In recent times, solar photovoltaic energy has experienced unprecedented growth in many countries. Spain is a particularly clear example, where more than 3 GW have been installed annually since 2019, with 5.5 GW installed last year (excluding self-consumption, which adds a significant contribution).
As a result, solar energy is becoming one of the key players in the electricity mix during many hours of the year. This is beginning to reduce the revenues solar energy earns in the market, a phenomenon known as price cannibalization.
Price cannibalization in the electricity market occurs when an increase in renewable energy generation, particularly solar and wind, reduces electricity prices during periods of high production from these technologies. This happens because renewables have very low marginal costs, which displace more expensive technologies and exert downward pressure on prices during those times.
This phenomenon reduces the revenues solar producers earn for their energy, affecting their profitability, especially in markets with high solar penetration.
Meanwhile, wind energy, although also affected during episodes of strong winds, better maintains the captured price because its generation is “more distributed” throughout the day and overlaps less with solar generation due to the complementarity between the two technologies.
The phenomenon of cannibalization is occurring to varying degrees in all countries with significant renewable (especially solar) penetration. For instance, in Europe, countries like Spain, Germany, or Greece are experiencing this. Here is a chart for Spain.
Julien Jomaux explains (and visualizes) this very well in his newsletter GEM Energy Analytics, which I highly recommend if you want to better understand electricity markets. The chart above is his.
To give a specific example of this phenomenon, it is estimated that the capture rate in Germany for solar energy will be 66% by 2025, while for wind energy it will be 90% onshore and 92% offshore.
The capture rate is the ratio between the average revenue obtained by a renewable plant in the market and the average electricity market price, reflecting the plant’s ability to capture revenue in relation to market behavior.
And of course, with lower expected revenues, expected profitability decreases, making it more complex to invest in new solar (especially) and wind plants (less so). This is reflected in the movements of the major players in these markets we’ve mentioned.
For example, the Italian giant Enel (main shareholder of Spanish Endesa) recently presented its strategic plan for the 2025-2027 horizon, highlighting its shift toward wind energy and “flexible” technologies, prioritizing these over solar.
Enel’s strategy involves installing 5.7 GW of wind energy in the next three years compared to 3.2 GW of solar energy. It also plans to incorporate 2.3 GW of batteries and 0.7 GW of hydroelectric power.
Another clear indication of this change in strategy is that Endesa recently sold 49.99% of its solar assets to Masdar, retaining control of the projects but reducing its exposure to the aforementioned cannibalization. Shortly after, it purchased 626 MW of hydroelectric power from Acciona Energía.
Does this mean investment in solar energy will stop? Clearly not. But if nothing changes, it will become increasingly difficult to maintain the pace of recent years in some markets.
There are already ways to “partially sidestep” this cannibalization and uncertainty, such as long-term PPAs (though their price is also tied to the market price, of course).
A PPA (Power Purchase Agreement) is a contract in which an energy producer agrees to sell electricity to a buyer (such as a company or utility) at a fixed price and for a specified period, providing stability for both the producer and the buyer.
Another solution could be CFDs awarded by governments through auctions, common in many European countries but not yet in Spain.
A CFD (Contract for Difference) is a contract where the producer and buyer agree on a fixed price: if the market price is lower, the buyer pays the difference; if it is higher, the producer returns the surplus.
And of course, we also have storage and demand increases, which have the potential to raise prices during peak midday hours.
Interesting times lie ahead, without a doubt.
