Last April 1, a negative price was recorded for the first time on the Spanish daily electricity market (OMIE). Specifically, -€0.01/MWh was recorded between 2pm and 5pm. However, at the time of writing this article, this situation has already been repeated for up to six more days during April, including setting a new low of -€0.02/MWh on April 6. With this fact I want to indicate that this is not an isolated case, but probably, if demand does not increase and the weather conditions of the last few days are repeated, we will see negative prices again with some ease. This fact should not catch us off guard, as experts in the energy sector such as Ramez Naam, Professor of Energy at Singularity University, had already anticipated that this could happen.

However, it is not the first time that negative electricity prices have been recorded in the Spanish electricity market. In the intraday markets (adjustment markets within the same day) and other secondary markets managed by the System Operator, this had already happened some time ago. Also other European countries such as Germany, France, Belgium or the Netherlands had already recorded negative prices on the wholesale market in the past (April 2020).

It should be noted that until May 2021 the wholesale price of the electricity market was limited between €0/MWh and €180/MWh, but in order to comply with the guidelines coming from Brussels, this limit is extended to the range -€500/MWh and +€3,000/MWh. Every time any of these countries that participate in the European price-fixing algorithm, called Euphemia, reach a price close to the maximum or minimum threshold, this is expanded. During the energy crisis as a result of the war in Ukraine, some European countries approached the maximum price limits, so currently the price range that the European wholesale market can reach is between -500 €/MWh and +4,000 € /MWh.

What is the reason for the negative price phenomenon?

First of all, it is necessary to emphasize that for some time now the wholesale electricity market has recorded prices at or very close to 0 €/MWh in many hours, especially in the solar ones. This occurs when two situations come together: high renewable generation and low demand.

These conditions were given on April 1. After the episode of rain caused by storm Nelson and with reservoirs with a lot of capacity, specifically those in the northern part of the country (not those in Catalonia), a wind and solar photovoltaic generation also quite high (with hydraulics, they assume 72.6% of the energy scheduled in the hours with a negative price), together with a low demand due to the mild temperatures in April and the Easter Monday holiday, caused that for the first time it was exceeded the €0/MWh barrier in the wholesale electricity market.

What implications does it have for generators and consumers of electricity?

As for electricity generation plants, on the one hand we have those that enter solely according to the price of the wholesale electricity market, these are the most affected when there are episodes of low prices. But on the other hand, many renewable generation plants have signed long-term energy delivery contracts with fixed prices, which are known as Power Purchase Agreements (PPAs), so that the price of the wholesale market does not affect them not influence their income. There are also facilities included in the Specific Remuneration Regime known as RECORE, which ensures remuneration for renewable production at a price set by the administration. Therefore, these also do not have a direct impact on the market price.

As for electricity consumers, the most benefited will be those who are in the free market with a rate indexed to the market, since those who have contracted fixed prices this fact does not affect them since they will always pay the price agreed with their marketer .

On the other hand, those in the regulated market will also benefit but not in the same way as those in the free market, due to the recent change in the regulated rate known as Precio Voluntario al Pequeño Consumidor or PVPC, which modified the calculation method so that part of the price was also indexed to the futures price market in order to give it greater stability.

Finally, it must be emphasized that the cost of the electricity bill does not depend solely on the price of the wholesale market, there are other concepts such as tolls and charges that must be added to the price of electricity, these are regulated by the state and have a weight important in the cost of the bill, so it is very difficult for the consumer to get charged for consuming energy.

Are negative prices here to stay?

It is difficult to give a firm answer, since the electricity market is influenced by several external variables, but as long as the demand is not electrified and the rate of increase in installed renewable power continues, it is very likely that episodes will continue to be repeated low prices especially on days of low demand. Even so, it must be said that for the moment the OMIP futures market maintains average price expectations of around €50/MWh for the coming years.

As we have seen, although these low prices are good news for consumers, specifically for indexed ones, it is not so good news for the renewable sector. Although many of these generators have already hedged to minimize their exposure to market prices, this trend of low prices does not encourage them to invest in renewables in the future.

So it is important to take a long-term view and consider that when the time comes for mass storage, greater electrification of demand, the electric vehicle and flexibility of demand, they will lead to doubling what is known in the sector as a duck curve, due to the similarity of the hourly price curve with this animal, and will favor the flattening of the price curve and the increase in demand.