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| Author | InfoLink |
| Updated | May 06, 2020 |
Amid the COVID-19 crisis, oil prices are not the only ones that went negative. The evaporation of electricity demand caused by the pandemic also left the U.K. with electricity prices below zero. The U.K.’s day-ahead electricity prices have remained negative for 13 consecutive days as of the middle of April, following the first negative pricing recorded last December.
The day-ahead electricity prices are dependent on the principles of demand and supply. When supply exceeds demand, power suppliers need to pay their wholesale consumers to buy electricity. Negative prices have become a common phenomenon in countries with higher share of renewable power. Having said that, electricity suppliers can still earn profits despite negative pricing, as most countries with bid-based electricity market provide payments to support renewables.
However, the negative impacts of falling wholesale electricity prices would be felt by the renewables sector. Aurora Energy Research forecasts that revenues in the 2020-2021 period for merchant renewable energy power plants will fall 30-50% across major European markets, spanning France, Germany, Great Britain, Ireland, Spain and Italy.
The energy research firm’s latest study also found the day-ahead power prices have fallen by 30-40% in many European countries, since the coronavirus lockdown measures started. Countries like the U.K., France, and Ireland whose renewable sector is backed by subsidy policy are less affected. But countries that adopt merchant renewables, such as Spain, might be among the hardest hit, sustaining 20-44% lower profits.
Moreover, countries protecting renewable energy from volatile wholesale prices with subsidy payments may struggle to keep a balanced budget. Taking the U.K.’s Contracts for Difference (CfD) scheme for example, suppliers who have secured a contract in the three rounds of auctions held to date can receive top-up payments for the difference between the pre-agreed ‘strike price’ and the ‘reference price,’ a measure of the average market price in the GB market. This means that the lower the reference price is the higher the top-up payment will be.
Cornwall Insight, a U.K-based energy research firm, states that the government will be facing increasing finance costs under the CfD regime if prices continue to stay low. That might affect the budget the government is willing to commit to in the fourth round of auction. In the face of flagging demand and low prices caused by the pandemic, some developers may reassess their strategy for upcoming auctions.
For instance, Swedish power company Vattenfall, which has secured two tenders held in 2018 and 2019 to build non-subsidized offshore wind farms, announced recently that to ensure the company’s long term growth in Europe, it will not participate in the tender for the Hollandse Kust Noord offshore wind site in the Netherlands. The decision came after the company reviewed its asset pipeline and ongoing projects under the COVID-19 situation.
According to the latest reports from the international energy agency (IEA), electricity demand is expected to fall 5% this year, the largest decline since the Great Depression. While the COVID-19 crisis took a heavy toll on major fuels, renewables have proven resilient to the market shock.
In the first three months of the year, renewable electricity generation accounted for nearly 28% of electricity supply, up from 26% in the corresponding period in 2019. Despite supply chain disruptions that have delayed the deployment of wind and solar, renewables are set to grow this year, with the total global use of renewable energy projected to rise by 1%, predicted the IEA.
Wind InfoLink opinion:
Having reached maturity and cheaper costs, European offshore wind power is on the road to subsidy-free and wholesale market to compete with fuel and gas. In light of low electricity prices, power suppliers will assess risks of participating in wholesale electricity markets. Developers and investors will also give a second thought to invest in offshore wind farms in Europe, and seek more returns in countries with higher subsidies or lower price volatility.
Source：
Energy demand, hit by coronavirus crisis, is set to see record drop this year, IEA says
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