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The Conversation Spain

Snow and cold heat up Spain’s electricity market

Andrey_Popov / ShutterstockIn Sesame Street, children were explained that 3 + 3 + 3 is greater than 5 + 1 + 1, since 3 + 3 + 3 = 9 and 5 + 1 + 1 = 7. However, from what is seen and heard these days in the media and on social networks, it seems that many believe that the answer is 5 + 1 + 1 since 5 is the highest number. The problem I am referring to is not exactly this but a similar one, that of calculating the electricity tariff. In the first days of January 2021, the average price of electricity in Spain was substantially higher than in the same period in 2020, but that does not mean that it will be like this at the end of the year. In fact, the vast majority of consumers pay a fixed price per kilowatt-hour, since they accept the offer of their electricity supply company and accept what is called an unregulated price. Probably the reader already has his electricity rate fixed for 2021 (although he does not know it) or even for more years. In fact, there are companies that offer a fixed rate for the next 5 years, although this may not be the most interesting option for the consumer. Therefore, the fact that the price of electricity has reached a very high price these first days of January is irrelevant for most consumers. On the other hand, to those who have accepted (by their own will) the regulated rate, the price of each hour of consumption is applied, which is variable according to the supply and demand. There will be some days when the price will be much higher than the average for the year, but the important thing is the total, that is, 5 + 1 + 1 = 7, and not 5. How is the price of electricity set for the small consumer? electricity with regulated tariff? The procedure is simple: every day, around 8 o’clock in the afternoon, a reverse auction is carried out through the Spanish Electric Network (REE) in which the different electricity producers (nuclear, gas, combined cycles, wind, etc.) , offer energy at different prices, according to their different production costs. This is how the hourly prices are set for the next day. The allocation method is not, as has been heard these days, similar to that of art auction houses, where you bid at the highest price. In the electricity wholesale market, the procedure is just the opposite: whoever offers the lowest price sells the electricity. The prices reached for the electricity of the next day are announced at 8.15 pm and can be consulted here. Example of the report that is generated each day at 20:15 with the applicable hourly prices for the following day. Source: REE. I insist that this system is only accepted by consumers who want. The funny thing is that last year those who had this type of rate (which implies a risk), benefited compared to those who opted for a fixed price. Although there were days and hours in which the price was well above the average (there is no mathematical procedure that guarantees to be below the average at all times), the result at the end of the year was usually favorable compared to those who they had a fixed price. Price range The fact that in the first days of January 2021, and mainly due to exceptional weather conditions, the price was higher than in the same period last year does not imply that the average price of electricity in 2021 will be abnormally high for consumers who have contracted the regulated rate. In addition, in the regulated (variable) rate, the price of electricity depends on when the consumption is made, so those with the highest energy consumption can be programmed for the hours when the price of electricity is lower. There is also a very interesting intermediate option for the consumer, which is the hourly discrimination rate. It sets two (and sometimes three) electricity prices according to the time it is consumed, so it can be the cheapest alternative if the highest energy consumption is shifted to the time where the rate is lower. If you want to know more about how the price is set for the small consumer (who has not chosen a fixed rate) see here. Range of electricity producers What is sought with the variable price system is to optimize the electricity system, directing consumption to the times when generating electricity is cheaper. For example, if it is expected that there will be a lot of wind, at times of greatest intensity, wind energy will be offered at a very low price in order to favor consumption. The base energy, which remains practically constant throughout the year, is nuclear and is usually the one that offers the lowest price. In contrast, renewable energies show great variability. In Spain, wind energy has an efficiency (load factor) of only 25%, while that of nuclear power plants is around 90%. In other words, it is necessary to have almost 4 times the power installed in wind energy to produce the same energy as nuclear power plants. Despite this, the important thing is the total cost, including environmental costs. Although wind power is proving to be a great source of electricity, one must be aware of its limitations: the wind does not always blow enough to produce it. Therefore, it is appropriate to combine all the energy sources. When demand for electricity is very high, combined cycle gas plants are normally used, which are on standby for these occasions. In fact, there are gas plants that only work 200 hours a year, to cover those peak times. This is when the electricity producers offer the energy at the highest price. Here you can see what the different energy sources contribute to the electrical system at all times. Generation structure of the Spanish electricity system for 01/06/2021. Source: REE. The amount to be paid by the customer is not fixed only by consumption The way to assign costs in the calculation of the electricity tariff can be discussed, starting with the costs and taxes that are charged to the electricity tariff (approximately 65 % of the invoice). However, the proper use of a variable rate, which makes the system more efficient, would reduce production costs, allow a lower installed power and reduce the environmental impact. In any case, that is another discussion different from the one that is being raised these days, because, as has been explained, the small consumer can choose electricity rates that do not depend on the price of electricity at a specific time.This article was originally published in The Conversation. Read the original. Guillermo Sánchez Leon does not receive a salary, nor does he carry out consulting work, nor does he own shares, nor does he receive financing from any company or organization that may benefit from this article, and has declared that he lacks relevant links beyond the academic position cited.

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