Europe’s negative price trend could continue until summer

Several consecutive days of low or negative prices are typical in spring. Negative price situations are also common in the summer, but are relatively more isolated on weekends, public holidays, and, in some countries, during vacation periods, explained Spanish energy consultancy AleaSoft. It added that the summer of 2024 could be slightly different.

“This year's situation with a higher contribution of solar PV will mean that the number of hours with negative prices in summer will be higher than in previous years, but we do not foresee a situation similar to that of this spring,” Oriol Saltó i Bauzà, chief data scientist at AleaSoft, told pv magazine. 

Negative prices often occur in the spring because of low demand typical of non-extreme temperature situations, and high production from hydropower, wind, and solar. This year, hydropower is in full swing due to statistically normal precipitations in the winter and spring after several years of drought.

“In summer, several of these factors are not present. On the one hand, demand is much higher, except on weekends and holidays, and there is much less wind and hydroelectric power,” added Saltó i Bauzà. “It is true that solar photovoltaic is higher than in spring, but on its own, it is not yet capable of reducing the thermal gap sufficiently to have negative prices every day.”

But not everybody agrees. According to SolarPower Europe, the trend will likely continue into the summer.

“We can expect the phenomenon of negative prices to intensify this coming summer, especially in markets with increasing penetration of renewable electricity into the grid, such as Spain, Germany and the Netherlands,” Simon Dupond, policy adviser at SolarPower Europe, told pv magazine.

According to the French national authorities, electricity demand is systematically lower when solar panels are more productive. This tends to lead to more supply and demand imbalances, but it still heavily depends on local electricity systems.

In short, the peculiarities of each country's energy system will define whether the negative price phenomenon becomes more or less common in the summer, with respect to the spring. It is also reasonable to think that the increase in air conditioning in northern markets could also change consumption profiles in the summer ahead.

Battery options

Saltó i Bauzà, who is also head of data analysis and modeling at AleaSoft, said that energy storage systems, the production of green hydrogen, rising electricity demand, and expanding international interconnection capacity will significantly reduce negative prices and the curtailment of renewable energy. He said bad management and poor energy planning are the structural reasons for negative prices. 

“Most government efforts have focused on the development of renewable energies, ignoring the fact that both the increase in demand, storage capacity, and green hydrogen should grow in tandem,” said Saltó i Bauzà. “The fall in demand during the energy price crisis of recent years has made this lack of foresight manifest itself prematurely.”

Spain's planned capacity market, an important element to ensure the profitability of batteries, has been in draft form for more than two years. The market is expected to be launched later this year, with the first auctions set for 2025. 

“The Spanish NECP expects a battery capacity of 9 GW by 2030, and according to our collaborators, the appetite for investment makes this target likely to be exceeded,” said Saltó i Bauzà. “This would be very good news in order to avoid negative prices and renewable energy curtailments.”

Given the rapid adoption of storage solutions across the continent, the next two years could lead the highest occurrence of negative prices. 

“More than complicated, 2024 and 2025 will be uncertain, because it is not clear how each of the key factors will evolve, especially the recovery of the demand,” added Saltó i Bauzà. 

The situation should change with more demand and more storage capacity, but negative prices are here to stay. 

“Negative prices will not disappear; the rise of solar and wind energy will tend to increase price volatility, while energy storage will tend to reduce it,” said Saltó i Bauzà. “In the very long term, volatility is expected to decrease on average, but negative prices are very unlikely to disappear completely, although they will occur less frequently.”

Dupond said that European countries should massively scale up battery energy storage system (BESS) technologies and provide incentives to investors by allowing the best business cases for batteries. He said they should also design support schemes that encourage the addition of flexibility assets in new and existing solar plants.

“Europe desperately needs a more supportive political framework for storage, with less fragmentation regarding the various technical requirements like grid connection agreements, permitting rules, asset colocation rules and many more,” said Dupond.

Key consequences

Negative prices have negative consequences on the business case for solar projects. Saltó i Bauzà said he expects prices to show an increase in volatility in the short and medium term, with a “slight” reduction in volatility over the long term. 

In the future, average prices are not expected to be lower than historical averages, except for extreme periods.

“Depending on the country, prices will be less dependent on gas prices, but should be sufficient to make investments in new installations profitable in the long term,” said Saltó i Bauzà.

According to Dupond, negative prices should not be underestimated, as they can affect the investment case for solar energy.

“Less revenues for solar plants risk diminishing investor certainty, and at the same time makes corporate power purchase agreements (CPPAs) less attractive to corporate electricity consumers, especially if electricity prices are following a duck curve,” said Dupond. “This leads to less private financial resources available to build new solar plants and automatically slows down the energy transition. If frameworks to deploy flexibility solutions are not set up in a timely manner, the slowdown of renewable energy capacity additions will be more pronounced in those countries with the highest renewable energy penetration shares and the lowest flexibility.”

He also said European authorities should set storage targets, systematically include storage in renewable energy auctions, and allow battery storage devices to operate in all electricity markets.

“Green hydrogen is not yet viable in Spain and Portugal. The development of the necessary technology and infrastructures takes time and significant investment,” said Dupond. “It is something that has not been prioritized initially. In the next years, it will be key to seeing how green hydrogen takes off. But, while in the case of batteries we are talking about years, in the case of green hydrogen, we would be talking about lustrums or decades.”

Saltó i Bauzà SAID that despite increased volatility, countries with higher renewable capacity will become more attractive for the industry. 

“The decarbonization of industry will undoubtedly lead to relocation in regions with more competitive energy prices,” added Saltó i Bauzà. “Southern European regions with abundant solar power and northern European regions with abundant hydropower will be poles of attraction for industry in search of renewable energy and competitive prices.”

According to Dupond, green hydrogen could become more competitive already next decade.

“Electrolyzers will become an important flexibility contributor in the coming decade, as their business case improves thanks to economies of scale and policy support,” he said.

Alternative pathways

Dupond said that time-of-use tariffs and other forms of dynamic pricing are effective ways to address supply and demand imbalances, while incentivizing smart electrification business models.

“At present, however, the availability of such tariffs is unevenly distributed across the continent. While generally available in the Nordics and the UK, dynamic pricing is often not an option in Central and Southern Europe,” he said. 

When it comes to demand-side flexibility, the European Union is making progress with the creation of EU-level rules for markets to use local and demand-side flexibility, within a network code on demand response.

“Yet, there is much more than markets to mobilise demand-response, grid operators can incentivize self-consumption or use the grid tariff. But we clearly haven’t used the potential at its fullest,” Dupond said. “A report published in December 2023 by ACER shows that distribution system operators (DSO) do not have price signals to unlock flexibility. Market-based redispatching is only implemented in France, the Netherlands, Spain, and Sweden, while DSOs in eleven member states use some kind of non-market-based measure to solve congestions. In the remaining member states the DSOs do not perform a congestion management measure other than requesting the TSO to solve the congestion or network reinforcement and expansion.”

He said other instruments also limit market price volatility, such as contracts for difference.

“While we need to make sure such contracts encourage solar plant stopping production when prices are negative in order not to worsen negative prices, it will equally be necessary to keep compensating renewable plants for being available and not create remuneration uncertainty,” said Dupond. “Such features are important to avoid the produce-and-forget rationale of traditional contracts- leading to price cannibalisation, while still protecting the investment case of solar energy.”

Power purchase agreements are then other instruments to efficiently stabilize electricity prices, according to experts.