Boosting futures markets and reducing the role of the spot market would make electricity prices more stable and guarantee the investment needed in renewable energy to meet 2030 targets.

WhatsApp Image 2021-05-06 at 10.07.41 Energy and environment

A PwC report published by the Naturgy Foundation analyses the best options for reforming wholesale electricity markets to address the mass integration of renewable energy while guaranteeing that consumers receive a quality service.

The document authors also support giving greater power to the system’s adjustment services, which would make it more flexible and allow for renewable technology, storage and energy demand management.

Promoting the futures market, which is aided by holding auctions, is needed to establish a stable price signal over time. This would benefit both renewable energy project promoters and consumers. This is one of the conclusions of the PwC report “The wholesale electricity markets and their adaptation to the energy transition” published by the Naturgy Foundation. The document recommends solutions to reform wholesale electricity markets to meet the challenge presented by the mass integration of renewable energy that is part of the energy transition.

The report is based on the premise that, “for all consumers to have a quality supply that meets levels of demand, the electricity system needs to guarantee three key factors: energy; power, so the expected amount of energy is supplied at each moment; and services, so that electricity reaches consumers securely and with high quality,” explained Oscar Barrero, leading partner of the Energy sector at PwC and one of the authors of the report.

The current Spanish electricity market is essentially based on conventional thermal power generation that is able to provide these three aspects (energy, power and services). In contrast, not all new renewable technologies are capable of offering all these factors at the same time, so it needs to create separate markets that can guarantee each aspect, generating efficient price signals to ensure solidity, flexibility and security. “This reform will make it possible to address the challenges of the energy transition and the intermittent nature of renewable energy generation, as well as to converge with the rest of Europe,” stated Barrero.

More futures markets and less spot markets

According to PwC, “Spain needs to have a liquid, far-reaching futures market, either through negotiating long-term power purchase agreements or boosting the current markets.” It believes that the spot market should take on “the role of a balancing market” and no longer be “the most important way of setting prices.”

Most European countries, unlike Spain, primarily trade electricity in futures markets, which helps to achieve greater price stability. In France, Germany and the United Kingdom, only 24%, 39% and 55% of total electricity demand in 2019 was traded on the spot market. “Spain should remove the obligation to trade electricity on the spot market because this decreases liquidity in the futures market,” explained Barrero.

The study also supports finding a balance between the PPA (power purchase agreement) market and renewable energy capacity auctions. “Auctions help to control the maximum installed renewable capacity, stabilise remuneration and reduce the risks linked to renewable energy plants,” continued Barrero. “However, an unbalanced auction design can make it difficult to develop futures markets, which prevents the increasing development of PPAs,” outlined Barrero, who also stated that “auctions should only be recommended at times of instability and low electricity prices.”

The authors believe that Spain should follow a series of European trends and recommend expanding the role of balancing markets even further, thereby accommodating new players such as “large-scale renewable energy generators, battery storage solutions and distributed energy resources such as energy demand management, small-scale battery storage and distributed renewable energy generation.”

It is also necessary to approve a market that guarantees a solid, flexible capacity that can meet demand peaks and ensures the electricity supply in light of the fluctuating nature of renewable energy generation.

According to the report, countries such as the United Kingdom, France, Germany and Italy already have operating capacity markets that allow technologies such as renewable energy, storage and energy demand to participate. Spain has now begun to take steps to achieve a similar situation, such as the recent public hearing by Ministry for the Ecological Transition to create a capacity market that promotes investment in storage and the solidity of the electricity system.

The experts back futures markets

A round table was held after the report was presented this morning, with the participation of representatives from the Ministry for the Ecological Transition (MITCO), OMEL REE and CNMC. They all agreed on the need to boost futures markets and further develop capacity and balancing markets to integrate the renewable energy that is being added to the system.

Manuel García Hernández, director general of Energy Policy and Mines at MITECO, explained that the regulator is faced with the challenge of the technology neutrality principle, “but no technology is general and comparable,” and he stressed the importance of being guided by efficiency and effectiveness criteria in this respect. García Hernández stated that it is necessary “to regulate new innovative business models but life is always one step ahead, which is why we need more flexible regulation models.”

In turn, Carmen Becerril, chair of OMEL, recalled that the concept of a marginalist market was one of the major features of the liberalisation process. “It has evolved, but it is also one of the essential tools for the energy transition process, with changes such as quarter-hourly market regulation and holding pan-European auctions,” she added. In terms of price volatility, Becerril confirmed that “it underscores transparent price formation in the market; another issue is to what extent the consumer can shoulder this volatility,” and she stated that “the antidote to volatility is finding solutions in futures markets.”

Tomás Domínguez, director of Operations at REE emphasised one of the future challenges of the system: “the renewable energy that is coming in will possibly have to keep on playing a greater role in balancing services, and capacity mechanisms are a key part.” “We need a powerful tool that can pair the solid, flexible power the system always needs with economic sustainability guarantees that mean the system can function securely,” as it has done to date, confirmed Domínguez.

In turn, Esther Espeja, deputy director of Derivative Markets at the CNMC, in her role as market supervisor, stated that, similarly to regulation, “supervision also has to be flexible to adapt to the new design of the markets. It’s a big challenge. We’ve moved from a local intraday market with auctions to a continuous market with the rest of Europe, plus artificial intelligence is being incorporated into market management.”