Why did prices on the balancing market hit the ceiling in parts of Europe?

Recently we have seen a lot more volatility on the spot market. The reasons behind them are various, some of them known for a long time, some of them appeared this year.

Midday valleys, and evening Mount Everests

Energy prices are stacked from the cheapest energy source (described in terms of short-run marginal cost, which is almost zero in renewable energy sources) up to the most expensive (gas, coal and oil) in every given moment.

However, recently the market showed extensive volatility. Increased number of negative hours (in Germany – 223 in first half of the year), usually in late morning and early afternoon, as well as unforeseeable energy prices during evening peak (24 times above 200 EUR/MWh in first half of the year) raised issues about the reasons behind this increased volatility on spot market.

During recent month, the prices during the day were low and oftentimes reached negative values. That means that technically you could get paid for using energy, which effectively means helping stabilise the system! Nevertheless, this situation might lead to wasting energy in form of curtailment.

Moreover, during the evening, when the sun goes down, the solar production dramatically drops and more expensive gas units need to be launched in order to stabilise the frequency on the system. The start-up process of gas-fired units can take up to few hours and is connected with additional costs, called start-up costs.

Why is it so?

The units have been designed to operate within specific technical capacities, called technical minima and nominal capacity. Hence, there is a need for a sufficient incentive in order to make the specific unit work and deliver power to the system.

Different energy mixes influence the prices on different markets – Poland has the highest volatility, driven by low-efficiency coal units, then Germany – due to start-up costs, and then France, driven by insufficient flexibility of nuclear fleet.

Germany produced 57.1% of electricity from renewables last year. Given the intermittency of the renewable energy sources (sun, unfortunately, does not always shine and wind does not always blow) and pace of RES build-out the situation is getting more complicated with the saturation of the market. Moreover, this saturation cannot be easily dealt with using interconnectors with other countries (especially those having higher spot market prices, like Poland), due to the fact that the current weather across the border is usually not very different to the one in Germany and that the interconectors’ capacity is not sufficient.

What could help to offset the generation, would be additional demand. Nevertheless, industry is not flexible enough to help to a satisfactory extent in this case, while hydro pumped storage units cannot be built everywhere. The promising technology is battery energy storage systems, however, their current capacity is far from saving the system from extreme volatility.

Other countries have it worse…both ways

The heatwave that deprived 10 million people of electricity across Balkans caused a substantial increase of electricity prices. On the 17th of July, at 9pm, Hungarian day-ahead prices reached the level of 891 EUR/MWh. The situation was very similar across the region (especially in Romania and Bulgaria). All of the countries does not have enough flexible generation in the system and are far away from the biggest energy storage “facilities” of Europe – Alps and Scandinavian mountains.

On the other hand, Finland’s prices were -0.03 EUR/MWH. Reasons? The same as for Hungary and Balkan Peninsula countries – deficiency of interconnection capacity resulted in energy oversupply. Moreover, the wind was unexpectedly high then. This situation creates a risk for the investors in renewables, operating on merchant basis.

What may impact the prices on the balancing market in the future?

Without enough electricity demand and electricity grid build-out, we might be doomed to curtailment of existing RES installations, worse business cases for RES investors and slower pace of economies decarbonisation. And this, in effect, will result in prolonged extreme weather events, not only heatwaves.