The lowering of electricity prices in February anticipates the increase in VAT to 21% in March, which was not planned until the end of the year

The drop in the price of electricity that has been recorded throughout the month of February, especially in recent days, is good news for domestic consumers with contracts in the regulated market but it could also be the reason for an increase immediate VAT on electricity that was not planned until January 2025. If the average price in February exceeds 45 euros/MWh, this tax will rise from the current 10% to 21%, according to a reservation that appeared in the decree at the end of last year that contemplated a first increase, from 5% to 10 %. If on February 27, the average is below, at 42.3 euros/Mwh, and points to a VAT increase to 21% in March that will affect all consumers, also those who have contracts in the free market, which has led the electricity sector to protest against what it considers a tax “lottery.”

The origin of this possible new increase in the VAT on electricity, which the sector already sees as “very probable”, is the decree-law on measures to face the consequences of the war in Ukraine that the Government approved on December 27, and which contemplated a progressive increase in energy-related taxes, which had been reduced to a minimum to be able to face the price crisis of 2022.

As the president, Pedro Sánchez, announced at a press conference, in January 2024, VAT on gas and electricity would go from the super-reduced rate of 5% to the reduced rate of 10%.. The gas rate would return to the ordinary rate of 21% in April, at the end of the winter season, while the electricity rate would remain at 10% throughout 2024 and would not rise to 21% until January 2025.

However, there was a caveat, the extraordinary measure of maintaining the VAT on electricity at 10% and not at the ordinary rate of 21% would not be met “when the arithmetic average price of the daily market corresponding to the last calendar month preceding that of the last day of the billing period has exceeded 45 euros/MWh”.

This phrase applied to any contracted power and any “contracting modality” and its effects are about to be verified, unless this Wednesday the price of electricity experiences an increase that affects the entire average for the month which, on the 27th , stands at 42.3 euros MW/h, that is, below the threshold from which VAT will once again be 21%. From there, the VAT will not necessarily remain at 21% because if the price of electricity rises again to exceed the average of 45 euros/Mwh per month, then it will go back down to 10%, until it eventually returns. to fall below that average amount.

Given this almost certain increase in electricity in the month of March and a possible fluctuation in the VAT on electricity throughout the year – in 2025 it will already rise to 21% without conditions -, the Government has highlighted as a “positive argument” that this foreseeable increase in VAT is due to a drop in the price of electricity, thanks to the fact that the winter has been less cold and also to the penetration of renewables, which has ruled out taking any measure to avoid the increase next month .

“The measures that were designed with conditions associated with the evolution of prices, the urgency of inflation in energy matters, have to continue their course and will continue to do so if the situation arises in the following months,” declared the Minister of Economy, Carlos Body, in Moncloa after the Council of Ministers.

On the contrary, in the electricity sector an increase – and possible new decreases and increases – from 10 to 21% of VAT is not seen with such positivity and protests against the “volatility” in the prices that the Government introduces through these variations VAT, which also affects all consumers because it is also transmitted to those who do not depend on the daily market, which is what is determined if the VAT is 10 or 21%. Households that have free market contracts will also have to pay 15% more, with a fixed price per month set to general for one year but will also see it vary due to variations in the regulated market, daily and hourly auctions.. In the eyes of the sector, it will also generate “uncertainty” among self-employed consumers when it comes to paying VAT quarterly.. For now, if it rises in March, it estimates an increase in the average annual bill will be from 467 to 539 euros.

“Tax lottery”

The sector criticizes what it considers a “tax lottery” that not only affects VAT on electricity, but also other electricity taxes that were lowered in 2022 to address the price crisis and that will also increase progressively.. It considers that the variation in taxes on electricity is a “barrier to the electrification” of demand and requests the Government to review these variable VAT mechanisms, subject to criteria “foreign to the majority of consumers.”

This will happen with the Special Tax on Electricity, which was at the minimum allowed of 0.5% until December 2023; was set at 2.5% between January and March, from April to June it will go to 3.8% before reaching the pre-crisis 5.1% in the second half of the year. With the Tax on the Value of Electrical Energy Production (IVPEE), which until March will be 3.5%, it will rise to 5.25% until June and in the second half of the year it will reach the pre-crisis level of 7%.