Spain’s Prime Minister, Pedro Sánchez, on Friday unveiled a sweeping package of measures aimed at cushioning the economic fallout from the war in Iran, including a sharp reduction in VAT on energy and fuel.
Under the plan, VAT on electricity, gas, petrol and diesel will be cut to 10%, while the 7% tax on electricity production will be temporarily suspended. The special electricity tax will also be slashed from 5% to the EU minimum of 0.5%.
Speaking after an extraordinary cabinet meeting, Sánchez said the “first pillar” of the €5bn package — comprising 80 measures — was a “drastic reduction” in energy taxation. The decree-law will come into force on Saturday following its publication in the official state gazette.
Overall, the government estimates that taxes on electricity will fall by around 60%. VAT on natural gas, pellets and firewood will also be reduced to 10%, while the maximum retail price of butane and propane will be frozen.
The VAT cut on petrol and diesel — also to 10%, the lowest level permitted under EU rules — is expected to reduce prices by up to 30 cents per litre, depending on the fuel. Sánchez said this would equate to a saving of roughly €20 per tank for an average car, describing it as a measure that would have a “direct impact on household budgets”.
He argued that the plan would give Spain “the strongest social and economic shield” in the European Union, adding that the measures would remain in place for as long as necessary and could be extended if the crisis deepens.
Fuel discounts for transport and primary sectors
The package also includes targeted support for key industries. Farmers, livestock producers, fishermen and transport operators will receive a 20-cent discount per litre of fuel when refuelling vehicles such as lorries, buses and vans.
“These sectors are being hit particularly hard and are vital to our productive fabric,” Sánchez said, adding that the aim was both to help them “weather the crisis” and to contain rising food prices.
Farmers will also be eligible for additional support to offset the rising cost of fertilisers, which have been affected by the conflict and risk pushing up prices of goods such as olive oil.
The VAT reduction on fuel will apply alongside the discount, although the tax cut ultimately benefits the end consumer. Sánchez said the VAT change alone could account for savings of up to 30 cents per litre.
Push for renewables and self-consumption
Alongside short-term relief, the government is seeking to accelerate the energy transition. The plan includes what Sánchez described as a “substantial package” of tax breaks to encourage self-consumption and the uptake of heat pumps.
These incentives, delivered through income tax, will support the installation of solar panels, electric vehicle charging points and more efficient heating and cooling systems in buildings. They form part of a broader, more structural strand of the government’s response.
Sánchez said Spain was better positioned than many countries to withstand energy shocks, citing a sharp increase in renewable capacity since 2017. He pledged to continue a “coherent policy” of decarbonisation and electrification, arguing it not only helps tackle climate change but also reduces costs for households.
The measures are also intended to strengthen Spain’s energy independence by boosting domestic sources and improving resilience to external shocks. Additional steps will be taken to speed up renewable projects, ease bottlenecks, expand battery storage capacity and support pumped hydro schemes.
Highlighting the government’s record, Sánchez said renewable capacity had risen by 150% over the past seven years, compared with just 3% in the preceding period. “It is worth considering how we would have faced recent energy crises with that level of capacity,” he said.