-
+
GETTY

Renewables: Spanish industry’s competitive advantage

Miguel Gil Tertre

8 mins - 2 de Abril de 2024, 07:00

Spain benefits from a diversified energy mix and is progressing faster than other countries towards the decarbonisation of its electricity system.

In 2023, the electricity mix included wind (25%), nuclear (24%), solar (19%), and hydro (4%). Fossil fuels accounted for less than half (with combined cycle gas accounting for 16% and coal a mere 2%). On 2 November 2023, Spain reached its renewable generation record of 73.3%. The extent to which the growing renewable capacity in our country can reduce prices is already beginning to be seen occasionally. Since November 2023, daily prices in Spain have been below 10 €/MWh on at least twenty occasions, with differentials of several tens of euros with respect to other prices in Europe (calculations by the Chief Economist Unit of the European Commission’s Directorate-General for Energy using data from the ENTSO-E platform until 12 March 2024). While excessively low prices could slow down investment in renewable capacity in our electricity system, they also drive greater use of electricity in our society and offer competitive advantages for industry. Moreover, increased industrial production and electrification that harnesses this abundant, clean, and cheap energy can serve to sustain demand and avoid the dreaded absolute price collapses. A symbiotic process that can be mutually reinforcing.
 
Source: Private

Why a transition to a system in which renewables determine the majority of electricity prices can be a positive supply shock for the whole economy?

How can this affect Spain’s industrial competitiveness?

Over the next decade, if Spain is able to make the necessary investments to adapt the system to the electrification of the economy and accelerate the deployment of lower-cost generation sources, its electricity mix can be a positive competitiveness shock. Once fossil fuels are displaced in electricity generation, Spain could benefit from lower electricity prices. By arriving earlier than other neighbouring countries, this would be an even more important positive shock, generating important competitive advantages for our electricity sector and for the industry that uses this energy.
 
 
 
Renewables benefit from lower generation costs
Generating electricity with renewables is and will be cheaper. Renewables have lower generation costs than other technologies. It is estimated that the Levelised Cost of Energy (LCOE) range in Europe for producing electricity with natural gas will go from 120-230 €/MWh in 2020 to 70-225 in 2030, with coal from 140-230 to 95-225, with nuclear from 105-205 to 95-170. This contrasts with the level and cost evolution of solar electricity from 38-140 €/MWh in 2020 to 30-115 in 2030, onshore wind from 50-70 to 40-55 and offshore wind from 65-180 to 45-105 (calculations by the Chief Economist Unit of the European Commission’s Directorate-General for Energy using ranges of future gas prices and capital costs and levels of use of different technologies).  Moreover, Spain’s excellent geographical and climatic conditions for renewable energy generation make our renewable energy, especially solar PV, cheaper than in many other countries. Solar PV LCOEs in 2023 in Spain would average 29 €/MWh compared to 30 €/MWh in Italy, 32 €/MWh in France and 39 €/MWh in Germany. [In onshore wind the terms are slightly reversed with Germany and France exhibiting an average of 32 €/MWh compared to 43 in Spain and 46 in Italy] (Calculations by the unit of the Chief Economist of the European Commission’s Directorate-General for Energy looking at ranges of future gas prices and capital costs that influence the costs and usage levels of different technologies).

It is essential for the economy to displace fossil fuels from the electricity mix as soon and as much as possible. In the marginal pricing system, prices are determined by supply and demand at each price point in the day. The most expensive technology needed to meet demand (usually coal or gas) determines the prices for all electricity generation produced at each time of day. That is why in the hours when there is a lot of wind and sun that is able to satisfy all the demand, we have prices that tend to 0 euros.

However, completely displacing fossil fuels will take time. A modelling analysis by Andreas Zucker and Derck Koolen (JRC Publications Repository - The Merit Order and Price-Setting Dynamics in European Electricity Markets) shows that until 2030 gas will continue to determine the price in most hours in EU countries. As we move into the thirties, gas will be pushed out of the electricity mix by increasing renewable electricity generation thanks to a greater presence of storage technologies and demand flexibility. These technologies will allow excess cheap renewable energy from the central hours of the day to be transferred to times without sun and wind and reduce prices there by displacing expensive fossil-fuel generated electricity. In other words, low prices across the entire daily time spectrum. Given the differences in natural endowments and stages of renewable energy development between countries, the leap to low prices is unlikely to happen simultaneously. Countries that achieve it first will have a significant competitive advantage.

Countries that are able to displace fossil fuels from the electricity mix earlier in the decade starting in 2030 will have a positive competitiveness shock.

 
 
That it requires an appropriate regulatory framework...
Until renewables are able to displace gas from the electricity mix and supply generally reflects their low costs, we need a regulatory framework that allows our industry and households to benefit from them. To this end, European legislation encourages the increased use of Power Purchase Agreements (PPAs) between renewable project developers and consumers and an increased supply of so-called two-way contracts for differences between renewable producers and the public administration. These instruments reduce revenue uncertainty for project investors and generate cost benefits and price stability for consumers. In the case of PPAs, their success will largely depend on the emergence of measures to encourage their use by small and medium-sized developers and consumers, including greater standardisation of contracts and the development of appropriate financial hedging instruments.

PPAs encourage investment in new renewable energy projects by setting an exchange price that guarantees at least a return on the developer’s investment and satisfies the buyer’s need for stable and reasonable prices, taking advantage of the low generation costs of renewables. Contracts for differences between renewable producers and the public administration eliminate investment risks for the producer by offering a fixed price guaranteed by the public purse, which covers the difference when the market price is lower than the guaranteed price, but which also receives the difference when the market price is higher and can use this revenue for multiple purposes.
Furthermore, although limited by our interconnections with neighbouring countries, the Spanish electricity sector will be able to obtain significant benefits by exporting part of these surpluses of clean and cheap electricity. This has already been happening in the last two years, with Spain showing a positive balance of our net electricity exports ([Exports to France and Morocco in 2023]).
 
Source: Fuente: Red Eléctrica Española
 
Source: EY

...and investments today to benefit in the future
However, not everything is straightforward. The transition to a system in which renewables (with their variability) are in the majority and which at the same time requires servicing greater electricity use (with the electrification of the economy) may face transitory costs and imbalances if the appropriate infrastructures are not available. 

If Spain is able to develop in the next ten years the necessary infrastructures to manage and absorb the electrification of the economy (e.g. distribution grids, storage, demand flexibility solutions...) it will be able to benefit from lower prices.

Conclusion
In order to benefit from this situation, Spain should pursue a policy of:
  1. Accelerating renewables permitting
  2. Favouring generation and self-consumption in households and businesses. 
  3. Development of the necessary grids to absorb and manage the growing electrification of households and industry.
  4. An appropriate taxation policy to encourage electrification. 
  5. A stable regulatory framework with good planning to adequately accompany the growth of electricity supply and demand.
Industry in the past has been installed where energy was abundant and cheap. For example, in the early 20th century, a lignite-fired power plant was installed where there were coal mines with industry around them. In turn, blast furnaces were installed near the mines.

Low-emission energy is the ‘coal’ of the future. Spain has it in abundance and it is in its hands to be a successful example where renewables and reindustrialisation go hand in hand. 
 
Se puede leer el artículo original en español

¿Qué te ha parecido el artículo?
Participación