Free market or regulated market - which is better for me?

Blog

Free market or regulated market - which is better for me?

Free market or regulated market - which is better for me?


Rates Sector 4


Since the new electricity tariffs began to be applied on 1 June, the price per kW/h has not stopped rising and there have already been several days in which the historical limits have been exceeded. Today's figures show that the price per megawatt/hour is now over 140 euros, whereas a year ago it was just over 40 euros.

The question is, then, why does the price of electricity continue to rise in Spain, and why are there two different markets? What does "free market" mean and what does "regulated market" mean? Which one should I choose? In this article we will go over these questions so that you can determine for yourself which is best for you.

How does the Spanish electricity market work?

Until 1997, the price of electricity was regulated solely and exclusively by the Spanish government, paying a fee to a series of private companies that were responsible for the generation, transport and distribution of electricity.

In 1998, the division of the electricity market in Spain took place thanks to Law 54/1997, of 27 November, on the Electricity Sector, with the aim of "establishing the regulation of the electricity sector, with the triple and traditional objective of guaranteeing the electricity supply, guaranteeing the quality of this supply and guaranteeing that it is carried out at the lowest possible cost".

The first record of the use of electricity in Spain dates back to 1852 in the pharmacy of Doménech from Barcelona, and its use quickly spread throughout the country.

In this way, the Spanish electricity landscape was divided into two different types of markets determined according to two types of activities:

  • Partially liberalised, with electricity generation and commercialisation activities.
  • Regulated, with electricity transmission and distribution activities.

The result of the new law was a more diverse business landscape with the appearance of independent commercialisation companies that based their activity on the management of electricity commercialisation. It was in this enclave that Lumisa was born in 2010.

Free market

In this type of market we find all the electricity marketing companies, such as Lumisa, which develop their activity based on the sale of electricity to the end consumer, thus distancing themselves from the electricity distribution companies and electricity generators.

These are the tariffs that we currently offer at Lumisa. Check them out and find out how to save on your electricity bill now. Moreover, we do not have permanence.

In this type of market, the price of electricity is deregulated and is decided by the marketers themselves. In most cases, they work with fixed prices that allow the end consumer to enjoy the peace of mind of knowing what price they will pay for electricity on their bill.

There are stable price tariffs, fixed prices or tariffs with hourly discrimination.

In this type of market, there are various electricity tariff options that the consumer must determine which is best suited to their day-to-day life. Precisely this point is one of the main benefits for those who have opted for this option, the possibility of adapting the tariff to actual consumption.

Although free market users do not have the option of benefiting from the bono social, marketers usually offer discounts that compensate for the difference in price compared to the regulated market.

Regulated market

In this type of market the tariff is determined by the administration and is known as the PVPC (Voluntary Price for the Small Consumer). This is a system for regulating the price of electricity supervised by the government for customers on the regulated market and who have a contract for a power equal to or less than 10 kW with a Reference Reseller, and these are the only users who can benefit from the social voucher.

In Spain, the number of Reference Marketers is limited. There are currently only 8 companies of this type, regulated by the Government.

The price of the regulated market is directly affected by market trends. For example, in 2016 there was a downward trend that led to lower prices than in 2018, when the trend was reversed.

The tariff change on 1 June affected all consumers in the regulated market, establishing peak, flat and off-peak hours. Find out about all the changes in our article on the subject.

The main characteristic of this market is that the price per kW/h varies according to supply and demand and is the price set by the wholesale market, so there are 24 different daily prices, one for each hour of the day. As the price is set by the regulation of the market itself, the higher the demand, the more expensive the price per kW/h and vice versa.

Differences between the free market and the regulated market

Thus, we know that there are two types of markets in Spain and the final customer decides in which of them he/she wants to be, being possible to change from one to the other if he/she wishes to do so. These are the main differences, as a table to make them easier to see:

Free market  Regulated market
There is no possibility of benefiting from the bono social, but the marketers compensate with discounts. The only option to apply for the bono social.
There are offers for any power. Only available for power ratings less than or equal to 10 kW.
There are more than 100 suppliers to choose from. We recommend Lumisa. There are only 8 Comercializadoras de Referencia that offer the service, regulated by the Government.
The price of electricity is known to the consumer, as it is contractually agreed. The price of electricity varies daily and is subject to the wholesale market price, based on supply and demand and market trends. Therefore, its users pay more than those on the free market when there is more demand, but less when there is less demand.
It allows the possibility of combining the electricity tariff with other supplies, such as gas. There is no permanence in any case.

How is the price of electricity in Spain determined?

The Spanish market is divided into two large groups: wholesale and retail. Below we are going to see what each of them is and their main differences.

Pool

Firstly, we have the wholesale market or pool. This pool, as we have mentioned, is where the price of electricity that will be seen on the regulated market is set and is managed by the operator OMIE, which is responsible for managing it in Spain and Portugal, designated by Europe, like the other NEMOs (Nominated Electricity Market Operators) designated in each member state.

The pool, in turn, has two different types of markets, both operated by OMIE, which are the daily market and the intraday market in which electricity companies that will later sell this energy to end consumers usually operate.

Daily market

The daily market bases its activity on the classic law of supply and demand, both in Spain and in the rest of Europe, in sessions at 12 pm that take place daily throughout the year. In these sessions, prices and energies for the whole territory are fixed for the next 24 hours, at which time another session takes place to decide the prices for the following day.

The agents that offer and demand electricity contact each other through OMIE and all the offers are accepted until the demand is complete. The prevalence of one offer over another depends directly on economic issues, as well as on the available interconnection capacity between the price zones, opening the possibility for the same price to exist in both zones at the same time.

Once all the demand has been covered, a review is made to see if it is possible to carry out the distribution of electricity in each zone from a technical point of view and due to the technical restrictions that are applied the final price can vary by 5%.

Intraday market

OMIE defines the intraday market as a "tool for market participants to adjust their schedule resulting from the day-ahead market according to the needs they expect in real time". This market is governed by 6 auction sessions that take place after the above-mentioned adjustments of the day-ahead market in which electricity is sold and bought back.

There is a continuous intraday market which is not governed by the 6 sessions and aims to facilitate interconnection between the different European markets.

Retail market

On the other hand, there is the retail electricity market, which is where traders such as Lumisa operate. They first buy the energy from the generating companies through the procedures described above and then sell the electricity to the end consumer.

To do this, the distributors make use of the distribution networks managed by the distribution companies, in addition to the obligation to pay tolls for access to these networks, which are determined by the public administration. All of this is set out in the Electricity Sector Act 24/2013.

Thus, the electricity bill is broken down into the following concepts:

  • Cost of energy.
  • Regulated costs, which include access tariffs.
  • Business margin of the marketers.
  • Rental of customised equipment for the transmission of electrical energy.
  • Taxes.

It is precisely in the concept of the cost of energy that competition is generated, as the regulated costs, as the name suggests, are implemented by the CNMC. In this sense, the marketers act as intermediaries between those who generate and distribute energy and those who consume it.

In conclusion, either of the two options is valid, but it is up to the consumer to decide which one best suits their day-to-day life or what they prefer: to be aware of the price per kilowatt per hour on a daily basis or not to worry about it and pay a tariff set by contract, even though this may mean paying a little more than they could.

That is precisely the beauty of liberalisation at the end of the last century, the wide range of possibilities available to consumers today.

Sources:

  • Revista Física y Sociedad
  • OMIE
  • RJ Consultores
  • Endesa
  • Selectra
  • OCU
  • La Razón
  • Kill my Bill
  • ABC

  • Share

Continue reading

What is it and what do you need to have a self-sufficient house?
Previous

What is it and what do you need to have a self-sufficient house?

Aras de los Olmos (Valencia): Spain's first
Next

Aras de los Olmos (Valencia): Spain's first "100% renewable" village

×

Do you have any questions?

Solve your doubts through our customer service channel.


Or if you prefer, call us at our totally free customer service number