VAT hike on electricity bills imminent

Despite the price of electricity falling, consumers are unlikely to feel the benefits due to VAT on electricity bills more than doubling.

On March 1, the VAT on electricity bills is set to soar from 10 per cent to 21 per cent as electricity prices plunge below €45 per MWh.

This adjustment, detailed in Article 21 of the Royal Decree-Law 8/2023 of 27 December, is a response to the economic and social fallout from conflicts in Ukraine and the Middle East, as well as the impacts of drought.

Sudden shift in energy costs

February’s windy weather has significantly boosted energy production at wind farms across Spain, leading to a decrease in electricity prices.

Despite the benefit of lower wholesale market prices, this drop carries a sting for consumers. With the average price falling to €41.25 per MWh, and unlikely to rise due to the continued impact of storms and low gas costs, customers face an unwelcome VAT increase.

The law states, ‘with effect from [January 1, 2024] and valid until [December 31, 2024], the 10 per cent VAT rate on electricity will be applied to holders of electricity supply contracts whose contracted power is less than or equal to 10 kW…when the arithmetic average price of the daily market…has exceeded €45/MWh’.

Unpredictable impact on consumers

This change introduces volatility and complexity into the electricity sector, affecting all consumers. Those with fixed-price contracts, aimed at avoiding market fluctuations, will find themselves indirectly subjected to these changes through increased taxes.

The industry estimates a 15 per cent increase in the average annual bill, rising from €467 to €539. Moreover, the VAT adjustment poses a challenge for self-employed individuals, complicating their quarterly VAT settlements.

Calls for stability

The sector is urging a re-evaluation of this variable VAT system, which relies on factors beyond most consumers’ control. This push for review highlights the broader issue of market predictability and the need for stable regulatory frameworks.