The effect of hydropower bidding strategy on the iberian day-ahead electricity market

Abstract

In 2021, the Iberian Electricity Market, which includes Portugal and Spain, experienced a significant increase in electricity prices. On average, prices tripled compared to pre-pandemic levels in 2019, despite stable demand. This trend, though less pronounced in other European markets, has raised concerns about the efficiency and competitiveness of wholesale electricity markets. This study investigates the bidding behavior of non-pumped hydropower plants in the Iberian market, employing a merit order model based on real data from 2019 to 2021. The analysis reveals a clear mismatch between hydropower bid prices and actual production costs. Although this practice is legal, it conflicts with the European Union's goal of promoting fair competition within the internal electricity market.Our findings suggest that aligning hydropower bid prices with 2019 levels could have reduced annual market costs by approximately 2324 million euros under a moderate scenario. This indicates substantial potential for cost savings and improved integration of hydropower. However, this strategy also benefits companies that own these hydropower plants, as they often possess large portfolios and can capitalize on increased market prices through other plants, particularly renewable energy units, which offer electricity at very low prices and have a high likelihood of being dispatched.Furthermore, the study highlights regulatory gaps allowing hydropower plants to price low-cost energy similarly to thermal plants, raising consumer costs and distorting market dynamics. These findings emphasize the need for stronger regulatory oversight and reforms to prevent excessive price inflation by hydropower, which plays a critical role in renewable energy integration and grid stability. Policymakers must ensure fair pricing while compensating hydropower plants for their flexibility and essential contributions to the energy system.