Fundamentally conflicting objectives in the electricity spot market
The electricity spot market, once a haven for lucrative investments, is increasingly shaped by fundamental conflicts of interest. The energy transition, accelerated by the war in Ukraine combined with scattergun subsidisation of wind turbines and solar parks, is leading to unprecedented – and very expensive – conflicts of interest. But at whose cost?
Subsidies – from a ray of hope to an obstacle for the energy transition
Many of the wind turbines and solar panels in Europe have benefited from subsidies. These subsidies are often granted for every MWh fed into the electricity grid – sometimes even when there is a negative wholesale price. Combining the subsidies with the fact that wind and solar have very low operating costs (there are no fuel costs) means that the goal for many wind and solar asset owners is: produce, produce. The result is that electricity is fed into the grid whether there is demand for it or not. After all, the wind turbines and solar panels often depend more on subsidies than the spot price. The consequence of this situation is lower spot prices in spells of sunny and/or windy weather.
The electricity spot markets were created for short-term trading in electricity, usually for the next day. For each marketplace, the spot market gathers the submitted hourly bids from producers and arranges these in ascending order, and the hourly bids from consumers in descending order. The intersection point of the supply and demand curves determines the market clearing price, which each market player receives for this hour with a premium.
A look at the hourly wholesale prices of the Iberian electricity spot market OMIE illustrates the excesses of unconstrained electricity feed-in. Large parts of Iberia have an average spot price of zero and, depending on the regulations, the wholesale electricity market prices on some relevant market could even be negative – in other words, electricity consumers are paid to consume electricity!
All market players suffer from this cannibalisation effect. The solar and wind farm owners themselves, as the portion of their income dependent on the spot price reduces – whenever they are not in a subsidy scheme. For conventional power stations, which are essential when electricity production from solar and wind power is low, the number of profitable operating hours is constantly decreasing. Given the challenging economic conditions, many owners of conventional facilities may be considering early decommissioning, or move the power station to the capacity market where it helps to stabilise the electricity transmission grid.
Energy transition – the goals are getting out of reach
Investing in a power station is therefore becoming less profitable under existing electricity market regulations. This applies to new renewable facilities as well as conventional power stations. The situation is compounded by accelerated decommissioning of older conventional power stations in Europe. While we are currently confronted by significant price volatility, we could soon face insufficient power station output at peak times and, in future, rolling blackouts.
The “energy transition” envisaged after Fukujima cannot be attained with current electricity and energy policy. Investors are losing money; further investment in the electricity infrastructure is less attractive; supply security is struggling; and consumers are exposed to ever-growing price fluctuations.
European energy regulation needs to be more forward-looking to offer a solution to cannibalization. Without it, subsidies will soon become needed for all new power stations and climate targets will be further out of reach.
