Prices in the European light sector climbed through August, with the wholesale electricity market showing a stair-step rise in recent days and reaching the highest levels seen in half a year. The pool, the market where energy companies, distributors, and traders buy and sell the energy needed for the next day, has been nudging upward as demand grows and supply conditions tighten across the Iberian Peninsula. On Tuesday, the average price per megawatt hour for electricity scheduled for consumption on Wednesday stood at 134.94 euros, a provisional figure reported by the Iberian Energy Market Operator. That level marks the peak since early March. Within the day, the highest price for Wednesday is expected to occur between 21:00 and 22:00 at about 180.34 euros per MWh, while the lowest price is anticipated between 04:00 and 05:00, with recent lows around 111.12 euros per MWh. The pool has not yet hit the extraordinary highs seen during the worst moments of last year’s energy crisis, when prices briefly surged above 500 euros per MWh, but steady increases continue due to several contributing factors. A larger share of gas-fired plants meeting electricity demand as overall consumption recovers, weaker wind output during a new heat spell, and reduced hydroelectric generation due to drought are all weighing on prices. According to analyst Francisco Valverde of Menta Energía, the price dynamics are driven by several pressures. The persistence of the heat wave, combined with workers returning from holidays, raises electricity use. Gas prices and carbon allowances have risen, and wind generation has slowed, prompting gas-fired plants to produce more. The thermal gap in the Spanish market remains significant enough to pull prices higher when gas costs rise, Valverde notes, even as cheaper renewable generation mitigates some of the impact.
gas rise
A fresh heat wave has pushed up electricity demand as air conditioning use surges. Red Eléctrica de España, the system operator, has accelerated the deployment of gas-fired plants, which now account for about a fifth of total summer production, while nuclear energy remains the largest single source of output. Gas-fired generation has emerged as a central energy source, contributing roughly 25 to 30 percent of total national production. This shift aligns with higher natural gas market prices, which climbed from around 25 euros per MWh at the start of the summer to about 40 euros per MWh. CO2 emission costs have also risen, approaching 90 euros per tonne. The market is reasserting the role of price caps and market design. Spain relies on the Iberian price cap to limit gas costs used for power generation and prevent gas prices from pushing up the entire system. The cap is intended to shield other generation technologies from spikes in gas costs. In practice, this mechanism has been inactive for six months because the Mibgas gas market price sits below the cap. To reactivate the gas market and trigger movement again, the August price would need to exceed 60 euros per MWh, analysts say.
This is how the electricity market works
The wholesale electricity market uses a marginal pricing approach that sets the price for all hours based on the most expensive technology needed to meet demand. When gas prices and CO2 costs rise, electricity prices follow, as gas plants are pushed to supply more. At the same time, some generation technologies known as inframarginal renewables, nuclear, and hydropower can enter the market at zero price, so if enough of these energies are available to cover expected consumption, prices can stay at zero for stretches. Water and wind contributions can keep prices very low for long periods even when other generators push costs higher. The evolution of the wholesale price directly affects how households are billed under the regulated tariff known as the price on demand for small consumers. In addition to the pool price, charges related to compensations paid to gas plants arise when the Iberian mechanism is active, though that adjustment is currently zero as the mechanism is not in effect. The government has approved a reform to reduce volatility by linking price formation not only to the daily market but also to longer-term markets. Set to take effect in 2024, the reform increases the role of long-term market development in determining the annual final price and aims to stabilize volatility across price signals for both consumers and generators. The changes reflect ongoing efforts to balance supply, demand, and the financial risk inherent in energy markets across Europe.