How is the electricity market facing the second wave?

How is the electricity market facing the second wave?

Effect of COVID on the electricity market. Possible effects of a second wave.

The COVID pandemic caused a 10% -20% drop in electricity demand after the Government declared a State of Alarm. The combined effects of a reduction in electricity demand and the price of fundamentals (gas, oil, CO2) put pressure on the pool price (reaching the lowest monthly average price in April 2020, with € 17.6 / MWh).

This price drop has also been extended to the futures market, with the 2021 annual base load product trading below 40 euros / MWh in April. Given that buyers use these price signals to calculate the implicit savings of the PPA, in a context of low prices, they push down the price at which the possible PPAs are negotiated, which have seen their expectations of the sale price of the energy, especially in the period of lower prices during the second quarter.

The price of CO2 fell significantly between March and May, as did the price of gas, the latter reaching below € 5 / MWh (a drop of c.40%). And something similar can be said for oil , which hit rock bottom around the same time.

Currently there has been a complete recovery in the price of CO2, with a certain recovery also by oil and gas, which helps the pool’s average daily price to be above € 40 / MWh, with the average price expected to be of the next 4 following quarters is higher than € 45 / MWh and in 2021 it is above € 46 / MWh.

grafico
Pool evolution (daily average prices)

It can be seen that prices have risen considerably despite the fact that they are still relatively low compared to levels of other years, which shows that the low prices that have been seen this year will hardly be seen again. In fact, in recent days we are experiencing a significant increase in the price of energy in all European markets due to a combination of factors and from which we are relatively marginalized in the Iberian market thanks to our limited interconnection capacity with France.

Regarding the behavior of the market in the face of a new wave of infections, which seems increasingly likely, everything will depend to a large extent on the response that is given. In the event of a new confinement at the national level, the reduction in demand could provoke a response similar to the one we already had in the first wave, although less marked.

It should be borne in mind that at the end of the first quarter and the beginning of the second there is naturally a reduction in demand and an increase in renewable production (especially wind power) that aggravated the situation. This coupling of factors would not occur in a second wave, which would also no longer cause the same feeling of panic when faced with something totally unknown.

Proof of this is that, despite the obvious threat of a second wave, futures markets are maintaining reasonable price levels, demonstrating the industry’s confidence that market behavior will not be seriously affected in the future near.

In conclusion, the electricity sector, in general, and renewable energies, in particular, have been very resilient during the period of the pandemic, once the first moment of confusion had passed. Indeed, there are clear signs of recovery, as evidenced by the reactivation of investments in renewables or the recovery of raw material prices, and in the long term the models show a market equilibrium point similar to the projections obtained before the crisis , thanks also to the recovery in fuel prices. In addition, the European Commission has already placed renewables at the center of economic recovery, establishing stimulus packages to encourage them as an engine for recovery, job creation and consolidation of more efficient and resistant energy systems, which makes us optimistic looking to the future.

José Manuel Ventura
José Manuel Ventura
Energy Asset Manager

Industrial Engineer with experience in the electricity sector in general and in the electricity market in particular, both at a technical and economic level, with a high level of knowledge about the functioning of the market: system costs, treatment of Distribution and Transportation information, settlements , structural data management and market operation. LINKEDIN • EMAIL