Free power: Spain tops European league table

In recent years, the Iberian power market has experienced significant shifts, driven by the rapid expansion of renewable energy sources such as wind and solar. Broader European trends around fossil fuel dependency and market volatility have played their part too. As we move further into 2024, these dynamics are reshaping the way power producers, policymakers, and traders interact with the market, resulting in profound implications for long-term planning and intraday strategies.   

Negative and zero prices compared  

Negative power prices have been widely discussed in the media over the last months. Finland is leading Europe in numbers of negative prices, but if we include prices cleared at zero, Spain actually leads the table. As of mid-October, the country has seen almost 800 hours where power prices were valued at zero or below. The chart below shows the evolution of both negative and zero-priced hours over the year for Spain and Portugal compared to similar numbers in France, Germany and Great Britain.

Historically, Spain and Portugal, have been at the forefront of renewable energy adoption. With around 10% of all hours trading at or below zero, these markets are experiencing unprecedented price volatility, especially during periods of high solar generation. This shift has been largely driven by high solar production during solar peak hours, cannibalising returns for solar power producers. 

Cannibalisation refers to the scenario where a particular type of generation, for example solar, all generate at the same time. This leads to a reduction in wholesale power prices as generation overtakes demand. This is also why co-location of renewables with battery storage assets is a key factor for project investors and portfolio managers looking to maximise revenues from renewable energy sources.

Cannibalisation is an issue which affects all kinds of weather dependent generation. Wind generation has seen falling revenues too. For example, in March 2024, nearly 50% of wind generation was priced at €10 or lower. These periods of extremely low or even negative prices raise questions about the future profitability of renewable energy assets and challenge conventional financial models for Power Purchase Agreements (PPAs). 

Solar revenue does not follow the solar profile either. The chart below shows how revenues line up with the actual generation as an average for the month of May. Note that revenues for solar are lowest during the periods of highest production.

If we analyse solar production in more detail, we can see that the captured value per MWh of solar production drops significantly during the summer. This is most obvious in April and May, where we see higher levels of solar generation (but not the high demand of summer). During this period, most solar generation only captured a price below EUR 10/MWh.

For wind, we see the lowest relative revenues in March and April where around 50% of all wind power captured revenues below EUR 10/MWh.

Compared to countries in Northern Europe, we did not see massively negative prices in Spain and Portugal. As we see wind, solar, hydro and gas assets responding to price signals, negative price levels in the region are very moderate when they happen. 

The main cause of negative prices can be traced back to the value of Guarantees of Origin (GOs), which generate revenue for the power producer even when the power price is zero, or below zero. GOs have also achieved lower prices than in previous years, limiting the impact on negative prices. When France started limiting imports from Spain during solar peak hours, we started seeing the first negative prices in Spain, reflecting the price of GOs.

Onwards and upwards, volatility and complexity 

The impact of further renewable growth on the Iberian power markets is not difficult to guess. After the first negative prices were observed in the spring, the trend has continued through the year. The next few months will be of significant interest again as solar generation will be more modest. More power will produced from wind as weather conditions change, potentially causing more instances of zero and negative prices. 

But as the news focuses on negative prices, there is also another trend that can be observed. In the evening peak hours, we are also starting to see higher prices. These prices are driven by fossil fuel generation, which has to start up (or ramp up) its generation for the evening peak. Starting up is expensive, and the additional cost has to be recovered in the period in which an asset is sure to be running. Day ahead auctions cover the period from midnight to midnight, which means that if you start a gas asset at 20:00, you only have 4 hours in which to recover your start costs.

It is interesting to see how different scenarios affect prices in different ways. Traditional stack models no longer suffice to forecast day ahead prices. Weather forecasts alone are not enough to forecast renewable generation either. There is a whole new reality in which prices, weather and power plant economics interact in a different way than before, but not all of the time. We have worked long and hard on a new modelling methodology and it is paying off, identifying new opportunities for our customers as the market adjusts.

Making the case for storage 

Another aspect of lower lows and higher highs when it comes to energy prices, is that the spreads between high prices and low prices within the day are increasing. This improves the business case for storage, which is needed to manage excess and shortage in a renewables dominated market. 

The key challenges for large-scale battery deployment in Spain include grid infrastructure limitations, complex market mechanisms and regulatory barriers that reduce the attractiveness of investment. Addressing these issues will be crucial to the success of Spain's energy transition. 

In terms of regulatory changes, it makes sense to look at grid access rules for batteries, reforming the technical restrictions market and at clarifying the role of storage in market rules. 

The asset owners and managers will soon realise that, just like in Northern Europe, the strongest business cases are created by stacking revenues from different markets. A combination of capacity revenues for providing reserves, energy revenues from reserve activation, or congestion solutions (with market revenue from day-ahead, intraday and balancing markets) adds up to a profitable case in many countries.  If the market works well enough, that should be possible without subsidies, although some temporary support will definitely help. 

Trading around the ramps 

For trading parties active in the intraday market, the growing price spreads between peak and off-peak periods offer new opportunities. With renewables dominating the supply mix during the day, intraday traders can capitalise on the price volatility driven by conventional power ramping up during morning and evening peaks. 

Understanding when and where these price-swings will occur is crucial. The Iberian market, with its high share of renewables and relatively low interconnection capacity, provides opportunities for trading strategies that capitalise on volatility. Success in this market will require a deep understanding of both weather patterns and the operational and economic dynamics of conventional plants, which are increasingly setting the price during peak hours. 

The role of PPAs in a volatile market 

As renewables continue to reshape the power price landscape, the valuation of Power Purchase Agreements (PPAs) will need to adapt. To manage this risk, we may see a shift toward more sophisticated PPA structures, including those with built-in flexibility clauses or contracts that hedge against negative pricing periods.  

Additionally, the growing interest in Corporate PPAs presents an opportunity for businesses to secure green energy at competitive rates, while also contributing to their decarbonisation efforts. An important aspect to keep in mind is that price-sensitivity of renewable generation should not be impacted by these new PPA-structures. There is no benefit to the world in having renewable assets producing against a floor price, when the market is seeing negative prices all around. 

Navigating an uncertain future 

Power producers, policymakers, and traders in the Iberian Peninsula are facing an increasingly complex market environment. While the growth of renewables has brought new challenges in terms of price volatility and revenue cannibalisation, it also presents opportunities for innovation in storage, flexible assets, and market design. As we look to the future, it will be critical for all stakeholders to adapt to these changing dynamics and find ways to navigate the uncertainties ahead. 

By staying informed and proactive, Iberian market participants can seize the opportunities presented by this transition and help shape a more sustainable and resilient energy system for the region.