A new peer-reviewed study on the Spanish electricity market finds that physical bilateral contracts (PBC) of wind and solar power increase wholesale energy prices during phases of high penetration, reversing their price-suppressing effect during earlier periods.
A new study published in Utilities policy finds that physical renewable energy contracts can reverse the price-lowering effect of wind and solar energy on day-ahead markets during periods of high penetration.
The paper, “Long-term and spot electricity markets: the technology link in Spain,” by Daniel Davi-Arderius from e-Distribución Redes Digitales and Tooraj Jamasb from Copenhagen Business School, shows that the effect depends on the regime, with renewable contracts shifting towards a positive impact on spot prices during the normalization phase.
The researchers analyzed 52,260 hourly observations of the Spanish day-ahead electricity market over 11 structural periods from January 2019 to December 2024, covering the pre-pandemic baseline, the pandemic demand shock, the post-Ukrainian supply shock, the Iberian gas exceptional tariff and the subsequent normalization phase.
Davi-Arderius and Jamasb fitted an AR(1,24) autoregressive moving average model with generalized autoregressive conditional heteroscedasticity (GARCH) and threshold ARCH extensions to model average price effects and conditional variance over each period separately.
PBC are over-the-counter off-take agreements – including vertical intra-group contracts, independent retailer hedges and physical power purchase agreements – where nominated volumes are netted from the day-ahead market before being cleared. Each megawatt traded under a PBC is a megawatt of generation and demand removed from the daily pool. The researchers said that PBC regulated between around 40% and 47% of total Spanish electricity demand for most of the study period, with the share declining in 2024 following the expiry of the Iberian exemption mechanism that had created financial incentives to migrate demand to bilateral contracts.
They said PBC’s effect on spot prices is technology dependent and changes with market conditions. During supply and demand shocks – for example the pandemic lockdowns and the post-Ukrainian crisis – the overall PBC reduced spot prices.
The direction reversed during the Iberian exception and continued in the normalization phase: total PBC increased spot prices by €0.672/MWh (about $0.78/MWh) per additional percentage point of demand under PBC in P8 and by €1.402/MWh in P9, the authors found, and the effect remained positive at €0.586/MWh in P10 and € 0.596/MWh in P11 during normalization.
Technology split
Hydropower PBC consistently lowered day-ahead spot prices in all eleven periods, peaking at -4.631€/MWh per percentage point during the Iberian exception, the researchers said. They suggested that this reflects the dispatchability of hydropower: placing hydropower in long-term contracts reduces the scope for strategic bidding behavior in the spot market.
PBC from wind and PV yielded different results. Wind PBC increased spot prices in all periods except during the pandemic, the authors found. Solar PBC reduced prices during the crisis phases from 2020 to 2022, but shifted to a positive price impact during the normalization phase, which coincided with rapid capacity expansion – contributing €1.676/MWh per percentage point in P10 and €0.292/MWh in P11, the researchers said. Solar’s installed capacity was 5 GW in P1 and had reached 39.7 GW in P11.
The researchers suggested several explanatory factors. As more renewable generation takes place under physical contracts, the day-ahead market loses the low marginal cost volume that would otherwise depress clearing prices. The remaining spot market, they suggest, then makes room for more expensive, available technologies: coal generation contributed €19.27/MWh and combined cycle €7.55/MWh to spot prices in P9, the paper reports. The variable renewable generation captured under PBC also creates additional exposure: when wind disappears or solar generation declines, the shortfall must be covered by expensive marginal units in the day-ahead market, the authors suggest.
In terms of volatility, the PBC increased the conditional variance of spot prices during the pre-pandemic period, the Iberian exception and the normalization phase, while reducing volatility during the pandemic lockdown and parts of the post-Ukrainian crisis, the authors find. Solar PBC showed a positive and significant effect on volatility during the normalization phase, consistent with the growing variance of bilateral PV contract volumes as installed capacity grew.
Davi-Arderius and Jamasb noted that Spain, Germany, France and the Nordic countries all operate self-dispatch market models in which physical bilateral contracts can be netted from the day-ahead auction before being cleared. As a policy response, the paper recommends promoting financial Contracts for Difference (CfDs) over physical PBC for renewable energy hedging.
Financial CfDs require producers to participate in the day-ahead market and physically ship their production – maintaining the merit-order dampening effect while hedging financial exposure, the researchers argued. They also recommend that regulators assess the spot market implications of any policy change affecting PBC volumes before implementation.
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