Value-added tax on electricity to drop from 21% to 10% until next year

ELECTRICITY bills will attract value-added tax (IVA) at 10% rather than 21% from this coming Thursday (June 24) as a temporary measure to keep them down – although government coalition partners Unidas Podemos is pushing to make it permanent.

For the moment, 10% IVA will apply instead of 21% until the end of this year, and only when the price of wholesale energy exceeds €45 per megawatt per hour (mWh).

The move comes after soaring power prices led the ministry of energy and environmental transition, run by socialist and deputy president Teresa Ribera, and the ministry of social rights, led by Unidas Podemos' Ione Belarra, to take urgent action to stop bills going through the roof.

It will apply to customers who have contracted a power level of up to 10 kilowatts (kW).

Although IVA will go back to 21% where energy prices drop below €45 per mWh, it will stay at 10% for consumers considered 'severely vulnerable'.

In all cases, though, it will only be until the end of 2021.

Also, tax on value of electrical energy production, currently 7% and payable by utility companies but passed onto the customer, will be temporarily axed – a move Teresa Ribera made for a short time in 2018 as damage limitation when power prices rocketed – and this time, it will only be waived for the third quarter of this year, from July to September inclusive.

Unidas Podemos is calling for the IVA reduction to 10% to be permanent for all households with a power level of 6kW contracted and all businesses with up to 15kW.

The left-wing party insists that this would help improve cashflow and income for small and medium-sized businesses, allowing them to grow and potentially improving job opportunities.

IVA adjustments should not be subject to market price fluctuations, Unidas Podemos says, as this would involve 'frequent reviews' that would 'make the system far more complex'.

The impact of an IVA reduction will cost the State around €3 billion a year, but Unidas Podemos says this can be compensated for by limiting what has become known as 'benefits that fall out of the sky' straight away, rather than in a few months' time as originally planned.

These 'benefits' are where utility companies pass onto the customer the charge they would have to pay as a penalty for carbon dioxide emissions they produce, and which can be a way of electricity boards increasing their profits: Making this a standard charge and integral part of the fixed element of energy bills even where their electricity production does not generate CO2 emissions.

This is the case with nuclear and hydroelectric plants – no emissions are created which the utility board has to pay a penalty for, but the amount of this penalty is still passed onto the end consumer.

The State gets 90% of the CO2 emissions penalty charges, every quarter, and spends 90% of this figure on financing the transition to renewable energy production, then the remaining 10% helps fund bill reductions or payments for low-income households.

Even with the temporary IVA cut, though, Unidas Podemos says it is positive news, since it will result in an immediate reduction in electricity bills.

“We consider electricity to be a basic need, and IVA should not be charged at the top band of 21% on basics, but at the mid-band rate of 10%,” said Unidas Podemos' Parliamentary spokesman Pablo Echenique.

He says Unidas Podemos will continue to insist on the creation of a public-sector energy company, since even though electricity prices are largely State-controlled, the main power board is a private-sector firm.

“The main problem with electricity bills is that there's a private-sector monopoly which holds around 80% of the market share, whilst a public-sector firm would inject transparency and competition into the market,” Echenique argues.