Author: Tom Walters
In our monthly series, Window on Europe, we shine a light on the best policy ideas emerging from across the continent and consider the lessons they may hold for the United Kingdom. In this piece, Tom Walters examines the policies and laws that have underpinned Spain’s expansion of renewable energy and contributed to some of Europe’s lowest wholesale electricity prices. You can keep up to date with these articles and IEEP UK’s other work by subscribing to our monthly newsletter.
One of the first measures taken by the new UK Prime Minister Andy Burnham was to cut VAT on domestic energy bills. The cost of electricity and heating remains a key concern for households, while governments across Europe continue to grapple with how to reduce greenhouse gas emissions without increasing costs for consumers. In Spain, these two objectives increasingly appear to be reinforcing one another. In March 2026, Spain’s average wholesale electricity price stood at around €42/MWh, making it one of the cheapest electricity markets in Europe. How has Spain managed to reduce electricity prices while remaining part of the European wholesale electricity market, and what lessons might this hold for the UK?
Spain’s current position
A recent report by the energy think tank Ember found that Spain’s rapid expansion of renewable energy has significantly reduced households’ exposure to volatile international gas prices. The country’s rapidly expanding wind and solar capacity mean that, for long periods, Spain is powered almost entirely by renewable electricity. Spanish households are currently saving around 19% on their electricity bills in comparison to 2021 because additional wind and solar generation has displaced gas-fired electricity.
Perhaps the report’s most striking finding is not simply that Spain is generating more renewable electricity, but that the increased contribution of renewables has fundamentally altered the way wholesale electricity prices are determined. Between 2021 and 2025, Spain increased electricity generation from wind and solar by 37%. During the same period, gas-fired power stations became far less important in setting the wholesale electricity price. Like the UK, Spain operates under a marginal pricing model, whereby the last, and typically the most expensive, generator required to meet electricity demand determines the wholesale electricity price received by all generators. In 2021, gas-fired generation set the electricity price during approximately 52% of all hours. By early 2026, that figure had fallen to just 9%.
Spain has not abolished marginal pricing or fundamentally redesigned its electricity market. Rather, sustained investment in renewable generation has meant that expensive gas-fired generation is needed far less frequently. Consequently, fluctuations in international gas markets now have a much smaller influence on Spanish electricity prices than they did only a few years ago.
The Spanish policy and legal landscape supporting the rise of renewables
Spain’s current position is the result of more than two decades of policy evolution. During the early 2000s, successive governments introduced generous feed-in tariffs that made Spain one of Europe’s pioneers in wind and solar energy. While these incentives successfully stimulated investment, they also encouraged far greater deployment of renewables than policymakers had anticipated. Combined with wider structural problems in Spain’s regulated electricity system, this contributed to the growth of the country’s electricity tariff deficit, the financial costs incurred when the authorities set the regulated prices too low to cover the running and maintenance of the power system. Following the global financial crisis, governments sought to reduce these costs by significantly reforming the support regime. Subsidies were reduced, including through retrospective changes to existing schemes, whilst taxes were also introduced, undermining investor confidence and resulting in extensive domestic and international legal disputes.
The policy framework that subsequently emerged was markedly different. From 2020 onwards, Spain introduced a new Renewable Energy Economic Regime, under which support is awarded through competitive auctions. Rather than guaranteeing generous tariffs, developers compete to offer renewable electricity at the lowest price, providing greater certainty for investors while limiting costs for consumers.
This auction system has been supported by a broader legal and policy framework. The Climate Change and Energy Transition Law of 2021 established climate neutrality as a long-term legal objective and prohibits the issuing of new exploration and extraction licenses. Spain’s National Energy and Climate Plan set out a detailed roadmap for expanding renewable generation, detailing specific targets for different renewable sources, including 76 GW for solar photovoltaic (PV) (as of early 2026 the country had 50 GW of PV installed), strengthening electricity networks and increasing energy storage. Together, these measures have provided greater policy certainty for investors and clearer direction for the energy sector.
Spain has also reformed the way renewable projects access the electricity grid. New rules introduced milestones for developers holding grid connection rights, helping to discourage speculative projects from occupying valuable network capacity. Other laws have simplified the process for building and connecting renewable projects. Responsibility for authorising many smaller renewable developments also rests with Spain’s autonomous communities, allowing regional authorities to play an important role in delivering new renewable projects and potentially streamlining the process of review and authorisation. Similarly, many put the success of Spain’s increase in renewable generation down to the network planning approach and the recent investments made by the grid operator which has reduced the obstacles for renewable projects coming online.
Spain’s membership of the EU has further supported the development of renewable energy and storage projects. Spain’s Recovery, Transformation and Resilience Plan (PRTR), financed by NextGenerationEU funds, has linked approximately 39.7% of available resources to the ‘ecological transition’. Similarly, in 2023, the Spanish government was able to approve 150 million euros of these EU funds for 36 hybrid storage projects, while the European Commission approved another Spanish aid scheme for energy storage worth 700 million euros in 2025.
The ‘Iberian Blackout’ and balancing the grid
Spain’s transition has not been without challenges. Following the widespread electricity blackout affecting Spain and Portugal in April 2025, questions were raised about whether electricity systems with very high shares of renewable generation could continue to operate reliably. The event highlighted the importance of ensuring that electricity systems remain resilient as renewable generation expands. In response to this, Spain has focused on strengthening the flexibility of its electricity system, rather than slowing renewable deployment.
Alongside conventional hydroelectric generation, increasing investment has been directed towards battery storage, improved grid management and technologies capable of providing frequency control and other balancing services traditionally supplied by conventional power stations. Modern renewable generators are also increasingly capable of supporting voltage regulation and responding rapidly to fluctuations in supply and demand.
Historically, gas-fired power stations were required not only to generate electricity but also to provide essential services that help balance and stabilise the grid. Spain’s revised Operating Procedure 7.4 (P.O. 7.4) increasingly allows renewable generators to provide these services instead, reducing the need to keep gas-fired power stations online solely for system stability. This represents an important step towards operating a highly renewable electricity system safely and efficiently. The UK has pursued a similar objective through reforms to its Grid Code and ancillary service markets.
The challenge for Spain is therefore no longer simply generating renewable electricity, but ensuring that renewable electricity can be integrated into the grid safely and reliably.
The state of play in the UK
The UK has made considerable progress in expanding renewable electricity generation over the past decade. Government support mechanisms such as Contracts for Difference have attracted significant private investment, while more renewable projects are expected to come online over the remainder of the decade, particularly with the jump in planning approvals for renewable energy projects under the current government. Another Ember report from this year predicts that around a third (36%) of power generation in Britain will be priced independently of gas by 2030.
Despite this, gas continues to play a much larger role in Britain’s electricity market than it does in Spain (approx. 33%). This has prompted renewed debate over whether Britain’s wholesale electricity market should be fundamentally reformed. Spain’s experience, however, suggests that reducing electricity prices does not necessarily require abandoning the existing market model.
Could the UK follow Spain?
Spain’s experience offers valuable lessons, but it cannot simply be replicated. Unlike the UK, Spain benefits from abundant solar resources, excellent onshore wind conditions and a significant fleet of hydroelectric power stations that can provide flexibility to the electricity system. Nevertheless, several elements of Spain’s approach are relevant to the UK. Continued expansion of offshore wind, increasing battery storage capacity, investment in electricity networks and planning reform could all reduce Britain’s dependence on gas-fired generation over time. Recent approvals for new pumped-storage hydro projects and continued growth in battery storage suggest that progress is already being made in strengthening system flexibility.
The broader lesson from Spain is therefore not that a single policy transformed the electricity market overnight. Rather, lower wholesale electricity prices have emerged from a combination of long-term political commitment, policy reform and sustained investment. Competitive renewable auctions, clear long-term planning, improved grid access and continuing investment in system flexibility have together reduced the role played by gas in determining electricity prices. As noted by Ember, Spain is ‘ahead of the curve’, but there is no reason why other countries cannot follow suit.