Spain's cheap wholesale electricity

 From  Bright Spots (Jan Rosenow)

In the first four months of 2026, the average wholesale electricity price in Spain was €44 per megawatt-hour. In Italy, it was €127. In Germany, €96. In the UK, €103. Spain is now cheaper than France, well below the central-European bloc, and within striking distance of the Nordic hydro-and-nuclear heavyweights that have always topped the cheap-power league.

This is not where most observers expected Spain to be. A decade ago, Spain was a cautionary tale of stranded solar investment and one of Europe’s more expensive power markets. Today it sits near the bottom of the price table, and the gap is widening.

The story behind that ranking is, on its surface, simple. Spain increasingly pushed gas increasingly out of its electricity supply, and the price of electricity followed.

The mix has changed beyond recognition

Twenty-five years ago, a third of Spain’s electricity came from coal. Today, coal is effectively gone. Gas, which surged in the 2000s as the replacement, peaked above 30% of generation in the late 2000s and has since been pushed back to roughly 19%. Nuclear has held steady around 19%, hydro and bioenergy together around 14%, and the remaining capacity has been steadily filled by wind and solar.

Wind alone supplied 20% of Spanish generation in 2025. Solar, which barely existed at scale in the early 2010s, hit 22%. Between them, those two technologies now generate more electricity than any other single category in the system, including the nuclear fleet that was once Spain’s reliable workhorse.

2022 was the turning point

If you stack solar and wind against all fossil generation (gas plus the last embers of coal and oil), the lines crossed in 2022. That was the first year wind plus solar generated more electricity than every fossil source combined. Through the first quarter of 2026, the gap has widened further. Solar and wind delivered 44% of generation, fossil fuels 17%.

This is the structural story that many arguments about energy policy circle around. Spain did not just add renewables on top of a fossil base. It substituted. The fossil curve has been falling, year after year, while the renewable curve has been climbing.

2022 also a turning point for wholesale electricity prices in Spain: The Iberian exception capped electricity prices initially to below EU27 average prices but even after the mechanism ended Spain widened the price gap further.

Why this shows up in the price

In a wholesale electricity market, the price in any given hour is set by the most expensive plant that needs to run to meet demand. For most of Europe, for most of the last decade, that has been a gas plant. The merit-order link from gas prices to power prices is the reason European households got an electricity bill shock when Russian pipeline gas collapsed in 2022.

What has quietly happened in Spain is that gas now sets the price far less often. In 2022, gas was the marginal plant in roughly 55% of all hours. In 2024 it had fallen to 27%. By the first four months of 2026, it was just 9%.

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A similar phenomenon has happened in Australia, where gas is also the most expensive generation source.  Over the last year, enough storage has been added to the grid to mean gas is used to set the price less often, and this has resulted in a significantly lower wholesale price.

How are wholesale electricity prices set?

The grid operator asks for offers to sell electricity for the next, say, 5 minutes or half an hour, to fill expected electricity demand over that period.  It accepts the cheapest offers first, then the next cheapest, and so on, until the total of all the offers to supply matches expected demand.  The price of the last supplier in that stack, the most expensive, is then paid to all suppliers.  This is called merit order pricing.  

Wind and solar have nearly zero marginal cost, because they have no fuel costs, and having built a wind or solar farm, its owners might as well use it as long as the price it receives is above zero.  So they offer first, at a low prices, because they know that the price they'll actually get will be higher.  Next in the queue comes nuclear.  Nuclear can't turn itself off and on at 5-minute or 30-minute intervals, so it is important that it sells its output.  Its marginal (as opposed to total) cost is lower than coal or gas, because of fuel and maintenance, so it offers into the stack at its marginal cost, certain that it will get at least that when the final price is settled.

Next comes brown coal (lignite).  Marginal/operating cost is higher than nuclear but lower than black (hard) coal, but like nuclear, coal power stations can't be rapidly scaled up and down.  So they'd make a middling offer, hoping that the final price will be higher.  And so it goes, with black coal more costly than brown,  gas (outside the US) more expensive than coal, and oil more expensive still.  Remember, each generator has a slightly different marginal cost, depending on its fuel supply contracts.

Some gas generators, called peaking plants, can rapidly scale up supply, so they tend to put in high offers.  If the merit order auction doesn't reach that price for that period, no matter, they'll make money when it does, which happens when renewable supply is very low or demand is very high.   

The implication of this process is that  as output of renewables rises, it pushes the highest marginal cost generators off the table, driving down wholesale prices.  Actually, it's worse than that.  Since total costs are higher than marginal costs, but marginal costs of renewables are zero, fossil fuel generators, except peaking gas plants, might not get high enough prices on average to cover total costs, leading eventually to bankruptcy.  For example,  lots of solar at midday drives down wholesale prices, as does lots of wind at late at night when demand is low.  Wholesale prices can even go negative, because coal power stations can't scale down output to zero.  If these periods of low/negative prices go on long enough, the very viability of coal generators is threatened, even if there are times when strong demand drives up wholesale prices.  The obvious solution for fossil fuel generators is to install batteries so that, for example,  at the mid-day solar peak, shunt their output into the batteries, to be released at the late afternoon/evening demand peak. 

The chart below, from Clean Energy Wire, shows how the merit order effect works.

Power demand is the vertical dashed line, price is the horizontal one. 
As output of wind/solar increases, the output cost curves shifts to the right.
The wholesale prices of electricity drops as a result.