Spain set to slash IVA sales tax on electricity bills again in face of a summer with higher prices

José María Camarero

Madrid

Monday, 24 June 2024, 12:58

Some households in Spain may start to notice differences on their electricity bills as of 1 July. The Spanish sales tax (IVA) on electricity bills is set to fall on this date from the current 21% to 10%. This will happen if the average cost of electricity generation is above 45 euros/MWh. One week out from 1 July, the average is already above 53 euros/MWh, according to data from Iberian electricity operator OMIE.

Regular changes to the IVA rate on electricity bills have been happening since the government's new anti-crisis decree came into force last January, which established a tax (21% or 10%) depending on the evolution of electricity prices. For the past six months, energy prices have been extra unpredictable.

In the months of March, April and May, with historically low electricity prices, driven by the strong presence of renewables in generation, and especially hydro, led to the application of a 21% IVA rate.

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This will mean a return to the rate of electricity bill seen in January, with the difference that the electricity tax will go up to 5.11%, returning to its usual value, so that, for a bill with 190 kWh consumed per month at 0.14 euros/kWh, it will go from costing 50.89 euros -with IVA at 21% and electricity tax at 3.8%- to 46.84 euros -with IVA at 10% and electricity tax at 5.11%-, according to official data.

The energy sector has already warned that IVA on electricity "is going to be variable, unpredictable and with rules that are complex to understand, affecting the bills of all consumers", which is why they are calling for a review of the IVA measure.

In fact, it is most likely that, at least during the summer, IVA on domestic electricity will remain at the reduced rate of 10% given the price forecasts. Futures point to an average of 75 euros/MWh for July, which will see a return of IVA to the reduced rate of 10% for all bills issued during the month of July. An average generation price close to 80 euros/MWh is also predicted for the third quarter of the year (July, August and September) and an average of 67 euros/MWh for the whole of 2024 - In most cases, costs higher than the limit of 45 euros/MWh established by the government to change IVA from 10% to 21%, or vice versa.

When this measure on electricity bills is definitively applied, the state coffers will once again suffer a drain on tax revenue. However, it will not be as significant as the 2.5 billion euros the Treasury lost at the height of the crisis in 2021 and 2022.

Meanwhile, the new regulated tariff is still in force, whereby 25% of the prices included in these contracts are already contracted for the future. In other words, they are stable, although at the same time, they have not benefited from the decreases recorded in recent months, nor will they benefit from the foreseeable increases in the coming weeks.

The proportional part of fixed prices of the PVPC (the regulated tariff of all life) will represent 40% of the cost in 2025 and will reach 55% from 2026, while spot indexation will lose its weight from 75% this year to 45% at the end of the reform.