Electricity prices are crashing and have set new record lows. The wholesale electricity market, where utilities and traders buy and sell the energy that will be consumed the next day, has fallen so far that several hours each day over an entire week have shown prices at zero euros per megawatt hour, something not seen in a decade.
The average daily price of electricity in the market, which serves as the fundamental reference for setting the regulated tariff that about eight million households use, has been hitting rock-bottom in recent days. According to provisional data from the Iberian Electricity Market Operator (OMIE), the daily average price for Friday, March 1, will be 2.01 euros per megawatt hour (MWh). In the previous days, the daily price ranged between 3 and 9 euros per MWh.
The wholesale electricity market, also known as the pool, assigns a different price to each hour of the day based on the electricity demand and the cost of the generation technologies in use at that moment. Prices are set by a marginalist system, whereby the last and most expensive technology needed to cover demand determines the price for all the other hours of the day.
Some generation technologies called inframarginal (renewables, nuclear, and hydro) enter the market at zero price, so when production from these sources is enough to cover the forecast consumption, the quote stays at zero euros. The main reason for the current price collapses is the combination of a very strong expansion of renewable energy and a drop in electricity demand.
Plunge in electricity prices
The intense trend in recent days shows that. In the last seven days, several hours each day have carried zero prices. The electricity market had not shown zero quotes for seven consecutive days since February 2014, exactly ten years ago. Over the past decade, the highest number of consecutive zero-price days was last November, but then it lasted only three consecutive days, according to a data-based analysis of the pool by energy consultant Francisco Valverde.
Moments of the day when zero-price levels occur are also undergoing deep shifts. Traditionally, the lowest prices clustered at night due to lower business activity and reduced energy use, but now they are happening more often during the peak daylight hours, driven by the increased solar photovoltaic generation and a boom in self-consumption that shapes price formation.
Recent weeks have seen zero-euro hours mostly around midday and early afternoon. In the last seven days alone, there have been 37 hours with zero quotes and 43 zero-price hours so far this year. Compare that to 109 zero-hour occurrences in all of 2023, the year with the most episodes since 2014.
Back in 2022, there were only four zero-price hours, all concentrated on New Year’s Eve early hours. Prior to that stretch, nearly a decade had passed without a single zero-hour in the market. To find previous periods with zero euros, one has to go back to 2014, when 177 hours were recorded across the year.
The hardest-hit period of the energy crisis saw the market spike to record prices and extreme volatility, amplified by the economic impact of Russia’s invasion of Ukraine. For months, prices surged and hit historic highs, with some daily hours exceeding 500 euros per MWh (and some hours above 700 euros per MWh). While prices have recently moderated from those peaks, the market has swung to more frequent zero-price instances.
No free electricity
That the market falls to zero euros does not mean consumers receive free electricity on their bills. The wholesale market’s evolution directly affects only the roughly eight million customers on the regulated tariff, known as the price voluntary for the small consumer (PVPC), and its impact is being dampened by a government reform intended to stabilize bills. Additionally, energy cost is just one component of a customer’s overall bill, whether on a regulated tariff or a market-based tariff set by energy companies in the free market.
Besides the energy component, the bill includes specific subsidies fixed by the government to fund renewables, charges for insular territories, or the system’s debt, and the access tolls established by the National Commission on Markets and Competition (CNMC) to fund the costs of electricity networks for transmission and distribution. The energy price can be zero, but customers still pay the rest of the bill’s components.