AleaSoft Energy Forecasting, October 7, 2024. Interview by Ramón Roca, director of El Periódico de la Energía, with Antonio Delgado Rigal, PhD in Artificial Intelligence, founder and CEO of AleaSoft Energy Forecasting.
October 8 is approaching, the date of AleaSoft’s foundation, which this year celebrates its 25th anniversary. How has the Spanish electricity market evolved over these 25 years?
Throughout these 25 years, the Spanish electricity market has undergone a profound evolution, marked by numerous changes, although its marginalist design has proven to be effective in ensuring proper functioning, providing clear price signals for both market participants and investors.
The generation mix has undergone a significant transformation: initially dominated by coal power plants, then combined cycle gas turbines emerged. Subsequently, wind energy came to the fore, and more recently, solar photovoltaic energy.
In addition, the market has witnessed key milestones such as the entry into force of the CO2 emission allowance market in 2005, the coupling with the Portuguese market in 2007 and, finally, with the rest of Europe in 2014.
In recent years, the gas price crisis affected all electricity markets in Europe.
And in the face of all these events and transformations, the Spanish market has functioned correctly, maintaining its equilibrium.
The NECP 2023‑2030 update has just been published. What do you think? Is it too ambitious? It seems not very credible, or at least that is what different voices in the sector say.
The NECP 2023‑2030 is undoubtedly ambitious, and that ambition is positive as an indicator of the path we want to follow. However, the key is that this ambition is also reflected in the steps that will be taken for its implementation in order to achieve the proposed objectives. We believe it is right to set high targets for photovoltaic and wind energy, as Spain has enormous potential in terms of solar and wind resources.
However, the energy transition is a kind of gear that requires several strategic vectors to be developed in an orderly fashion. At AleaSoft we have identified more than 15 vectors that must be developed to achieve the energy transition. For renewable energy to grow, the new demand for electrification, energy storage, distribution and transmission grids, as well as international interconnections must grow.
It is essential that demand grows to avoid a continuous drop in market prices when renewable energy production is high, and to reduce renewable energy curtailments. Energy storage plays a key role in this process, as it allows demand to increase during peak renewable energy production hours, helping to stabilise prices and minimise curtailments. In addition, the development of transmission and distribution grids is essential both to integrate new demand and to reduce curtailments. International interconnections, for their part, will give us the possibility of exporting surplus renewable energy production.
Renewable energy will gradually take their rightful place in the market balance. It is important that all the vectors of the energy transition move forward in a coordinated manner in order to attract and make investment in renewable energy attractive. If, for example, demand does not grow, investment in new renewable energy production will be discouraged because it will lead to low prices and curtailments. Therefore, it will be up to the market to decide how much renewable energy can be accommodated depending on how much demand grows, storage, investment in distribution and transmission grids, and the increase in the capacity of international interconnections.
One of the novelties of the Iberian electricity market this year is that for the first time negative prices are being reached in some hours. The cannibalisation of photovoltaic energy has also increased, especially in the spring with the low prices registered during solar hours. Is it all a consequence of the increase in photovoltaic capacity?
The increase in photovoltaic capacity, together with the increase in wind capacity and a year with a lot of hydroelectric energy production, has undoubtedly been one of the main factors driving the appearance of low and negative prices in some hours, especially in the spring.
However, the increase in renewable energy generation is not the only factor responsible for the negative prices. Another factor that has played a role is the decline in electricity demand after the COVID crisis and the subsequent energy price crisis, coupled with the boom in self‑consumption. In the first half of 2024, despite a slight recovery compared to 2023, the half‑yearly demand was the second lowest in the last 20 years, even lower than in the first half of 2020, at the height of the COVID crisis and the confinements. The increase in demand that should come from the electrification of industrial demand and electric vehicles has been lower than expected.
Should the sector be concerned about the coming years when renewable energy will continue to gain prominence?
As we have previously stated, for the energy transition to develop in an orderly manner, it is essential that several factors move forward in a balanced way along with renewable energy. Renewable energy will undoubtedly continue to gain prominence in the coming years and decades. But this should not be a concern for the sector, but rather an opportunity to advance in decarbonisation. Currently, renewable energy is growing at a faster rate than demand and storage, which is generating imbalances in the short term. However, in the long term, with electricity demand three times greater when fossil fuels and nuclear energy are no longer used, these imbalances will be corrected, so there should be no concern that renewable energy projects will be profitable. Although we do not rule out moments with negative or near‑zero prices, these would be exceptional cases and not a constant.
In the medium term, especially in spring, we are likely to see episodes of low prices again, as we have seen this year, particularly if it coincides with high hydroelectric energy production. Fortunately, batteries have seen a remarkable reduction in cost, reaching half their price in just one year, making them much more accessible for both stand‑alone projects and hybrid systems of renewable energy and batteries. This progress will be key to mitigate falling prices, reduce energy curtailments and ultimately increase project profitability.
You comment that batteries and hybridisation will be key to reduce cannibalisation, negative prices and curtailments, but are battery projects already profitable?
In the last year, the cost of batteries has dropped significantly, halving, which has facilitated their integration into energy storage projects. At the same time, the massive expansion of photovoltaic energy generation has increased the price differential in the electricity market between solar energy production hours and nighttime hours. This increase in the price differential allows batteries to earn higher revenues through arbitrage. The increase in revenue coupled with falling costs and CAPEX has led to a progressive increase in project profitability.
But beyond stand‑alone battery projects, what we are seeing in the reports and analyses we carry out is that correctly dimensioned battery systems can increase the IRR of a photovoltaic or wind energy project, because they increase the manageability and price of the energy produced, as well as avoiding the loss of revenue due to energy curtailments.
The new capacity mechanism is expected in January next year. How will such a market affect electricity prices? Will it boost storage?
The new capacity market will be key to make the profitability of batteries viable in Spain, so it will undoubtedly be a significant boost for energy storage.
Batteries are charged at the hours of lowest prices, either from an associated renewable farm or directly from the grid. This will generate an increase in demand, which in those hours will try to take advantage of those reduced prices, and will create a virtual floor for prices, preventing them from sinking further with the increase in renewable energy. Subsequently, this energy will be fed into the grid during the hours of higher demand and higher prices, which will help to avoid price peaks at times of higher demand and lower renewable energy production. As a result, the net effect will be a more stable price curve, reducing price volatility in the electricity market.
One of your divisions, currently very important, is AleaStorage, which provides solutions for batteries, hybridisation of renewable energy with batteries and green hydrogen. Are you seeing interest in reports for this type of projects?
Yes, in recent months we have seen increasing interest in our forecasts and reports for projects involving batteries. Most of the revenue forecasting reports for batteries that we have prepared this 2024 have been for hybrid projects of renewable energy plants that want to evaluate the incremental revenue from adding a storage system. Investors and developers are already seeing that new renewable energy plants are going to be more viable and profitable, with a higher IRR, if they include the option of energy storage, being able to manage these intermittent energies that depend on the solar or wind resource and deliver the energy when it is more profitable or when it is needed due to higher demand.
What kind of solutions do you provide?
We provide solutions to optimise the revenues of battery projects by calculating and simulating revenues generated through price arbitrage in the day‑ahead market and ancillary services. We use hourly price simulations and optimisation algorithms to maximise battery profitability. These solutions apply to stand‑alone projects as well as hybrid systems combining wind energy and batteries, photovoltaic energy and batteries, and more complex configurations integrating wind energy, photovoltaic energy and batteries.
One of the problems we are seeing is grid bottlenecks, especially for new consumers. How can the growth of renewable demand be incentivised?
The development of electricity grids is another strategic vector for the energy transition to progress properly. Currently, one of the biggest challenges is precisely the ability of grids to integrate new consumption, especially those that demand large amounts of energy, such as data centres driven by digitalisation and Artificial Intelligence.
To incentivise the growth of renewable demand, it is crucial to invest in the modernisation and expansion of electricity infrastructures, allowing these growing sectors to set up in Spain, taking advantage of the abundant renewable resources available to us.
In the medium term, technologies such as battery energy storage, green hydrogen production, and the electrification of industry and transport will be key to generate greater demand for renewable energy.
In the short term, an electricity tariff reform may be necessary. Incentivising consumption during peak solar energy production hours would not only stimulate demand, but would also reduce renewable energy curtailments, making the overall electricity system more efficient.
What about long‑term contracting (PPA)? Are they no longer part of the solution?
PPA are still part of the solution in the energy transition, as they offer stability and predictability for both renewable energy producers and consumers. Although we have seen some slowdown in our PPA Marketplace this year due to falling energy prices, it is critical to remember that PPA are not simply a tool to secure lower prices. Their true strategic value lies in their ability to insulate both parties from market price volatility.
In an increasingly complex energy environment marked by uncertainty, PPA allow consumers to plan for the long term because they guarantee the stability of their energy costs. For producers, they offer income predictability, which is essential to facilitate access to financing and enable new investments in renewable energy projects.
From a strategic perspective, PPA not only benefit energy producing or consuming companies, but also contribute to the country’s energy security. By facilitating the integration of more renewable energy projects, PPA help reduce dependence on fossil energy sources and improve the resilience of the electricity system in the long term, so they remain a key component in achieving decarbonisation goals and ensuring a sustainable energy supply.
Despite the ongoing wars between Ukraine and Russia and Israel and Gaza, this year there has been stability in gas, CO2 and Brent prices, which has helped to maintain stability in the European electricity markets. What are your mid- and long‑term prospects?
The gas, CO2 and Brent markets are highly influenced by external news and events, which makes it difficult to predict their behaviour. The evolution of the conflicts you mention will continue to be a key factor in these markets, while slower demand growth in China and OPEC+’s intention to start lifting production cuts by putting more crude in the market in the coming months are putting downward pressure on the oil market.
In Europe, gas prices are the main driver of electricity market prices, but gas reserves are above 90%, leaving us well prepared to face the coming winter without major shocks. Even so, we expect volatility to continue as the market is very alert to any news, even if it does not represent a real danger to gas supply.
In the specific case of the Spanish electricity market, prices are expected to rise in the coming months due to increased demand during the winter and lower solar energy production. However, as we have mentioned previously, we are likely to see episodes of low prices again in the spring, driven by higher renewable energy production and demand that is rebounding, +0.8% in the first nine months of the year, but it is still at low levels not seen since the COVID crisis and, before that, for two decades.
In the long term, if the energy transition develops smoothly, electricity market prices will tend to reach their equilibrium price and will depend less and less on the volatility of the gas market.
This evolution of the market has led you to create six divisions this year to cover all the needs of the sector and boost the development of renewable energies. One of the divisions you are known for is AleaGreen, as you have produced a large number of long‑term forecasting reports in recent years. What are the main characteristics of these forecasts?
At AleaGreen we use a scientific methodology that combines Artificial Intelligence, time series and statistical models. This approach ensures that our forecasts have the quality and coherence to accurately reflect market trends. This methodology has been the basis of our forecasts for the last 25 years, not only in AleaGreen for the long term, but also in AleaBlue for short- and mid‑term forecasts, in AleaStorage services for energy storage, in the consulting services of AleaConsulting and in the information services for the energy sector of AleaWhite.
One of the most remarkable features of our long‑term forecasts is their ability to capture the historical market equilibrium and project it into the future, taking into account scenarios of the variables that will influence market prices in the long term.
In addition, our forecasts have hourly granularity, a level of detail that is essential for portfolio valuation and audits. We also include probabilistic metrics such as confidence bands and AleaLow, which are essential for risk management. These metrics are calculated by modelling prices as stochastic processes and by simulations of the explanatory variables, allowing us to provide a comprehensive analysis of possible scenarios.
Finally, our long‑term forecasts include estimates of prices captured by solar photovoltaic and wind technologies over the entire forecasting horizon, which can extend up to 40 years.
All services you have described use a methodology that uses Artificial Intelligence as a basis. Can it be said that AI is not just a fashion, but that it works?
Without a doubt, Artificial Intelligence is not just a fashion, but a solid tool, proven in practice. At AleaSoft we are pioneers in the use of AI and have been using it in our models for more than 25 years. The trust of our clients, some of whom have been with us since the beginning of the company, represents an endorsement of the quality of our models and proves that the use of AI has been a success.
In this interview we have focused mainly on the Spanish market, but your forecasting services cover several markets. Which are the markets most demanded by your clients?
European markets are the most demanded. We have carried out forecasts for different horizons for practically all markets in Europe. In addition, we also cover markets in America, such as the United States, Canada and Chile.
But our goal is to cover all energy markets globally, and we have also provided forecasts for countries in other continents, including Israel, South Africa and Australia.
To close the interview, I would like to congratulate the AleaSoft team on your 25th anniversary and ask you about your goals for the coming years.
First of all, I would like to thank you on behalf of the entire AleaSoft team, and also thank you for this interview on the occasion of our anniversary.
In the coming years, our main objective is to continue expanding our presence globally, providing solutions that help renewable energies and all actors in the energy sector to face the challenges of the energy transition.
To achieve this, in addition to the services we have mentioned throughout this interview and those that we will develop to adapt to new market demands, we want to continue to establish ourselves as a benchmark for information and analysis of the sector, through our market analysis news and our monthly webinars, where we have the participation of leading experts from the main companies in the sector.
A special edition of our monthly webinar series will be the 50th edition in December, which, in addition to being quite a round number, will coincide with the fifth anniversary of the first webinar in December 2019, and obviously, with the year of the 25th anniversary of the company. In this edition we will have guests from three leading global companies: Deloitte, PwC Spain and EY, to analyse the present and future of the energy sector.
With this comprehensive approach we want to boost the development of all vectors that make up the energy transition.