Towards the advent of the era of free electricity?

The economic news this past Tuesday was the unique offer of electricity at extraordinarily low prices for the, until now, long-suffering tenants of the Regulated Electricity Market. Specifically, in the inhospitable 4:00 to 5:00 a.m. slot, it stood at 0.65 euros/MWh. But it was even cheaper in the early hours of yesterday morning, when the price from 2:00 to 4:00 was 0.10 euros/MWh. It is worth remembering that we have had time slots in 2022 that exceeded 700 euros/MWh. Then we would be talking about reductions of 99.999%, with respect to those maximums. Statistically, by comparison, we could speak of almost free electricity.

This still infrequent anomaly provoked a quick commentary in the media. The explanation was simple: wind power supply has come to account for 40% of the electricity mix. In addition, we are experiencing the increase and normalization of hydroelectric power production following the recent rains, especially in northern Spain, coupled with low electricity demand in the early hours of the morning. A perfect storm for power companies' revenues, a beautiful, but brief, Shangri-La for consumers.

Beyond the anecdote, the economically relevant question is how likely it is that these episodes will be repeated in the future. That is, if we are facing a swan, but this time not a black swan, but a snowy white one, or, on the other hand, following the ornithological metaphors, this event would be Noah's dove, which ends up being the herald of the future presence in the skies of multiple companions. This second scenario would give rise to new and even more relevant economic questions, but which can be synthesized in how the greater frequency of these events of excess electricity supply can affect the electricity demand of domestic economies and companies.

Regarding the first question, current trends, with an acceleration in the deployment of renewables, both wind and photovoltaic plants, as well as self-consumption in buildings, intensified by the exuberances of the electricity market that we have been experiencing since mid-2021, are bringing about a significant change in the human control that we can exercise over the electricity supply. In contrast to the traditional model, based on quasi-constant offers, such as nuclear energy, or with limited short-term variability, such as hydroelectric power, or simply on offers that we rely on according to expected demand, such as those from combined cycle power plants, we are moving towards a new, increasingly uncontrollable and volatile supply. And it will depend on the vagaries of weather conditions.

Therefore, the baseline scenario would be that, as the deployment of renewables increases, the frequency of these oversupply events will increase. However, with a large seasonal difference. In winter they will foreseeably occur at night, well into the early hours of the morning, the time of greatest wind power production and minimal social and work activity, but in summer they will occur in broad daylight, specifically during the hours of maximum solar irradiation.

Given this scenario, consumers will have a great incentive, more effective than any public subsidy, to optimize their electricity consumption, shifting part of their demand to times of electricity oversupply. It is not a question of going to live at night, but families, thanks to the internet of things, may soon see how certain household appliances, such as dishwashers and washing machines or sockets associated with the charging of electric car batteries, cell phones or laptops, will take on a life of their own depending on the tariffs in force at any given time. There will be highly sophisticated and digitized solutions, along with low-cost ones, the latter offered by our favorite online sales platforms.

But there will also be electro-intensive companies with digitized, automated and robotized production processes, true industry 4.0, which will seek to take advantage of these fleeting but happy moments for, for example, the intensive production of green hydrogen or for the maintenance and backup of the large computer servers of the aforementioned platforms. Even the most questionable cryptoasset mining will be able to be optimized based on such events.

In short, more and more companies and households, especially those in the middle and upper classes, will seek to transform themselves into digitized and interconnected islands of energy efficiency, thanks also to the controversial support of present and future public subsidies. Photovoltaic panels, real and virtual batteries, together with smart devices and appliances, will work in synchronization, seeking to take advantage of any tariff anomaly, while we will monitor it with our cell phone or tablet.

But this future, like any other based on oversupply, will have an expiration date. The paradox of this analysis is that a generalized response by electricity consumers, seeking to monetize these free lunch moments, would, in the long term, reduce the frequency of these moments. As the demand for electricity achieves its partial transfer to off-peak hours, the price of these off-peak hours will converge to the average daily price. In short, any economic Shangri-la is always ephemeral, but as this future comes and goes, once again, the gains can be significant for those who adapt first.

José Ignacio Castillo Manzano is Professor of Economics at the University of Seville.