Spain’s Rising Energy Poverty: A Cautionary Tale

Governments across Europe have sounded the alarm as ongoing energy price hikes hit millions of households on the continent. The current crisis comes at a time when the EU is negotiating new legislation – its ’Fit for 55’ package – that should deliver at least 55% greenhouse gas (GHG) emissions reductions by 2030. Many observers warn that, unless the social implications of the energy transition are addressed, social unrest will grow.

Spain is one of the EU countries hardest hit by the current energy crisis, with power prices hitting record highs on an almost daily basis in the past months. The number of citizens at risk of energy poverty is growing in parallel: according to Eurostat figures, 10.9% of citizens in Spain were unable to keep their homes adequately warm in 2020, up from 7.5% in 2019.

Spain ranks sixth for energy poverty in the EU, following Bulgaria (27.5%), Lithuania (23.1%), Cyprus (20.9%), Portugal (17.5%) and Greece (16.7%). However, it is the EU member state that has seen the steepest increase in energy poverty in recent years.

Spain high energy prices
Demonstrators hold banners and chant slogans during a protest against increases in the price of gas and electricity in Barcelona, Spain, on 2 October 2021. (Photo by Alexandros Michailidis via Shutterstock)

At the latest meeting of EU environment ministers on 20 December 2021, Spain’s Deputy Prime Minister and Environment Minister Teresa Ribera was clear: the energy transition needs to be seen “as an agenda of opportunities, thoughtful of our citizens”.

Although renewables capacity has surged across Spain, gas still makes up about a quarter of the country's power mix. That explains to a large extent why Spain has been one of the countries most affected by the gas price surge: in the EU’s marginal power markets, all energy sources generate electricity at the same price, but it is the most expensive source of generation that dictates that price.

Spain aims to ditch coal by 2030 and nuclear just five years later, so it will likely still rely on gas – imported from either North Africa or through its six LNG terminals – for many years. Its National Energy and Climate Plan (NECP) estimates that combined gas cycle turbines would still amount to about 17% of its installed power generation capacity in 2030.

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Spain demonstrates the risks the most vulnerable face in the energy transition, as the EU’s ‘Fit for 55’ package intends to make burning fossil fuels significantly more expensive. Ramón Mateo, director at the Madrid-based consultancy beBartlet, says the opportunities of the energy transition have been clear from the start, but “the actual costs [of the energy transition] weren’t as clear, until now”.

“Before the crisis, the political discourse was highly ambitious, but the reality is that, as long as the transition lasts, we will still depend on fossil fuels and, as such, we will be exposed to geopolitical and economic risks,” he tells Energy Monitor.

An energy poverty strategy

ECODES, a non-profit organisation based in Zaragoza, Spain’s fifth-largest city, is one of the NGOs fighting to reduce energy poverty on the ground. In 2013, it launched the initiative Ni Un Hogar Sin Energía (Not a Household Without Energy), providing direct support to citizens in need by helping them understand their energy bills or how to apply for financial support, and providing energy efficiency kits. More efficient energy use is one way of bringing down household bills.

ECODES told Energy Monitor that the number of families requesting assistance has “considerably increased”.

“There is an increasing concern about rising power prices, as the current situation is widely covered in the media," says Javier Tobías, an officer for energy and people at ECODES. "We assist families on how to lower their energy bills and which types of power contracts are cheaper, but the ongoing price crisis is making our job really difficult."

Energy poverty is not a recent phenomenon in Spain. The Madrid-based Association of Environmental Sciences has found that Spain’s energy poverty levels are closely tied to the country’s high unemployment figures and the overall rise of poverty. According to beBartlet’s Mateo, “several studies suggest that Spain’s welfare state does little to redistribute wealth, and lacks the specific and complementary instruments to address issues such as energy poverty”.

The Spanish government adopted a five-year National Energy Poverty Strategy in 2019. This aims to reduce the number of citizens at risk by at least 25% by 2025 and work towards a 50% decline in the longer term, through a mix of social policy and energy savings measures.

The strategy was hailed as a victory by civil society organisations, but two years on, progress has been disappointing, says ECODES’ Tobías.

“There are several outstanding issues … When the strategy was approved, it was an ambitious and coherent document, but two years on, about half of the measures have not even been initiated, and just around a quarter of them are on schedule,” he tells Energy Monitor.

Before the strategy was released, the country’s flagship measure to tackle energy poverty was its ‘bono social’, a discount rate applied to power bills for households in need. Before the energy crisis, vulnerable households would get a 25% discount on their bills, and ‘severely’ vulnerable households a 40% discount. Those rates were raised to 40% and 70% respectively as the crisis unfolded.

However, the policy has several weaknesses, according to beBartlet’s Mateo: “The ‘bono social’ is not targeted enough and requesting it is an extremely cumbersome procedure. There are plenty of households that do not request this aid simply because they do not know how to do it, or whether they are eligible at all.”

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Insufficiently targeted measures are not an issue only in Spain, says Louise Sunderland, a senior advisor at the Regulatory Assistance Project (RAP).

“The complexity of the experience of energy poverty means that designing effective eligibility criteria is very difficult,” she adds. “Very narrow targeting leads to a situation where many people in real need are excluded and also makes finding eligible people quite difficult and expensive. Targeting that is too wide can lead to support disproportionately going to the better off households in the eligible group who are more engaged and have more time to apply.”

Meanwhile, Spain is striving to increase the energy savings of its buildings as another cornerstone in its fight against energy poverty. The Spanish government said in its NECP that it intends to improve its energy efficiency by 39.5% from baseline projections by 2030, but decarbonising its building stock will prove to be the hardest task: according to a EuroACE study, about 84% of buildings in the country are energy inefficient.

Madrid has joined the EU’s Renovation Wave to accelerate building renovation and intends to use €6.82bn in funds from the EU’s Recovery and Resilience Facility to achieve this.

Spotlight on the power market

At the height of the current crisis, Spain led a coalition of EU member states that demanded more bloc-wide measures and a steep reform of Europe's electricity market to tackle the implications of high energy prices. In the presentation of its energy price ‘toolbox’ last October, the European Commission said that EU member states were better equipped than the EU to tackle the crisis in the short term.

Ahead of a meeting of energy ministers on 26 October, Spain suggested it might quit the EU’s wholesale power market to be able to set its power prices based on cheaper renewable generation. However, EU energy commissioner Kadri Simson warned of the risks to predictability and competitiveness, and questioned whether such a system “would be a better alternative to the current market design”.

Nevertheless, as part of its communication on energy prices, Brussels requested that the EU’s Agency for the Cooperation of Energy Regulators (ACER) assess the functioning of the bloc’s power market as it currently stands, and whether alternative systems could be more beneficial. In a preliminary report released in November 2021, ACER said that while a marginal market model is not "fully future-proof", it can shield the EU from even higher volatility as a result of increasing shares of wind and solar, and discourages speculative bidding by incentivising producers to bid their true costs to get dispatched.

ACER shed light on the importance of interconnectivity too. The report pointed out that the countries with the highest power prices are not only those with the highest dependency on gas, but they also have very limited interconnection levels. In the case of Spain, the report found that only 4% of Spain's total electricity demand was covered by imports. ACER’s final report is expected in April 2022.

Domestically, rising energy costs have put Spain’s power companies in the limelight. Last summer, the government outlined plans to claw back ‘windfall profits’ these companies were making as a result of the EU’s electricity market design. Natural gas sets electricity prices – and these include the roughly €90-a-tonne EU carbon price – but renewables and nuclear generators benefit just as much from them.

“[Spain’s power companies] can afford it,” said Prime Minister Pedro Sánchez in an interview with Spanish broadcaster RTVE. The measure came into force in September 2021 and is intended to run until until March this year. The government intends to use the revenue to lower Spain’s electricity bills.

The main losers from this move are Spain’s largest utilities, notably Naturgy, Endesa and Iberdrola.

"There are other measures [that could be enacted] that are more efficient and tackle structural problems," said Endesa CEO José Bogas when the measure was adopted. Although the earnings of Spain’s main utilities have increased overall in the past quarters, many of them are now offering new contracts and tariffs targeting the most vulnerable households, signalling affordable and stable prices as their main selling points.

Additionally, companies are increasingly pairing up with NGOs to support households at risk of energy poverty. Endesa, for instance, is supporting a project with the Spanish Red Cross and ECODES aimed at providing energy advice, distributing energy efficiency kits, and offering workshops on how to reduce energy bills or request the 'bono social'.

‘Fit’ for the transition

In recent EU climate negotiations, Spain has positioned itself as one of the most ambitious member states, supporting from the start the minimum 55% emissions reductions goal for 2030 and calling for the exclusion of gas from the new EU Taxonomy for sustainable investments.

However, the current government – a coalition formed by the centre-left Socialists and leftist party Unidas Podemos – has also shown strong opposition to some elements of the ‘Fit for 55’ package.

“We are concerned about extending the EU emissions trading system (ETS) to buildings and road transport because we are afraid of the [social] impact this is going to have,” Ribera told environment ministers last December.

One of the keys to alleviating the impact of the ETS extension on the bloc’s poorest is the proposal for a Social Climate Fund, a €72.2bn financing instrument paid for by 25% of the revenues from this new ETS. The Commission also hopes EU member states will pay national contributions into the fund, and double its size – although that is likely to come under fire from the EU’s ‘frugal’ nations.

The law establishing the new ETS is currently under negotiation, although the current draft expects the first funds to be paid in 2025, a year before the launch of the new carbon pricing system. The Commission has proposed an amendment to the EU’s seven-year Multiannual Financial Framework (2021–27) to be able to front-load these payments.

The aim of the Social Climate Fund is to reduce the negative impact on low-income households and small businesses by providing discounts on bills in the short term, and energy efficiency and heat decarbonisation support in the longer term. However, the fund is too small for its many objectives, says RAP’s Sunderland.

“The total fund, including the required 50% member state matched funding, is equivalent to just €230 a year if shared between the 20% of citizens on lowest incomes,” she says. It may be enough to protect low-income households from price increases in the short term, but it will not be enough to renovate homes and achieve longer-term goals.

For civil society organisations, the sum proposed is tiny compared with the challenge of decarbonising buildings – the fund is meant to support renovation – and should be disbursed even earlier. “There are two options here. Either not applying the EU ETS to road transport and buildings at all, or creating the Social Climate Fund at an earlier stage and with more funds,” says ECODES’ Tobías.

“The harsh reality of not moving fast enough on energy efficiency and decarbonisation – which is volatile and rising fossil prices – is all too clear right now,” says Sunderland. “I am hopeful that the recent price hikes create more support for the swift roll-out of large-scale energy efficiency and renewables programmes and policies.”