Electricity System Service Costs on the Rise: Is Spain’s Cost Allocation Mechanism Still Fit for Purpose?

Abstract

System service costs in Spain have increased by more than 400% since 2020, reaching 16.5% of wholesale market value in 2024. These costs are recovered through a uniform volumetric charge on demand, despite being largely non-marginal or location-specific. This paper assesses the efficiency implications of this allocation mechanism and quantifies associated welfare losses using empirical aggregate supply and demand curves from the Spanish day-ahead market. Results show growing distortions, although small in size relative to wholesale market volumes. However, the distortion is expected to grow, particularly as demand elasticity increases. The paper concludes that volumetric recovery is no longer fit for purpose and proposes alternative mechanisms based on network tariffs and imbalance-linked allocation.