The month of January has started with a significant increase in energy markets after a 2020 at historic lows. Last Friday, January 8, 2021, the price of electricity reached a daily average price of €94.99/MWh, while the maximum hourly price was recorded on Saturday 9 at 9:00 pm, reaching €121.24/MWh. This situation is not new to the market, as in January 2017, a similar situation was experienced with heavy snowfall that drove electricity prices to an average price of €71.49/MWh at OMIE (with a daily maximum of €91.88/MWh on January 25, 2017).

There are several elements that help explain this increase in prices:

• Increase in demand: The cold snap that the Iberian Peninsula is experiencing has increased demand to near historic maximum levels, standing at 23.2% above the average of the last 5 years for the same period, which has caused less competitive generation sources to come into operation to meet demand (mainly thermal power plants).

  • Renewable sources: This January, renewable generation has increased compared to the same period last year, especially wind power. However, the increase is proving insufficient to cover the rise in demand.

  • Interconnections: It is worth noting the import of electricity from France to cover the lack of national generation, representing around 4% this January and reaching more than 7% of demand on January 8, 2021, with a base price on the French market of €84.85/MWh.

• Increase in natural gas prices: A harsher winter than expected in Europe and Asia has increased gas demand in the two continents, magnified in the Asian continent due to the recovery of pre-pandemic production levels, while Europe is confined by the 2nd wave of infections. This situation has led to LNG vessels preferring to discharge in the Asian continent rather than Europe due to the price differential, changing the trend of 2020 and limiting supply to the European continent.

  • LNG: This situation has led to LNG from the Gulf of Mexico changing direction to the point of saturating the capacity of the Panama Canal. At the Iberian level, it has caused Algeria (the main gas supplier) to reduce its pipeline capacity temporarily to send some of the gas by vessel to the Asian continent, thus causing a daily price of €58.61/MWh at MIBGAS on January 8, 2021, when December had an average price of €18.27/MWh. So far in January, the average is €33.47/MWh.

  • Thermal generation: The high price of natural gas, combined with CO2 prices at historic highs, leads to uncompetitive offers in the electricity market.

However, it is important to note that this situation of high prices is temporary and is linked to low temperatures, since once demand is reduced and renewable contributions increase, prices will normalize.