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Shock as Spain's IVA sales tax on electricity bills set to double
Energy

Shock as Spain's IVA sales tax on electricity bills set to double

Households could be in for a surprise from this Friday, 1 March, when the current rebate rate of 10 per cent ends

José María Camarero

Madrid

Wednesday, 28 February 2024

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Some households in Spain could be in for a nasty surprise from this Friday, 1 March, when the Spanish sales tax (IVA) on electricity bills rises from the current rebate rate of 10 per cent to 21 per cent. Paradoxically, this will be due to the plummeting electricity prices this month.

It is expected that the average price of electricity generation will cost 41.20 euros per megawatt hour (MWh) today, the final day of the month’s data. This figure is below 45 euros/MWh, the key price that determines what IVA should be applied to bills. The last anti-crisis decree approved by the government at the end of 2023 established that IVA would be 10% as long as this average price did not fall below 45 euros. Now, all indications are that it will no longer exceed this figure, which will trigger the tax increase to 21%.

This change will be applied "automatically", according to government sources, as of this Friday, the first working day of March, when all bills will be recalculated with the new tax rate. The government does not intend to make any changes to prevent the hike. The minister of Economy, Trade and Enterprise, Carlos Cuerpo, said that the government's measures are conditional on the energy price.

The drop in electricity prices in February was completely unexpected by all market players. It has come due to an increase in the supply to the grid from wind and solar plants. Last month, 60% of the electricity generated came from green plants: 31% from wind farms; more than 15% from hydroelectric plants; and more than 11% from photovoltaic plants, among others.

Low natural gas prices on the international markets have also contributed to the electricity market cost. Its price is around 23 euros/MWh, the lowest value since the outbreak of the Ukraine war, when it soared to more than 200 euros/MWh in August 2022.

The impact of increasing the IVA on an average customer's annual bill would increase by 15%, from 467 euros to 539 euros per year, according to industry data. Likewise, for self-employed consumers, this tax increase will also generate uncertainty when it comes to settling quarterly IVA payments.

The good news is that if the average electricity market price returns to above 45 euros/MWh in March or in subsequent months, the IVA on electricity would fall back to 10%.

The energy sector indicates 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 it is calling for a review of the IVA mechanism as it is "variable and dependent on variables that are alien to the majority of consumers".

In addition to IVA variations, other tax increases are expected between now and next year, such as the Special Tax on Electricity (IEE), which will increase progressively throughout the year. From January to March, it will stand at 2.5%; from April to June it will rise to 3.8%, and then to the 5.1% it was set at before the crisis.

In addition, the Spanish tax on the Value of Electricity Production (IVPEE), the only one of its kind in the European Union, will also rise gradually. Until March it will be 3.5%; rising to 5.25% until June and, before reaching 7%, the pre-crisis level.

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