OMIE Spot Prices 2015? Unveiling the reasons to that

Before you begin, we recommend to read our previous M•Blog on the power pool of the peninsula to better understand why prices of 2015 were higher. Except September and October, other months have been higher than 2014 and above the average price of last 3 years. Moreover, January, June, July, August, November and December 2015 have been the most expensive months of history.

To do this, we start by analysing the behaviour of demand and we will continue with the composition of the offer that has formed the energy mix in 2015.

On the demand side we include an increase of 1.9% over the previous year according to the REE report. It is the first increase in four years, mainly supported by:

– A gradual recovery of economic activity.

– A heat wave in the third quarter which increased the consumption caused by cooling system.

While the demand increased, the power technologies capacity, that are price taker, remained the same as in 2014. We recall that the technologies that are price taker (they offer their electricity at 0 € / MWh) are mainly the generators that cannot stop production. As they will produce electricity anyway, the offer to 0 € / MWh ensuring that sell all. Clear examples of price taker technologies are: nuclear power, wind and solar farm installation.

Therefore, the daily market price in 2015 was under double pressure to go up with more demand and the same production capacity regarding price taker generators. Here are the changes in the installed power technologies, which have been nil or insignificant mostly:

Comparing to 2014, it shows that the renewable generation in 2015 decreased by 5.9%. Specifically, there was a significant decline in hydro output of 28% and also, but to a lesser extent, wind production by 5%. The absence of water and wind was covered by a significant rise in coal followed, but far, with gas:

The share of wind farm production ebbed at year’s end because there was no wind blowing. Hydro participation absence was notable throughout all the year. As a result, the second half was hit hardest, failing not only water but also wind.

This difference between the contribution of wind and hydro over the year relates to the fact that production water depends not only on whether or not it is raining at the time, but whether or not there it was raining before, referring to the level of water reserves.

In Spain there is a reservoir capacity of 55,977 hm3, of which 40% is hydroelectric dams. The filling level of such reservoirs varies throughout the year, and in turn, also vary the hydroelectric reservoirs. Hydroelectric reserves is a term that refers to the amount of electricity that a basin produce with completely emptying its l water reserve at any given time, without natural contributions (without assuming it was raining at that same moment). As it was shown in the installed capacity by technology table of REE, all the hydroelectric plants represent a total of 20,774 MW; the third technology with more capacity installed in the peninsula.

In late 2014, the filling of the reservoirs was 64% resulting in a hydropower reserves of 11,826 GWh. These indicators augur a better start to the hydraulic contribution in the period of 2015 than it was in 2014 (at the end of 2013 the filling was 58%, representing an electricity production capacity of 10,667 GWh). However, this beginning was overshadowed by a dry weather that lowered water reservoirs continuously, ending the year filled with a 48.1%, meaning a capacity production of 8,912 GWh.

As for coal, one of the less clean and expensive energy sources, it became the unexpected protagonist of 2015, followed by far by gas. The role of coal in electricity generation was more important from June, with a contribution throughout the remaining months of 22% at least. Coal use was favoured not only by the lack of water and wind but also by:

– The heat wave that hit the summer, on July. The average temperatures were higher than the previous year with 26.2 ° C compared to 23.5 ° C July 2014. The cooling consumption shot up no less than 11.2% over the same month last year (in May, 4% fixed holidays and temperatures). The increased demand led to greater upward pressure on prices.

– The increased use of coal versus gas, mainly by low international prices for this raw material. Reducing the use of coal of two large -United States by the success of fracking and China by the need to reduce pollution- have caused prices to fall to levels not seen since 13 years ago. Price levels that offset the carbon price which it is not having enough force to induce power companies to opt for cleaner production modes.

Highlight the increase of more than 22% of coal use in Spain in 2015 coincided with the end of the incentives that the state granted to power plants that burn domestic coal and thus support the Spanish mining. From January 1, 2015 there were no support for burning domestic coal (more expensive than imported coal). However, during the month of May 2015, the Ministry of Industry established the obligation to increase domestic coal consumption of 3.6 million tons in 2014 to 6,000,000 in 2015.

In short, a lack of wind, and especially a lack of hydro production, have given the way to coal, a cheaper commodity. We can say that 2015 was a clear slowdown in the decarbonisation of the electricity system and the fight against climate change.

According to the CNMC, it is expected that electricity production in coal power plants down between 23% and 40%, driven by the new environmental regulation of these plants. The entry into force of the directive on large combustion plants will require them to reduce their emissions of nitrogen oxides (NOx) and particles between 2016 and 2020, which may involve such large investments that in some cases can lead to the closure of the central. Hopefully the new regulations on energy efficiency and environmental achieve discourage the use of coal.

Marta Merodio | Energy Consultant