How can we reduce electricity bills?

The price of electricity is very high and is destined to increase; this is without taking into account the fact that we are yet to start winter. Will I have to spend all my salary on paying the electricity bill? These maximum price peaks only occur in a certain time slot between 9 pm and 10 pm, when consumption by citizens is highest. This does not mean that the price of electricity will not change during the other time slots, but it will be cheaper.

Let's look at what are the causes of this price increase, evaluate the latest measures adopted by the government, and talk about what consumers can do to minimize the impact of this increase in prices.

The key items in the electricity bill

It is important to pay attention to the information on the electricity bill, where a series of key guidelines are given for taking the appropriate decisions.

Energy costs represent 39% to 45% of the total electricity bill, so the remaining 60% corresponds to taxes and additional charges.

Energy costs represents 39% to 45% of the total, so the remaining 60% corresponds to taxes and additional charges. VAT and electricity tax currently represent 10% and 0.5% of the bill, after the latest measures adopted by the government until the end of the year. After this grace period, they will return to their original values of 21% VAT and 5.11% electricity tax, that is, 26.11% of our bill. The transport and distribution fees represent from 16.5% to 22%, which is the cost of the facilities used so that electricity reaches our homes. Finally, the additional charges range from 21.1% to 28.5%. These correspond to a premium to subsidize a part of renewable energies, cover the electricity deficit (we are paying for the mistakes of the past), pay the extra for cogeneration and waste, and compensate for tariff imbalances in electricity generation in non-peninsular territories (Ceuta, Melilla, Canary Islands, Balearic Islands, where energy needs to be generated using supplies of gas and fuel transported by sea).

These transport and distribution fees plus the aforementioned additional charges are distributed based on a fixed amount linked to the power that we have contracted and a variable part according to our electricity consumption in each time slot.

The contracted power is the maximum amount of energy that a home can consume in a given moment. For most consumers, it varies between 3.45 kW and 5.75 kW with the more power we contract, the more we will have to pay. Most consumers have more power contracted than they really need. Adjusting this power to the real needs of each household is recommended, as well as checking that the company has not increased it without informing you. You can also ask them to implement the two different contracted powers that current regulations allow.

The cost of energy consumed

The amount we pay for energy consumed is the variable component of the bill, which depends on external factors (gas, CO2 emission rights) and other factors that are due to our habits, although these things are clearly related. As such, our habits of using household appliances in the different time slots affects our pockets in a tangible way, since the three time bands of peak rate, flat rate, and cheap rate correspond to the highest, average, and lowest prices respectively.

 The price of a kWh during peak rate is 22 times more expensive than a kWh during cheap rate and 3 times more expensive than the flat rate; this is evidently something to think about.

 The price of a kWh during peak rate is 22 times more expensive than a kWh during cheap rate and 3 times more expensive than the flat rate; this is evidently something to think about.

The daily price of electricity is set through a wholesale market regulated by the company OMIE, where, on the one hand, the distributors that generate the energy, such as Iberdrola and Endesa, are located and on the other hand, the trading companies. The former report on the volumes and prices at which they are going to sell electricity the next day, for each of the 24 periods of the day, while the traders communicate the quantities they are going to need and the prices they are willing to pay. An algorithm then compares the demands and offers, covering first the entire supply at the cheapest prices and then the higher prices, until reaching the point where supply is balanced with demand for each of the periods of the day. So, what is the problem? The final price applied to electricity for each band is marginal, that is to say, the most expensive price that is the cut-off point between supply and demand, and this is where our consumption habits come into play.

Electricity generation basically comes from non-storable sources such as nuclear energy, renewable energy and continuous flow hydraulic energy, whose variable costs are very cheap and therefore these are the first volumes used. If this supply is insufficient, the demand is covered through coal and combined cycle plants (which use gas) and later with peak demand plants (fuel oil), which have much higher costs. This is for two reasons: the price of gas has increased in international markets and CO2 emission rights need to be bought due to them being polluting, and this considerably increases their variable costs.

The peaks make everything expensive

If our consumption were more distributed in the different time bands, with greater use of cheap rates and flat rates, the marginal price of electricity would be much cheaper, since possibly the demand would be covered entirely with the cheapest energy (nuclear and renewables), while if we cause voltage peaks in the grid, marginal prices will inevitably be set by combined cycle plants, which are much more expensive and exposed to volatility and dependence on international markets.

If our consumption were more distributed in the different time bands, with greater use of cheap rates and flat rates, the marginal price of electricity would be much cheaper.

Other measures, such as the reduction of taxes, the reduction of charges due to the electricity deficit, renewables and non-peninsular territories (all of them, with considerable room for action), as well as intervention in the emission rights market for CO2, the purchase and storage of gas, incentives for long-term contracts, and auctions for the expansion of renewables are not in the hands of the consumer and must be left to the government to decide.