other aspects of the IE – such as reducing consumer bills - could have been, and in other countries were, addressed by other policies. The ‘exception’ was allowed by the European Commission (on behalf of the EU27) because it was deemed to be likely to have a limited pan-European impact on electricity prices. By contrast, Spain competes directly with other European countries for LNG supplies on the global gas market and hence large effects in Spain would necessarily spillover to gas prices in the rest of Europe. Our findings suggested that IE successfully lowered the fossil fuel bids with a secondary effect of decoupling the Spanish power markets from France. Decoupled observations increased by +59.2% compared with our reference period. Even the border between Spain and Portugal was decoupled slightly by +0.9%. Daily net outflow to France increased by 2.3 GWh daily. Daily net outflow to Morocco increased 32 times, and outflow to Andorra increased by 25%. The power outflow increased the domestic electricity price by 24.8%, relative to the effect in the absence of interconnection. We also simulated the counterfactual scenario by investigating wholesale electricity prices without the subsidy paid to gas generators. Our demand and supply adjustment scenario shows that the subsidy reduced Iberian electricity day-ahead prices by 35.3%. The model was further used to compare the gas-fired generation between June 2022 and February 2023, when the gas price was above the gas cap. Depending on the scenarios, IE increased the Iberian gas burnt by 19.2%; On the EU level, gas burnt also increased by 1.3%. The total Iberian foreign demand also increased gas for power burnt by +5.47% in Iberia (+0.81% across the EU), relative to the effect in the absence of interconnection.