The schizophrenia of the electricity market fuels doubts about its operation

The schizophrenia of the electricity market fuels doubts about its operation

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The schizophrenia of the electricity market fuels doubts about its operation

In 2007, the rise in the price of the corn tortilla brought thousands of people to the streets of Mexico and forced the government to sign an agreement to stabilize it. In 2013, the increase in the price of the public transport ticket generated violent riots in Brazil. And in 2018, the yellow vests wreaked havoc in France for months as fuel prices rose. When a good or service that is used daily rises in price, the reactions can become visceral. And in Spain the price of electricity is experiencing an attack of schizophrenia. In an escalation for weeks, the rates for hourly sections leave staggering differences. Last Sunday at four in the afternoon he marked a price of 7 euros per megawatt; two days later, on Tuesday at eight o’clock in the morning it reached the all-time high with a price of 111 euros. For this reason, the rise in what is paid for electricity in Spain has become a politically explosive issue. And unlike other controversies, the allocation of blame is blurred: some point to the Government – which has decided to lower the taxation of energy – others accuse electricity companies of multiplying their income at the expense of citizens’ pockets, and the rest it points to the dynamics of the market itself, with the price of gas soaring and carbon dioxide emission rights becoming more expensive.

A market problem?

The prices in the daily market are set through a matching process in which the electricity traders and generators launch their offers for each hour of the following day: the cheapest sources – nuclear and renewable – are the first to enter; the most expensive, such as the combined cycle, are the last. But finally, all the plants end up receiving the price of the last offer that covers the demand, the most expensive, regardless of their production costs. This is what is called the marginalist system, whereby the last energy to enter the system sets the price for the rest.

The system is not exclusive to Spain: it is used throughout the EU, but several experts consulted see room for improvement. Natalia Fabra,Professor of Economics at the Carlos III University of Madrid, explains that the electricity market is atypical compared to others. While in the case of audiovisual the dominant technology – be it VHS, DVD, Blu-Ray or streaming-, it usually displaces the others and prevails, in electricity there is an irremediable coexistence. “We would like everything to be hydraulic like in Norway, but there is a natural limitation. Then we have legal limitations on nuclear because we don’t want to have more. And renewables such as wind and photovoltaic are intermittent, they cannot be stored, so they do not guarantee supply when the wind is not blowing or the sun is shining ”.

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These barriers sometimes make it necessary for combined cycle plants to come into play to meet energy demand, and amid high gas prices and escalating CO₂ emission rights by Brussels’ target of Decarbonize the economy, the fact that the price paid to all generators is determined by the last megawatt (MWh) that enters the market, almost always coming from combined cycle plants, makes photovoltaic and wind energy more expensive or nuclear.

Fabra believes that the price matching system works well by including the cheapest energies first, but then it is not the most efficient. “There is no reason for us to pay all of them as the most expensive. We have to separate the cassation from the liquidation ”, he claims. And it uses a comparison similar to the one that The journalist of Cadena SER, Aimar Bretos has made famous, to illustrate. “It is as if we paid for pork sausages at the price of sirloin,” he says in reference to the extra income that electricity companies receive for energy as cheap as renewable, with hardly any maintenance costs, and that they depend on free natural factors to function.

Jorge Morales, spokesman for the Platform for a New Energy Model, shares this diagnosis. And he gives an example of the French case, which does not include its powerful system of nuclear power plants in the wholesale market, and where the percentage of energy that is traded in the volatile daily market is lower, prioritizing more long-term contracts instead. “The fact that there is a marginal price does not mean that all the plants have to charge that marginal price. It is not easy to see where the limit is between the freedom of company and the abuse of a dominant position to manipulate an essential market ”, he criticizes.

Morales regrets that in some auctions in which gas has been left out, the hydroelectric plant has taken its place, selling itself not based on its costs, which are very low, but at the price that would be if they were not there and the gas entered the system. Natalia Fabra is in favor, in those cases, of reviewing the public concessions of hydraulic installations. “The most scandalous thing is that they are producing that megawatt hour with a public resource that is water, they would have to pay us the value of what they are exploiting.”

Extreme volatility

It is difficult to find an asset with such a volatile price as electricity. Not even bitcoin oscillates that much. The changes this week are a good example: on Tuesday it reached 111.36 euros per megawatt / hour (MWh) in Spain, and for this Saturday a minimum of 73.49 euros is expected. Expanding the focus, on January 31 it came to only 1.42 euros, giving way to one of the months of February with the cheapest energy in recent years due to the impulse to wind power of several cyclogenesis and the thaw of the storm Filomena, who made the hydraulics cheap. Francisco Valverde, head of Renewables at Menta Energía, believes that it is not worth being critical of the system only at specific times. “Last year, when we were dealing with demolition prices, or in February, nobody said that the system was bad. It is the one that promotes more efficiency and more competitiveness. We have a series of generators fighting. If you launch an offer above, you do not get paid and you have to look for life, you can have problems, because it would mean not doing business or doing a worse one if they place it in another market ”.

Valverde recalls that price increases have been generalized in Europe, and that the United Kingdom and Italy tend to have more expensive prices than the Spanish. Although he admires cases like those of the Nordic countries, which he calls “aliens.” The mix of these countries, with a large presence of hydroelectric and nuclear, makes them much less dependent on gas or emission rights. “We are around 90 euros in July and they around 55 euros, there is a very big difference,” he explains.

Some of the large power companies are not only in the generation business, but also in direct marketing to customers. But there are also independent operators such as Iner Energía, based in Albacete and with a portfolio of 11,000 clients. Pedro Monasor, co-founder and trader of the company, explains that he usually buys about 100,000 euros a day in the market. Like her, there are hundreds of traders who go to the market every day to buy after calculating how much energy their customers will need. When making acquisitions, they advance the money before receiving it from their clients, “The rise in prices for us is a chore, it is not like for a large power generation company, it takes away liquidity from us.”

The price also depends on the demand. When it is scarce, it is easier to cover it with energy from cheaper renewable sources. But the use of others is still necessary, because they do not produce enough clean electricity. And despite all the investments underway, that moment may still be far off: Jorge Morales estimates that it may take Spain 15 years to reach a renewable mix.