Solar PPAs Raise Spanish Spot Prices, Not Suppress Them

Why It Matters

The findings reveal a hidden cost of expanding renewable contracts on wholesale electricity prices, urging regulators to rethink hedging structures to protect consumers and maintain market efficiency.

Key Takeaways

• PBC covered up to 47% of Spain’s electricity demand.
• Solar PBC shifted from price‑cutting to price‑raising after 2022.
• Each PBC percentage point added €0.6‑1.4/MWh to spot prices.
• Hydropower PBC consistently lowered day‑ahead prices.
• Study urges regulators to favor CfDs over physical contracts.

Pulse Analysis

Spain’s electricity market has long relied on physical bilateral contracts (PBC) to lock in generation and demand ahead of the day‑ahead auction. The new study, spanning 2019‑2024, applied an AR(1,24)‑GARCH model to over 52,000 hourly price points, revealing that PBCs removed 40‑47% of total demand from the spot pool. While this off‑loading historically suppressed prices, the rapid expansion of solar capacity—from 5 GW to nearly 40 GW—has altered the dynamics, especially after the Iberian Exception mechanism expired in 2024.

During the post‑crisis normalization phase, the research shows each additional percentage point of demand settled under PBC lifted spot prices by €0.6‑1.4/MWh (approximately $0.70‑$1.55/MWh). The effect is technology‑specific: wind PBCs consistently raised prices, whereas hydropower PBCs lowered them, reflecting hydro’s dispatchability. Moreover, the study links higher PBC volumes to increased price volatility, as the residual market relies more on expensive coal and combined‑cycle plants when renewable output fluctuates.

Policy implications are clear. By moving renewable hedging toward financial contracts for difference (CfDs), generators would remain active in the day‑ahead market, preserving the merit‑order price‑dampening effect while still managing revenue risk. The authors urge regulators in Spain, Germany, France and the Nordics to assess PBC impacts before future reforms. Adopting CfDs could curb the emerging price premium on wholesale power, safeguard consumer bills, and support a smoother transition to a high‑renewable grid.