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Quarantine Response: The prices of DAM are twice lower than the reference price

Quarantine Response: The prices of DAM are twice lower than the reference price

Two features shaped the response of Bulgarian day-ahead electricity market (DAM) to COVID-19 quarantine: volatility and a drop in electricity prices. The IBEX average DAM price slid to EUR 23.82/MWh during the two weeks of March after quarantine was imposed (16th 29th of March). In comparison, the average DAM price for the same time period of 2019 was EUR 34.58/MWh, this represents a 31% price drop.

The difference between Energy and Water Regulatory Commission (EWRC) reference market price of EUR 45.50/MWh set for the ongoing regulatory period and the average two-week IBEX price is even higher. 

Particularly notable is the volatility observed in the second week (23-29 March) when average daily prices fluctuated in a ratio of about 1 to 3, ranging from EUR 11.20/MWh to 31.64/MWh.

After Italy’s lockdown, similar trends in price drop and volatility were noticed in European DAMs and bilateral agreements, all triggered by demand insecurity

Who are the affected parties?

Undoubtedly, low price levels are good news for non-household clients in industry and services, and would probably be a driver in the efforts to mitigate quarantine aftermath.

However, this does not apply to electricity sector. Due to regulated service prices, network companies should not suffer from any implications while electricity producers, especially those exposed directly to market fluctuations, will have serious financial difficulties in case current price trends persist.

Electricity producers whose main revenue is generated by energy supplied at DAM will be the victims of such low pricesThe former include conventional coal-fired power plants that do not have long-term contracts. An average price of EUR 23.82/MWh for the two-week period considered by IBEX is less than half of the variable costs (fuel, emission, consumables, initial expenditures) incurred by such plantsIn theory, they should be involved in setting the exchange prices as well since they have the highest variable costs in the energy system. As can be seen, in practice this does not happen.

Stable and the most risk-free is Kozloduy NPP position because its costs are low (variable costs run below EUR 10.23/MWh). For this reason the energy it generates is the most in-demand on the market, and the most traded via the Centralised Market for Bilateral Contracts. Similarly, large-scale HPPs of National Electricity Company hold relatively risk-free positions, again because of low costs.

RES producers with a capacity exceeding 1 MW will also be affected by the low electricity prices. The energy they generate is sold at the exchange too and they are granted premiums reflecting the difference between EWRC reference market prices differentiated by RES-producer groups and the preferential price set in the long-term contractsSignificantly lower actual exchange price compared to the reference price will reduce revenues of such producers by over EUR 23 per 1 MWh sold. On the other hand, last year the situation was reversed: actual exchange prices were higher than the reference price, so last year’s higher profits will compensate in full or in part current negatives.

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