Blog April 22, 2020

Power prices in Europe took an unexpected turn in 2020 so far. Prices for the first quarter of the year were already weak, driven by warmer weather and a weak energy complex. Temperatures in the 2019-2020 winter were 3.4C above average, and 1.4C above the previous record of 2015-2016 (source: C3S). Regarding energy prices, Brent oil price in April dropped to $22.76 per barrel, a price last seen in 2002 (source: CNBC).

Since the beginning of the coronavirus outbreak, power demand dropped significantly throughout Europe, taking day-ahead auction prices below zero for multiple hours on different days.

On Monday, 13 April, the daily average price was negative at -5.45 EUR/MWhr in the Netherlands. The lowest price was during hour 16, with a low at -79EUR/MWhr. The full break down of hourly prices is in the graph below, with prices derived from our PowerRT platform.

Figure 1:Hourly price in Netherlands, Monday 13 April - Source: Genscape, ENTSOE
Figure 1: Hourly price in Netherlands, Monday 13 April. Source: Genscape, ENTSOE

The Case of Negative Prices

The fundamental drivers causing a “perfect storm” that takes power prices below zero is a combination of weak demand and high renewable generation, coupled with external factors (i.e. high level of “must run” capacity of inflexible power plants, cross border capacity restrictions, level of wind subsidy, demand response, etc.).

Negative hourly auction prices in Europe are nothing new, especially in Germany where new regulations tackle this issue. A negative price for the average of the day, however, is a first time in history for the Netherlands. As shown by figure 2 below, several countries were impacted.

Figure 2: Daily average of the day-ahead auctions, per country, for Monday 13 April. Source: EPEX SPOT
Figure 2: Daily average of the day-ahead auctions, per country, for Monday 13 April. Source: EPEX SPOT

On Monday, 13 April 2020, the residual demand (demand minus renewable production) of several European countries was close to or below the level of must run capacity (oversupply) for several hours, depending on net imports. The Netherlands was no exception with the following circumstances:

  • Drop of demand due to Covid-19, coupled with low consumption during Easter weekend
  • A high amount of wind and solar generation
  • Maximum imports from surrounding countries - Germany and Belgium - with low prices due to the combination of renewable power, low demand, and non-flexible conventional power plants

Was this a short-term effect of the Covid-19 or is this a glimpse into the future, a “new normal?”

Solar Capacity Increase

Even though the demand side was driven by the coronavirus, the supply side also played a role in taking the daily average below zero. By the end of 2019, the EU had ~132 GW of cumulative installed solar capacity (source: SolarPower), up 14% year-on-year. The total yearly breakdown is visible in figure 3 below.

Figure 3: Cumulative Solar PV installations Europe 2010-2024.Source: Wood Mackenzie
Figure 3: Cumulative Solar PV installations Europe 2010-2024. Source: Wood Mackenzie

In 2019, more new photovoltaic (PV) capacity was built on the continent than any other electricity generation technology. The total capacity addition for the year is ~17GW (source: SolarPower), taking the year-on-year increase to 104%. The breakdown of 2019’s installation is as follow:

  • Spain: 4.7 GW
  • Germany: 4 GW
  • Netherlands: 2.5 GW
  • France: 1.1 GW

In the Netherlands, the total capacity exceeds 7GW, and on a sunny day, the generation reaches ~5GW. Neighboring countries are all in the top 10 of highest new PV installations in 2019. The market impact of past addition is only visible during sunnier days, such as we have now. The magnitude of the impact, however, is amplified by the tepid demand for power.

The Way Forward

Central Western Europe is well coupled. Current price actions in the European electricity market stay aligned across the continent thanks to ample interconnections. However, it looks like power generation is over-invested in Central Western Europe when counting the occurrence of negative prices in recent years. Considering the current and future available capacity, Europeans have room to bring additional manufacturing capabilities back, for instance, to produce medical supplies.

Battery owners might be the only asset owners who profited from this situation. Such price moves, however, put unhealthy strains on the market, which would rather benefit from more standard price volatility. Last week’s move hurts market stakeholders - including wind and solar producers - which doesn’t help the system in the long run.

Now is a good time to reflect on the European supply and demand outlook. Are negative day-ahead auction prices good or bad for stakeholders in the energy complex? Will negative prices impact storage technologies positively while negatively impacting renewable subsidies? Provided that intermittent generation keeps increasing, who will invest in new CCGT/hydrogen capacity? As the coronavirus pandemic continues to evolve, our team will work to answer these questions and more using our real-time data and insights. To learn more about our services or to speak with an expert, please click here.