The 7% tax on the value of electricity production, one of the most significant levies on Spain’s power sector, is set to disappear once the tariff deficit debt it helped to finance has been fully repaid.
What is the tax?
The tax on the value of electricity production (known by its Spanish initials, IVPEE) was introduced in 2012 as part of a package of measures to tackle the so-called tariff deficit. It charges 7% on the revenue generators earn from selling electricity, and applies to all technologies, from gas and nuclear to wind and solar.
The tariff deficit
For years, the regulated income of Spain’s electricity system — mainly what consumers paid through the regulated part of their bills — did not cover its regulated costs, such as networks and support for renewables. The gap accumulated into a debt that reached tens of billions of euros. That debt was securitised and is being repaid over time through consumers’ bills, while measures such as the generation tax were introduced to stop new deficits appearing.
The debt is gradually being paid down and is expected to be extinguished in the coming years.
Why the tax would end
The tax was justified as a way of balancing the electricity system’s accounts. Once the old debt disappears, the argument for keeping it weakens. Its removal would reduce costs for generators and, in principle, could ease pressure on wholesale electricity prices, which ultimately affect consumers.
A tax that has come and gone
The tax has been suspended before. During the energy crisis that followed Russia’s invasion of Ukraine, the government temporarily removed it to help contain prices, before gradually reintroducing it.
The debate
Electricity companies have long argued that the tax distorts the market and penalises clean technologies, which also pay it. Others point out that it provides significant revenue for the public finances and the electricity system, and that its removal should be accompanied by measures to ensure that any savings are passed on to consumers rather than kept as profits.
What it means for the Balearics
In the Balearic Islands, where electricity generation still depends partly on local power stations and the cable link with the mainland, any change in the costs of the electricity system ultimately has an effect on bills. However, the impact on individual consumers will depend on how the end of the tax is reflected in wholesale prices.
