Europe faces a significant challenge in its energy transition. The high cost of electricity threatens both economic competitiveness and progress toward decarbonization, as well as the demand growth needed to balance the large renewable capacity in the pipeline, which totals 28 GW, although not all of it will be built.

While Spain has had cheaper energy than other European countries, it has not been able to reflect this in electricity bills, and countries like France and Germany, despite higher energy costs, are more competitive.

Joaquín Coronado Galdos, co-founder of Digital Five Investment, argues that a system based on renewables might not be cheaper than the current one, due to the costs associated with energy storage, flexibility, and grid infrastructure.

Fuente: Joaquín Coronado Galdós

In his post, he shares an analysis from Bruegel, a prominent European think tank, which reinforces this viewpoint. According to their study, the lowering of renewable generation costs could be offset by the increasing grid and capacity costs needed to ensure supply stability.

As Coronado explains, “a renewable system with more storage will not be cheaper than the current one, where the final guarantee of supply comes from thermal generation.”

Precios del MIBEL en 2024

In December, the market reached highs of up to 175 €/MWh, primarily driven by supply restrictions due to lower renewable generation on specific days.

The low prices during spring are explained by the abundance of renewable generation, particularly hydropower and wind energy. April and May were months where these technologies dominated the energy mix.

The annual average would be around 62.62 €/MWh, and future markets indicate that, although 2025 could be very similar to 2024, prices are expected to rise.

Capacity Market

One of the main obstacles to a renewable-based system is energy storage. Currently, 4-hour lithium batteries are unable to cover the 8,760 hours of the year, limiting their ability to ensure continuous supply.

The sector’s interest has been demonstrated by Red Eléctrica’s data, reporting nearly 10 GW of batteries requesting their connection points, but the profitability of this technology remains a challenge and is contingent on the execution of a capacity market.

Luis Marquina, President of AEPIBAL, stated in an interview with Energía Estratégica España that the Government will define the first call in the first half of 2025, providing a clearer perspective.

However, the introduction of capacity mechanisms, essential for providing greater price stability and ensuring supply, has raised concerns within the sector.

According to Coronado, the cost of these systems is significant and could be passed on to consumers. He argues that “even if every hour of the day were sold at the marginal gas price, the additional margin captured by the batteries would not be enough to make their investment profitable.”

He also mentions the recent auction for the Active Demand Response Service (SRAD), awarded a total of 283 million euros, with a cost of 246,655 €/MW enabled/year.

The analyst and advisor believes this expenditure could have been used to keep 14,150 MW of combined cycle plants operational, “a more cost-effective alternative and sufficient to guarantee energy supply in Spain” and emphasizes that they should receive a capacity payment, similar to the one they had in the past, of at least 20,000 €/MW.

This issue is exacerbated by the rising costs of balancing and flexibility services, which are essential for integrating intermittent generation sources like wind and solar.

Another key point in the discussion is the role of nuclear plants. In Spain, there are currently 7 GW of operational nuclear capacity, and many argue that they will be crucial for ensuring stable and low-emission supply.

However, the Government has not signaled any halt to the closure schedule for plants, which will begin next year, and Coronado warns that their operation will only be viable if their tax burden is reduced.

In this context, he proposes maintaining the Enresa fee but reviewing other taxes that hinder profitability under the current market conditions.

The debate over the real cost of a renewable-based system highlights the complexity of Europe’s energy transition.

In this regard, Coronado believes that it will be necessary to reform the price system in the market to decouple it from gas, keep combined cycle and nuclear plants operational, and invest in competitive technologies without subsidies.

“The challenge is not only to reduce emissions but to do so in a competitive and efficient way,” he concludes, adding that the energy transition cannot compromise Europe’s economic competitiveness compared to other regions like the United States and China.