Why are Spain and Portugal Getting Special Energy Treatment?

(Bloomberg Opinion) -- Spain and Portugal scored a diplomatic coup with a new alliance to fight the surge in energy prices. Not against Putin's Russia, which has its boot on the windpipe of European gas importers, but against their fellow European Union partners.

In the short term, it will shield Spanish and Portuguese consumers, whose anger over inflation spilled out onto the streets during May Day protests. But in the long term, the deal risks making visible cracks in European unity worse.

The two countries won a so-called “Iberian Exception” last week that will separate the peninsula's electricity prices, which have wide access to renewable power sources, from the soaring cost of the natural gas the rest of the bloc is dependent on. The resulting price cap of up to 50 euros ($52.55) per megawatt hour will reportedly halve power bills for 40% of consumers in the peninsula. Prime Minister Antonio Costa of Portugal called it a “great achievement.”

At first glance, this measure — pitched as a “temporary” emergency tool — looks no different from the tens of billions of euros spent by several individual European economies to shield vulnerable consumers and businesses from higher energy bills after Covid. But it reveals deeper energy divides within the EU as the bloc fights to keep a unified stance against Russia.

For one, it's a visible brake on the EU's drive to unify energy markets at a time when regulators are advocating tweaks like hedging strategies or vouchers rather than more radical intervention. It turns the peninsula into an “energy island,” separate from the rest of the union. Spain and Portugal have very low interconnection to the EU market, but this move winds the clock back years in terms of integration.

The Iberian exception also highlights a reshuffling of power dynamics within the EU as the influence of Germany's economic “model” is weakened by its dependence on cheap Russian gas. Brussels is now seeing increased French leadership. Spain and Portugal, once derided as stereotypical “Club Med” economies, could see their post-Covid growth rebound and diverge from the rest of the continent, which is seeing a slowdown because of Russia's energy disruption.

Redrawing the North-south divide along energy lines could have deeper ramifications, says Ramon Mateo Escobar, director of consultancy BeBartlet. If Iberian power prices become artificially depressed relative to their neighbors', he says, investment and business might shift accordingly. Spain and Portugal could use their influence to prod other countries to push for more fiscal stimulus in the form of Covid funds — the model being promoted by the EU's new power couple, France and Italy.

The optimistic view is that the Iberian exception could offer initiatives for rest of EU to follow. Spain wants to be a bigger player in alternative energy sources, incentivizing renewables and storage investment. The two Iberian neighbors could lead the way on saving energy as well as subsidizing it — such as making the case for energy-efficient buildings.

But long-term risks also increase. Consumers are being numbed to the cost of Putin's war, and subsidies like this will be hard to remove. If this is the start of EU members being encouraged to go it alone, Putin may also find it easier to play divide and rule as a result, according to Simone Tagliapietra, of Bruegel, a think tank in Brussels. Cracks in sanctions unity are showing already.

With the energy storm unlikely to abate soon, closer EU integration and more joint spending would be a very useful umbrella indeed. Given the task facing Europe — from the cost of overhauling its energy ties to ramping up its ability to defend itself militarily — it will be hard to find shelter in energy islands.

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