The Iberian exception: What was the cost of distorting electricity markets during the 2021–23 European energy crisis?

European wholesale power prices increased to an unprecedented level during the energy crisis in 2022. To tackle the adverse impact on consumers, Spain and Portugal implemented the Iberian Exception (IE) in June 2022, intending to decouple power prices from the rest of Europe to reduce consumer energy bills, via capping the price of gas for power plants. The ‘exception’ was allowed by the European Commission (on behalf of the EU27) because it was deemed to be likely to have a limited pan-European impact on electricity prices. We focus on the direct impact of the policy on gas demand in Spain and in Europe via examination of the bid stack in the Iberian electricity market. We find that the IE did reduce day-ahead power prices and that there were large increases in net exports to France and Morocco resulting in significant, partially offsetting, second round power price rises in Iberia. Gas for power demand increased by 25% from Iberian power plants relative to no IE (and by 3.2% at the whole EU level). IE Induced power exports from Spain account for around one quarter of the increase in gas for power demand in Iberia. We find no evidence that the extra Iberian gas for power directly increased gas prices at the main European gas hub (TTF). • Our results suggested that the Iberian Exception (IE) successfully lowered the gas bids with a secondary effect of decoupling the Spanish markets from France during the period that the IE was binding. • The IE distortions were large: power flows to Morocco and Andorra increased significantly, and Iberia subsidised the power price of bordering countries. • The IE further produced a partially uneconomic scenario for Iberian consumers as they could have purchased their electricity from France while saving some of the subsidy levied on the consumers. • We quantify the size of the extra purchases of gas induced by the IE: gas for power demand rises by 25% in Iberia and by 3.2% for the whole of the EU. • Of rise in gas for power demand in Iberia, roughly one quarter is attributable to the increase in electricity exports to Morocco and France.