The Bank of Spain a very timely report on the Spanish electricity market. Its publication coincides precisely with a new historical maximum of the average price of electricity in the wholesale market, which will touch another record this Wednesday for the third consecutive day, thus surpassing the record reached this Tuesday of 111.88 euros.
To get an idea of what this change means, last year at this time, the average price was 39.3 euros, so the increase is 190%, that is, the price of this Wednesday will almost triple the registered exactly one year ago, according to OMIE data.
Why is the light so high?
The Bank of Spain estimates that around 70% of the sharp rise in wholesale electricity prices in the first half of the year is due to the rise in CO2 emission rights (they are becoming more expensive by ) and the prices of gas, a material used by combined cycle plants.
Daily evolution of emission rights
In turn, the institution attributes nearly a third of the increase in the harmonized year-on-year CPI for Spain in the first half of the year to the higher cost of electricity, an impact much higher than that recorded in the euro area and in its main economies, where the evolution of wholesale electricity prices has been similar to the Spanish.
Increased pass-through to retailers
According to the Bank of Spain, the explanation for these differences could lie in the system for setting retail electricity prices in other European markets with respect to the Spanish methodology.
After recalling that wholesale electricity prices almost doubled in the first half of the year, the Bank of Spain attributes nearly 20% of this increase to the increase in CO2 emission rights observed in the same period, the effect of which has a direct impact on the costs of generating electricity through technologies that use fossil fuels.
However, the institution stresses that most of the rise in wholesale electricity prices, approximately half, is due to the increase in gas prices in the same period. Taking the price index for this raw material in the Iberian market as a reference, it would have translated into a rebound of around 20.9 euros/MWh in the wholesale price of electricity between December 2020 and June 2021.
“The increase in CO2 emission permits would explain a fifth of the increase (in wholesale electricity prices), while higher gas prices would represent half of it, specifically, 19.6 and 50.3 points percentages, respectively,” the agency points out in an article in which it analyzes the role of CO2 emission rights and gas prices in the rebound in electricity prices between December 2020 and June 2021.
The production tax
Additionally, the entity recalls, companies usually transfer, to a greater or lesser extent, to the price offered in the wholesale market the tax on the value of the production of electrical energy, which is levied at 7% on the value of the generation of all the central ones. Given the increase in the tax base, the Bank of Spain calculates that up to 6.9 points of the increase in electricity prices in the first half could be explained by the impact of this tax.
In his analysis, the body that governs Pablo Hernández de Cos explains that the lowest prices are those offered by nuclear, hydraulic, wind and solar power plants, while the highest prices and, therefore, satisfy the demand residual, are those offered by adjustable hydraulic power plants and thermal power plants based on fossil fuels.
We still need the gas
“Despite the strong increase in generation from renewable sources, it is still necessary to frequently resort to fossil fuel power plants, so these generators tend to exert some upward pressure on the market settlement price,” he points out. .
Throughout 2019 and early 2020, the wholesale price of electricity showed a downward trend due to the increase in generation with renewable energy sources and, in part, due to lower gas prices.
The Bank of Spain points out that the pandemic temporarily led to additional declines in prices, although these recovered quickly, “possibly due to the relatively low incidence of the crisis on industrial branches, which are very intensive in electrical energy.”
With the beginning of 2021, the arrival of the Filomena storm temporarily pushed wholesale electricity prices to very high levels, although in February, the institution recalls, “there was a rapid reversal as a result of high generation by hydroelectric plants and the validity of atmospheric conditions that favored an increase in the production of wind power plants”.
a glimpse into the past
However, the Bank of Spain warns that, compared to historical patterns, “the average price of electricity between April and June of this year has been uniquely high.”
“Usually, electricity is cheaper in the spring months as a result of the confluence of different factors. On the supply side, the production of hydroelectric plants is greater at that time of year, since so is the volume of water stored in the reservoirs. In addition, the demand tends to decrease during this period for seasonal reasons,” he maintains.
Thus, in his opinion, the “atypical” rise in electricity prices in the spring of this year is due, in large part, to the upward pressure that combined cycle technology is exerting on daily matching prices.
On the one hand, he explains, this is due, in turn, to the significant increase in the price of gas, a raw material used by these plants to generate energy, which, in part, would be related to the increase in Asian demand for this hydrocarbon.
But, in addition, on the other hand, the Bank of Spain affirms that the increase in the price of greenhouse gas emission rights that is associated with the generation of electricity in combined cycle plants has had a “significant” impact on the prices of production with this technology.
All of this would have had repercussions on prices in the retail market, so that the rise in electricity prices in the first six months of the year would have contributed almost 30% to the rise of three percentage points in general inflation.
higher volatility
According to the institution, Spain shows “a higher volatility” than the main economies of the euro area in the final price of electricity borne by the domestic consumer.
“There seems to be a certain tension between the level of prices supported by the consumer and the uncertainty regarding the volatility of said price,” the entity points out, adding that, although flat rates would eliminate uncertainty regarding possible changes in prices, they would incorporate a premium for risk elimination that would be reflected in higher prices.
On the contrary, he explains, dynamic rates offer lower prices in exchange for passing on the volatility of the final price to be paid to the consumer.
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