Get to know the electricity industry

Who is who in the industry?

Who is who in the industry?

The liberalisation of the electricity sector, which began in 1997 and was completed in 2013, introduced a series of important changes with the aim of opening up the sector to other companies, increasing competition and improving the overall efficiency of the sector by separating activities into four activity axes: generation, transmission, distribution and marketing.

Transmission and distribution are regulated activities that require a specific administrative authorisation and supervision, which in itself constitutes a natural monopoly formed by large companies in the sector.

As for generation and marketing, these are activities that can be carried out by any company that meets a series of requirements and rules of operation; in this case, we can, in fact, speak of partly-liberalised activities.

As a consequence of the above, and in line with the Law regulating the electricity sector, the market is structured in daily and intraday market (OMI, Polo Español S.A. – OMIE) and futures market (OMI-Polo Portugués, SGMR – OMIP), in which the purchase and sale of electricity is negotiated by all market players (producers, traders and direct consumers, among others).

Free market vs Regulated market

The electricity market regulation divides the market it into two: the free market and the regulated market. In 2009, legislation introduced the possibility for the end consumer to choose the contract modality of their electricity supply.

In the regulated market, the Government determines the cost of electricity, the charges to be applied and the conditions for its marketing, depending on the evolution of the wholesale electricity market (pool) through the

Voluntary Price for the Small Consumer (PVPC)

and the Social Electricity Subsidy (Bono Social). This tariff or contract modality can only be offered by the reference marketers, a list of which can be found through the following link of the National Commission for Markets and Competition (CNMC):

This modality is available to consumers with an access tariff for less than 10 kW. Above this power, electricity must be contracted through the free market.

In the free market, everything is subject to what is agreed with the marketer. There is a wide range of offers and tariffs, which means that you have more chances to contact the best price and service. However, these offers and tariffs are not always as they seem, and there are also more chances of being misled or overcharged. This is why we recommend checking the contract terms carefully, especially those regarding exit fees, charges, and tariffs applied on consumption, among others.

Do you understand your electricity bill?

As a consumer, knowing the product or service you are contracting and how much it is going to cost are essential.

To help you with this, we will explain the concepts on an electricity bill so that you can compare offers from different marketers and calculate the savings you can get by choosing one tariff or another.

The electricity bill is made up of two charges, one fixed and one variable, according to the consumption generated during the billing period.

1. Contracted Power..

The fixed charge is paid each month, whether or not there is consumption. This charge is set according to the contracted power for the supply point. The daily price per kW is multiplied by the days of the billing period. This charge is regulated by the Government, but there may be differences between the tariffs offered by different marketers for electricity marketing. Checking this information before contracting is essential.

Example: For a 30-day month, a household with a contracted power of 4.6 kW would pay the following amount: (4.6 x 0.104228 x 30) = €14.383464.

2. Variable charge (according to electricity use)..

The variable charge is calculated based on the kWh consumption in the billed period. This charge has two parts that we must differentiate: an energy charge set by the Government, and the cost of energy actually set by the marketer. Let’s take the previous household as an example:

Consumption of 350 kWh. In the contract, we have a set price of €0.13/kWh. That price would have the following components:

  • Variable charge (TE) 2.0A: €0.044027/kWh
  • Cost for energy consumed: €0.085973/kWh

Point 1 is regulated by the Government, and there should be no differences between the tariffs of different marketers. When choosing one offer or another, we need to calculate the difference to see which is actually cheaper.

For the variable part, this household would pay 350 kWh x €0.13/kWh = €45.50

3. Special Tax on Electricity.

This tax is established by the Government and is currently fixed at 5.1127% on the amount resulting from the sum of the two previous components. Following the example provided, we would have:

(€14.383464 + €45.50) = €59.883464 x 5.1127% = €3.062

4. Rental of measuring equipment (Meter)

Its cost is regulated by the Government and applies provided there is a rental scheme with the distributing company. The customer can choose to purchase one and have this cost removed from the electricity bill.

5. Value Added Tax (VAT)

A tax rate of 21% is applied to the total amount of the electricity bill.

6. Can I switch from one market to another?

As a consumer, you can freely choose to switch from one to the other without any limitations other than those established in the regulations regarding a contracted power of less than 10 kW.