The energy crisis has brought the workings of the electricity market into everyday homes. Just like monthly GDP or inflation figures, since mid-2021 and even more after Russia’s invasion of Ukraine, the average daily price of the so-called Iberian pool has appeared on television news, along with the cheapest and most expensive hours of each day. That will change next year, when the price is set every 15 minutes instead of every hour. In practical terms, this means moving from 24 prices a day to 96.
The change follows a European move to harmonize the Iberian electric system with the rest of the continent, while also aiming to provide a price that better reflects reality. Yolanda Cuéllar, the Operations Director of the Iberian Market Operator (OMIE), spoke about this in a forum organized by the Renewable Energy Business Association (AEE). In simple terms, electricity will become cheaper in a system with a high share of renewables, because the new structure helps manage the uncertainty tied to these technologies more effectively.
Generators and traders negotiate the sale and purchase of electricity in a daily auction held for the following day. Right now, the trading periods are one hour long, but demand and generation are not flat over that hour; they rise and fall in peaks and valleys. Still, a single average is applied to the whole period, which creates gaps between the market result and actual conditions.
The new mechanism aims to reduce those gaps by trading in 15-minute intervals. A shorter window gives market participants more flexibility to tailor their bids to the true conditions, increasing the value of the trades and cutting penalties for deviations. This matters especially with the growing development of renewable generation, whose output is far harder to predict, according to a report from the International Renewable Energy Agency (IRENA).
Reducing the time window and bringing the settlement closer to real delivery time helps system operators, namely OMIE and REE, forecast operations with greater accuracy. This reduces the extra costs caused by the mismatch between supply and demand in real time, IRENA notes in its assessment.
The change will begin this March in a testing phase, with the objective of launching in the early months of 2025, Cuéllar explained. The adaptation will be carried out in parallel by OMIE and Red Eléctrica, according to a January resolution from the Energy Secretariat. The challenge is substantial because OMIE handles around 500,000 offers on a daily basis today; with 15-minute periods, that number could rise to about 2 million offers, Cuéllar says.
OMIE plans to start a regional testing period with system operators from March through May, followed by further tests that agents can begin in the second half of June 2024 and continue until the market goes live, as outlined in the latest market report. Red Eléctrica will also begin testing on March 1, according to the Energy Secretariat’s January 25 resolution.
European integration
In 1998, a year after the liberalization of the sector, Spain launched its electricity market, with Portugal joining in 2007. Seven years later, the market began to be part of the European framework through ongoing integration. A connected and sufficiently integrated system reduces price volatility and stabilizes the market because renewable generation may be low in one area while demand is high, enabling imports of renewable energy from regions with different supply and demand patterns (Bruegel think tank).
A well-integrated market allows for cheaper electricity prices and greater reliability. When a region has abundant renewables, imports can balance shortages elsewhere, reducing the need for expensive back-up capacity or sudden price spikes. It also fosters competition by preventing a single country from distorting the market to favor its own electric consumers (Bruegel analysis).
For example, a solar panel in Spain can generate more electricity than one in Finland, and a Polish wind turbine can outperform one in Italy. Consumers would save by locating the best-suited installations in windier and sunnier areas. At the same time, integration strengthens reliability by reducing the risk of outages and lowers the need for large reserves, especially during periods of low renewable availability.
Overall, greater interconnection also promotes competition, avoiding regulatory distortions that benefit certain electricity users over others. Through this evolving European framework, the electricity market seeks to balance affordability, reliability, and sustainability across borders.