New findings on fossil fuels and inflation in Spain
New Cambridge Econometrics analysis for the European Climate Foundation explores the role of energy prices in recent consumer price inflation in Spain, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks.
Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in Spanish consumer price inflation.
The report also reviews Spain’s wider energy transition strategy, the Spanish government’s response to the recent energy price increases and discusses how the future energy system can better protect consumers from sudden price hikes.
Fossil fuels, including natural gas, are responsible for a large share of consumer price inflation in Spain in the past 12 months
- Fossil fuels alone were responsible for nearly a quarter of Spain’s annual rate of inflation in May, June and July this year.
The increase in energy prices currently makes low-income household in Spain €550 worse off in 2022 compared to 2020.
- Low-income households (those in the bottom 20% of the income distribution) are now spending an estimated 70% more on energy than in 2020.
- The Spanish government has intervened heavily in energy markets to reduce prices, cutting taxes, introducing direct cash transfers to households, and capping the price of natural gas used in power generation.
- Combined, the Government’s measures are forecast to cost the Spanish government over €35bn, equivalent to nearly 3% of Spain’s GDP.
Renewables are now much cheaper than fossil fuel-based electricity production and the cost of renewables is forecasted to fall further.
Accelerating the deployment of renewables could bring significant benefits to Spain, such as:
- Further increasing the share of technologies with very low marginal cost in the electricity production, which can lower the average cost of electricity production.
- Reducing consumer exposure to volatile fossil fuel prices, if the deployment of renewables is coupled with an increased electrification of transport and household heating.
- In the long term, the widespread deployment of renewables could bring down energy prices and limit the need for costly government intervention during times of high fossil fuel prices.