By Belén Carreño
MADRID (Reuters) -Spain wants the European Commission to allow it to set prices for nuclear and hydroelectric power as it seeks to decouple the cost of electricity production from gas and to curb windfall profits, energy ministry sources said.
The current mechanism for establishing European electricity prices is set by the power plant, typically a gas generator, that produces at the highest cost needed to meet demand.
The proposed reform would seek to prevent sources of energy that are cheaper from benefiting from the high prices.
The basis of the proposal is to promote futures contracts (known as CFDs) for nuclear, hydro and renewables and to have a dual market, a marginal spot market similar to the current one and a long-term market.
"We have enough experience of what works and of the limitations of the current model, which is not prepared for stressful situations," Energy Minister Teresa Ribera told a news conference on Tuesday, explaining part of the reform proposal.
The European Commission is working towards proposing a broader reform of the EU electricity market in March with a view to reducing the impact of gas prices on power bills for industry and households.
Ribera said Spain's proposal would not have an immediate impact on prices, but "would gradually displace the current situation", reduce volatility and help to secure supply through forward contracts.
A surge in gas prices caused by Russia's invasion of Ukraine in February benefited generators who used sources other than gas, and could sell at higher prices even though they had not faced increased fuel costs.
Spain's leftist ruling coalition approved a temporary 1.2% levy on power utilities' sales in 2023 and 2024, to help ease cost-of-living pressures.
The government wants to permanently end the current pricing system, but has yet to get approval from the European competition authority, which prevents intervention in hydro and nuclear pricing, although regulation in renewable pricing is possible.
Spain also wants the EU executive to extend the duration of gas price cap in Iberia until 2024 as a bloc-wide reform is likely to take some time, Ribera said.
The Spanish proposal also calls for the creation of a capacity market to guarantee long-term energy supply through incentives for companies to invest in energy storage systems, specifically aimed at boosting renewables in the new power market.
(Reporting by Belén Carreño; editing by Charlie Devereux and Barbara Lewis)