Soaring electricity prices in the day-ahead Iberian market: policy insights, regulatory challenges and lack of system flexibility

Abstract

Purpose This study is a targeted review of some of the major changes in European regulation that guided energy policy decisions in the Iberian Peninsula and how they may have aggravated the problem of lack of flexibility. This study aims to assess some of the proposed short-term solutions to address this issue considering the underlying root causes and suggests a different course of action, that in turn, could help alleviate future market strains. Design/methodology/approach The evolution of the most important (macro) energy and price-related variables in both Portugal and Spain is assessed using market and grid operator data. In addition, the authors present critical viewpoints on some of the most recent EU and national regulation changes (official document analysis). Findings The Iberian energy policy and regulatory agenda has successfully promoted a rapid adoption of renewables (main goal), although with insufficient diversification of generation technologies. The compulsory closings of thermal plants and an increased tax (mainly carbon) added pressure toward more environmentally friendly thermal power plants. However, inevitably, this curbed the bidding price competitiveness of these producers in an already challenging market framework. Moving forward, decisions must be based on “a bigger picture” that does not neglect system flexibility and security of supply and understands the specificities of the Iberian market and its generation portfolio. Originality/value This work provides an original account of unprecedented spikes in energy prices in 2021, specifically in the Iberian electricity market. This acute situation worries consumers, industry and governments. Underlining the instability of the market prices, for the first time, this study discusses how some of the most important regulatory changes, and their perception and absorption by involved parties, contributed to the current environment. In addition, this study stresses that if flexibility is overlooked, the overall purpose of having an affordable and reliable system is at risk.