An increase in VAT on electricity is coming. What happened and what two things can you do?
The lights will come back on starting at midnight on March 1st. The increase will begin to apply now, with the exception of rates for particularly vulnerable customers facing exclusion, and will end an extension to the electricity bill tax cut proposed following price increases following the Russian invasion of Ukraine in February 2022. .
The measure resulted in a reduction in value added tax from 21% to 5%, which was increased to 10% after an extension two months ago. VAT will remain at this level in 2024, unless the arithmetic average daily market price corresponding to the calendar month is less than €45 per MWh, which would mean that VAT will return to 21% in the following month.
This is the case for February, which ended with an average price of 40 euros per MWh, according to data from the Iberian Electricity Market Operator (OMIE).
The price of electricity has been particularly low this month due to sunny and windy weather, many hours when the cost was zero, and average daily prices over the past week of no more than ten euros.
However, it should be noted that the measure stipulates that if the price of electricity again exceeds this 45 euros per MWh in one month, the VAT tax on electricity will return to 10% in the following month.
What’s happening?
February will end with an average price per MWh of around 42 euros. According to Royal Decree-Law 8/2023, a reduced VAT rate of 10% is currently applied if the MWh price in the previous month is below €45. Thus, from March 1, VAT of 21% will begin to apply to all electricity bills that include at least one day in March in the billing period.
Because?
We are experiencing a period of declining energy demand as the coldest winter is behind us and less heating is used.
At the same time, wind and solar energy are at their peak. This caused electricity prices to fall throughout February. In fact, since Friday the 23rd we have prices below 10 MWh.
How long will this last?
This low energy demand and high levels of renewable energy production are expected to continue until at least June. This VAT will likely appear on invoices until at least June.
How will this affect my score?
Electricity consumers of any company with a contracted capacity below 10kW will move away from paying VAT of between 10% and 21% on their electricity bills from March. This could mean around 7 euros extra per month in VAT shown on the invoice.
Two tips
The consultation with Gana Energía summarizes two tips to ensure that the bill does not skyrocket:
- Take advantage of the general price reduction to review the rate and contract terms of your current company. Does it make sense to offer upgrade prices when electricity gets cheaper?
- Second, choose cost-based or electricity market-indexed tariffs to benefit from falling electricity prices in real time. That is, at cost price. Compared to a fixed rate, a customer who now has an indexed rate sees energy prices drop directly on their energy bill.