Short-Term Electricity Markets in Europe: Current Trends and Challenges

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European Short-term electricity markets have once again seized the spotlight after over two years of volatility and extreme pricing focusing attention on future prices. Amidst this, short-term market behaviors are revealing fascinating patterns.

In early April, the day-ahead price for electricity delivery in France plummeted below €10/MWh, with numerous hours seeing prices at €0/MWh or even negative territory. This sharp decline is attributed to persistently low demand, coupled with abundant hydroelectric production and favorable conditions for wind and solar generation.

Of particular interest is the significant curtailment of wind power observed, sometimes reaching up to 8 GW in just 30 minutes like on Saturday 6th of April in France, or more than 10 GW in total in Germany. This curtailment is driven by day-ahead market prices and the remuneration mechanisms for renewable energy sources (RES), incentivizing producers to curtail output during periods of low prices. This poses a novel challenge for investors, traders, and grid operators, as renewable generation now intricately depends on market prices, unlike before. Price forecasters are also faced with new complexities along with this change in the fundamental supply/demand balance. On top of this remains of course a question of profitability of such power generation assets in the long run with these very low wholesale market prices: how will solar capture rate evolve in the future, in countries like Spain and France?

Price volatility between the day-ahead auction from epex-spot  and intraday/ balancing markets has been remarkable in recent days, with price differentials in clearing prices exceeding €100/MWh in France. Yet, such differentials pale in comparison to those regularly experienced in Germany, Belgium  and the Netherlands, where balancing prices often reach four figures due to uncertain RES forecasts and lack of flexibility. This volatility illustrates the challenge around dealing with these curtailments in real-time for system operators, and more generally the integration of renewables. A low carbon grid will require regulatory adjustment of the European energy market

Another crucial aspect, resulting in unusual price differentials. For instance, the German market price for Monday, April 8th, stands €80/MWh higher than that of France, an unprecedented level. After a decade with German prices trading at a discount to French ones, will this new situation persist, especially in winter months? We think it’s possible, with nuclear generation improving and Germany is not as long as it used to be, especially on non-windy days.

A low-carbon grid will require regulatory adjustment of the European energy market.

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