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Friday, June 5, 2009

Introduction. Part I. How the electricity market works in Spain

A short introduction
Everything that I know about the electricity market, it's because some debates I participated with those against the renewable energy. This has compelled me to search for very large amounts of data to refute them (or not). In fact I will make you a confession. My position had also changed due to the data that I have found. Four years ago, after nearly six working in renewables, I thought it was necessary to complement the renewable with the nuclear and has been the strength of the data that changed my position in the recent years. Now I think it's quite obvious one being against nuclear energy and I wonder how I could be confused for so long?.

This is an introductory subject. It is necessary to understand the falsehoods and misunderstandings which we can read frequently. The electricity market that is using Spain is quite similar to a lot of European countries. Originally it was going to be a part of the "1st falsehood on renewable energy: renewable energy is expensive.", But given the length it has taken, I believe it is necessary to separate it. In fact, it has taken so much extention that the introduction is also splited in two parts: How the electricity market works and hidden costs of the conventional generation system.

The electricity market
The electrical market in Spain and many other countries works as follows. Some companies, many more than we think, generate the electricity that feed the grid. The electricity generation is always exactly what it is consumed, because in principle (we will see further whay means this' in principle ' another day) you can not store electricity. This electricity is distributed throughout Spain via the transmission grid. The transport network is the exclusive property of Red Eléctrica de España. Finally the electricity is distributed by the distribution companies to the end user. Is the distributor who actually buy the electricity at any given moment in a kind of stock exchange market, named 'electricity pool' with the prices per MWh generated fluctuating each hour. For the distribution company it doesn't matter the primary energy used to generate the electricity,. Price is the same if it's, for example, wind generation or nuclear generation. In the pool, wherever it comes the electricity, for evry hour of the day is negotiated a fixed price per MWh generated. The MWh, for those without a lot of technical background, is the measure of electrical energy generated. In a car we use liters of gasoline and in electricity we use the MWh of electricity. 1 MWh is roughly the amount of energy consumed by a family of two adults and two children for 3 months and currently 1 MWh of electricity in the pool costs an average of 60 € to 80 €. This is not the only cost that pays for the electricity distributor. A number of factors must be added to the cost of electricity. For example, to mention only a few, deviations in the generation when a generation plant is planned to produce and unexpected technical problem happen, requiring to start another plant fees of the transport grid and its maintenance.
So, we have that, from the point of view of the electricity market it doesn't matter if we use to generate 1 MWh wind, photovoltaic, nuclear or gas. Later on, the energies that are within the Special Regime, which are all renewable sources, excluding large hydropower generation and other special methods that are not renewable (eg the treatment of slurry) are compensated for each kWh (1000 kWh = 1 MWh) generated depending on the technology and the market price. This is known as the incentive paid each MWh generated by a given technology. Incentives from the special regime come from the energy bill and we will discuss them in the coming days.
The price at a given time of electricity is the following. Let's imagine that Red Electrica determines in the next hour we require a production 1000 MWh. Each plant makes its offer as follows:
0010 Hidraulica cantábrica: 10 MWh at 0 €/MWh
0110 Hidráulica del Ebro: 100 MWh at 0 €/MWh
0210 Wind plant Mestral: 100 MWh at 0 €/MWh

0220 Photovoltaic of Miramontes: 10 MWh at 0 €/MWh
0420 Nuclear Ascó: 200 MWh at 0 €/MWh
0520 Gas plant Juanito: 100 MWh at 40 €/MWh
0620 Gas plant Pepito: 100 MWh at 45 €/MWh
0720 Coal plant Pedrito: 100 MWh at 50 €/MWh
0920 Gas plant Jorgito: 200 MWh at 55 €/MWh
1020 Coal plant Penibética: 100 MWh at 60 €/GWh
1120 Fuel plant Arábiga: 20 MWh at 65 €/GWh

All numbers are hypothetical, just to explain how the system works. As 1000 MWh are needed (1 GWh). Plants are ranked by the offered price and it is bought the electricity in function of energy demand expected. In the example companies buy the entire production of the list up to Gas plant Jorgito. From the coal plant Penibética it is just purchased 80 MWh instead the 100 MWh offered. And do not buy energy on the fuel plant Arábiga. And here comes the most interesting, the price the distribution company will pay it is not the offered price, but the price of the latest plant that has entered in the generation list. In this case all the plants from Hidráulica Cantabrica to the coal plant Penibética at the price of 60 € / MWh offered by this plant. Obviously the Fuel plant Arábiga will not charge anything, it has been discarded. The plants can also do not offer on the pool.
You can see that there are several plants that offer at 0 € / MWh and this is because this plants whant to generate no mather the price is paid for their electricity. When there is wind the wind plants want to feed into the grid, when the sun shine the photovoltaic plants want to feed into the grid. The only costs that these plants have are only capital (payment of the credits needed for its construction) and a very small cost of maintenance (even smaller in the case of photovoltaics as they don't have mechanical parts). The wind and the sun always cost the same, 0 € / MWh and that is always more expensive to maintain not feeding a wind plant when there is wind, whatever it is the price paid by the pool for each MWh generated. With hydro it is even better. Basically all capital costs of the hydropower where paid years ago so they nearly just pay maintenance costs. Regarding the nuclear plants, they can not easily stop and start. An standard stop without later problems normally requires more than a day and the starting the same. Nuclear power, by this problem of the nuclear technology, can not enter and exit the system, so they always offer whatever price is for MWh. On the other hand the capital cost of these plants is much greater than for other conventional methods. Nuclear are plants where the fuel costs are relatively few, but their construction costs it is very high. Although sometimes lost money with each MWh generated, it loses more stopping the nuclear power plant, because most of them are still paying the amortization of loans that allowed its construction. So nuclear only have the option to be allways on or allways off, no matter if they earn or loss money. They can not turn on or off the reactor every hour.
From this point, the conventional power stations, with the exception of the nuclear we had seen, offered in accordance with the fuel cost and capital amortization.
Regarding the cost a power plant, renewable or not, has three elements that determine the cost of their energy. Amortization of capital (return to the bank the loan give it for the construction), low in the conventional, high renewables and high in the case of nuclear. Cost of fuel: high and variable in the conventional, middle and variable in the nuclear and zero in the case of renewables (sun, wind, etc ... are free). And the operating costs very low renewables (especially hydro and PV) and tmedium in the rest of the technologies.

Notes you can follow the real time generation in Spain:
- Prediction and real time measurement
- Real time production by sources
- Real time Wind generation

(This article is adaptated from the original in spanish: ("Introducción, 1ªparte: Como funciona el sistema elécttrico")

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